Monetary Policy And Macroprudential Regulation With Financial Frictions
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Monetary Policy and Macroprudential Regulation with Financial Frictions by Pierre-Richard Agenor Pdf
An integrated analysis of how financial frictions can be accounted for in macroeconomic models built to study monetary policy and macroprudential regulation. Since the global financial crisis, there has been a renewed effort to emphasize financial frictions in designing closed- and open-economy macroeconomic models for monetary and macroprudential policy analysis. Drawing on the extensive literature of the past decade as well as his own contributions, in this book Pierre-Richard Age&́nor provides a unified set of theoretical and quantitative macroeconomic models with financial frictions to explore issues that have emerged in the wake of the crisis. These include the need to understand better how the financial system amplifies and propagates shocks originating elsewhere in the economy; how it can itself be a source of aggregate fluctuations; the extent to which central banks should account for financial stability considerations in the conduct of monetary policy; whether national central banks and regulators should coordinate their policies to promote macroeconomic and financial stability; and how much countercyclical macroprudential policies should be coordinated at the international level to mitigate financial spillovers across countries.
Monetary Policy and Macroprudential Regulation with Financial Frictions by Pierre-Richard Agénor Pdf
"A monograph that accounts for financial frictions in some of the most-used macroeconomic models. An attempt to bring practical reality into macroeconomic theory"--
Informality, Frictions, and Macroprudential Policy by Moez Ben Hassine,Mr.Nooman Rebei Pdf
We analyze the effects of macroprudential policies through the lens of an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets. In particular, we explicitly introduce informality in the labor and goods markets within a small open economy embedding financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector. We use the estimated version of the model to run welfare analysis under optimized monetary and macroprudential rules. Results show that although informality reduces the efficiency of macroprudential policies following a convex fashion, combining the latter with an inflation targeting objective could be beneficial.
Monetary and Macroprudential Policies to Manage Capital Flows by Juan Pablo Medina Guzman,Mr. Jorge Roldos Pdf
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.
Money: Theory and Practice by Jin Cao,Gerhard Illing Pdf
This textbook provides an introduction to modern monetary economics for advanced undergraduates, highlighting the lessons learned from the recent financial crisis. The book presents both the core New Keynesian model and recent advances, taking into account financial frictions, and discusses recent research on an intuitive level based on simple static and two-period models, but also prepares readers for an extension to a truly dynamic analysis. Further, it offers a systematic perspective on monetary policy, covering a wide range of models to help readers gain a better understanding of controversial issues. Part I examines the long-run perspective, addressing classical monetary policy issues such as determination of the price level and interaction between monetary and fiscal policy. Part II introduces the core New Keynesian model, characterizing optimal monetary policy to stabilize short-term shocks. It discusses rules vs. discretion and the challenges arising from control errors, imperfect information and robustness issues. It also analyzes optimal control in the presence of an effective lower bound. Part III focuses on modelling financial frictions. It identifies the transmission mechanisms of monetary policy via banking and introduces models with incomplete markets, principal-agent problems, maturity mismatch and leverage cycles, to show why investors’ and intermediaries’ own stakes play a key role in lending with pro-cyclical features. In addition, it presents a tractable model for handling liquidity management and demonstrates that the need to sell assets in crisis amplifies the volatility of the real economy. Lastly, the book discusses the relation between monetary policy and financial stability, addressing systemic risk and the role of macro-prudential regulation.
Systemic Risk, Crises, and Macroprudential Regulation by Xavier Freixas,Luc Laeven,Jose-Luis Peydro Pdf
A framework for macroprudential regulation that defines systemic risk and macroprudential policy, describes macroprudential tools, and surveys the effectiveness of existing macroprudential regulation. The recent financial crisis has shattered all standard approaches to banking regulation. Regulators now recognize that banking regulation cannot be simply based on individual financial institutions' risks. Instead, systemic risk and macroprudential regulation have come to the forefront of the new regulatory paradigm. Yet our knowledge of these two core aspects of regulation is still limited and fragmented. This book offers a framework for understanding the reasons for the regulatory shift from a microprudential to a macroprudential approach to financial regulation. It defines systemic risk and macroprudential policy, cutting through the generalized confusion as to their meaning; contrasts macroprudential to microprudential approaches; discusses the interaction of macroprudential policy with macroeconomic policy (monetary policy in particular); and describes macroprudential tools and experiences with macroprudential regulation around the world. The book also considers the remaining challenges for establishing effective macroprudential policy and broader issues in regulatory reform. These include the optimal size and structure of the financial system, the multiplicity of regulatory bodies in the United States, the supervision of cross-border financial institutions, and the need for international cooperation on macroprudential policies.
Capital Flows, Financial Intermediation and Macroprudential Policies by Matteo Ghilardi,Shanaka J. Peiris Pdf
This paper develops an open-economy DSGE model with an optimizing banking sector to assess the role of capital flows, macro-financial linkages, and macroprudential policies in emerging Asia. The key result is that macro-prudential measures can usefully complement monetary policy. Countercyclical macroprudential polices can help reduce macroeconomic volatility and enhance welfare. The results also demonstrate the importance of capital flows and financial stability for business cycle fluctuations as well as the role of supply side financial accelerator effects in the amplification and propagation of shocks.
Mr. Tamim Bayoumi,Mr. Giovanni Dell'Ariccia,Mr. Karl Friedrich Habermeier,Mr. Tommaso Mancini Griffoli,Fabian Valencia
Author : Mr. Tamim Bayoumi,Mr. Giovanni Dell'Ariccia,Mr. Karl Friedrich Habermeier,Mr. Tommaso Mancini Griffoli,Fabian Valencia Publisher : International Monetary Fund Page : 49 pages File Size : 40,8 Mb Release : 2014-04-04 Category : Business & Economics ISBN : 9781475516494
Monetary Policy in the New Normal by Mr. Tamim Bayoumi,Mr. Giovanni Dell'Ariccia,Mr. Karl Friedrich Habermeier,Mr. Tommaso Mancini Griffoli,Fabian Valencia Pdf
The proposed SDN would take stock of the current debate on the shape that monetary policy should take after the crisis. It revisits the pros and cons of expanding the objectives of monetary policy, the merits of turning unconventional policies into conventional ones, how to make monetary policy frameworks more resilient to the risk of being constrained by the zero-lower bound going forward, and the institutional challenges to preserve central bank independence with regards to monetary policy, while allowing adequate government oversight over central banks’ new responsibilities. It will draw policy conclusions where consensus has been reached, and highlight the areas where more work is needed to get more granular policy advice.
Will Macroprudential Policy Counteract Monetary Policy’s Effects on Financial Stability? by Mr.Itai Agur,Ms.Maria Demertzis Pdf
How does monetary policy impact upon macroprudential regulation? This paper models monetary policy's transmission to bank risk taking, and its interaction with a regulator's optimization problem. The regulator uses its macroprudential tool, a leverage ratio, to maintain financial stability, while taking account of the impact on credit provision. A change in the monetary policy rate tilts the regulator's entire trade-off. We show that the regulator allows interest rate changes to partly "pass through" to bank soundness by not neutralizing the risk-taking channel of monetary policy. Thus, monetary policy affects financial stability, even in the presence of macroprudential regulation.
Macroprudential Regulatory Policies by Stijn Claessens,Douglas D Evanoff,George G Kaufman,Laura E Kodres Pdf
This book is a collection of papers presented in the conference held at the Federal Reserve Bank of Chicago in September 2010, that examines the role of macroprudential regulation in the financial industry. Shocked by the experience of the last few years, many argue that the more traditional microprudential regulatory tools are inadequate to create a safe and stable financial system. The microprudential paradigm relies on the presumption that the financial system as a whole can be made safe by ensuring individual financial institutions are made safe. This ignores interconnections and externalities, whereby the actions of one financial institution or events in financial markets can lead to spillover effects that adversely affect general market conditions, other financial institutions, and ultimately the economy as a whole. Instead, it is argued, there is a need for both microprudential approaches to regulate individual institutions and macroprudential approaches to manage the overall financial system risks. Conference participants discussed macroprudential regulation and related issues, including: What are the theoretical motivations for macroprudential regulation? How would it interact with other regulatory and macroeconomic policies, especially monetary policy? What would be the specific macroprudential tools? Who should have control over the macroprudential tools? How should a macroprudential regulator be structured? Where should it be housed? How can macroprudential policies be structured across national borders? What role, if any, can market discipline play in supporting macroprudential objectives? Concentrating on public policy issues, the conference featured keynote addresses by influential past and present public policy figures including: Paul Volcker, Chairman of the US President's Economic Recovery Advisory Board and former Chairman of the Federal Reserve System; Tommaso Padoa-Schioppa, Chairman, Promontory Financial Group Europe and Former Chairman of the Basel Committee on Banking Supervision; Jaime Caruana, General Manager of the Bank for International Settlements and Former Chairman of the Basel Committee on Banking Supervision; and Charles Taylor, Director of the Pew Charitable Trust Financial Reform Project and Former Executive Director of the Group of Thirty. Contents:Special Addresses:Protecting the Stability of Global Financial Markets (Paul A Volcker)Global Macroprudential Regulation (Tommaso Padoa-Schioppa)The Challenge of Taking Macroprudential Decisions: Who Will Press Which Button(s)? (Jaime Caruana)Macroprudential Regulation and Evolution: Looking at the Financial System Through Darwin's Glasses (Charles Taylor)Why Macroprudential Policies are Needed:Lessons from American Bank Supervision from the Nineteenth Century to the Great Depression (Eugene N White)Coordination with Other Policies:Cross-Border Coordination of Macroprudential Policies (Attila Csajbók and Júlia Király)Macroprudential Policy: Central Banking Reconsidered (Jean-Pierre Landau)Macroprudential Policy and Monetary Policy: Some Lessons from the Euro Area (Domenico Giannone, Michele Lenza, Huw Pill, and Lucrezia Reichlin)Commentary on Macroprudential and Other Policies (E Philip Davis)Components of Macroprudential Regulation:Measuring Systemic Risk (Viral V Acharya)Systemic Risk in Bankruptcy Exceptions, Natural Candidates for Liquidity Charges (Enrico Perotti)Working Macroprudential Tools (Jesús Saurina)Structuring Macroprudential Regulation:On the Governance of Macroprudential Policies (Erlend W Nier)Some Implications of Systemic Risk and the Design of Regulatory Architecture (Marco Espinosa-Vega, Juan Solé, Charles Kahn and Rafael Matta)Cross-Border Issues:The Last Frontier: Protecting Critical Functions Across Borders (Eva H G Hüpkes)Cross-Border Crisis Management: Can Harmonization Create Harmony If the Orchestra Is Dissonant? (Grégory Nguyen and Peter Praet)Regulation and Competition in EU Banking: Before, During, and After the Crisis (André Sapir)Market Discipline:Cycle-Proof Market Discipline and Macroprudential Regulation (Luc Laeven)Curbing Risk on Wall Street (Oliver Hart and Luigi Zingales)What Role, If Any, Can Market Discipline Play in Supporting Macroprudential Policy? (María J Nieto)Policy Panel: Where to from Here?:Macroprudential Regulatory Policies: The New Road to Financial Stability (William R White)Beyond Regulatory Challenge: The New Public Policy Paradigm (Tarisa Wataganase)Challenges for Macroprudential Supervision (Randall Kroszner)Macroprudential Regulation, Financial Stability, and Capital Flows (José De Gregorio) Readership: Undergraduate and graduate students as well as researchers in international finance, central banks and financial regulators. Keywords:Macroprudential Regulation;Financial Regulation;Systemic Risk;Dodd-Frank;International Banking;Financial Crisis;Financial Stability;Bank Capital;Microprudential Regulation;Policy Tools;Cross-Border;Countercyclical Policy;Governance;Failure Resolution;Globalization;Basel III;Contingent Capital;Stress TestsKey Features:Very impressive list of speakers, particularly the keynote speakersThe global perspective provided by leading regulators and academicsThe ‘currentness’ or highly topical nature of the issues addressed
Central Bank Independence and Macro-Prudential Regulation by Mr.Kenichi Ueda,Mr.Fabian Valencia Pdf
We consider the optimality of various institutional arrangements for agencies that conduct macro-prudential regulation and monetary policy. When a central bank is in charge of price and financial stability, a new time inconsistency problem may arise. Ex-ante, the central bank chooses the socially optimal level of inflation. Ex-post, however, the central bank chooses inflation above the social optimum to reduce the real value of private debt. This inefficient outcome arises when macro-prudential policies cannot be adjusted as frequently as monetary. Importantly, this result arises even when the central bank is politically independent. We then consider the role of political pressures in the spirit of Barro and Gordon (1983). We show that if either the macro-prudential regulator or the central bank (or both) are not politically independent, separation of price and financial stability objectives does not deliver the social optimum.
Optimal Monetary and Macroprudential Policies Under Fire-Sale Externalities by Flora Lutz Pdf
I provide an integrated analysis of monetary and macroprudential policies in a model economy featuring a financial friction and a nominal wage rigidity. In this set-up, the monetary authority faces a trade-off between macroeconomic and financial stability: While expansionary counter-cyclical monetary policy prevents involuntary unemployment, it also amplifies an inefficient reallocation of capital across sectors. The main contribution of the analysis is threefold: First it highlights a novel channel through which monetary policy can impact financial stability. Second, it shows that, by itself, monetary policy can significantly mitigate the wedge between the constrained efficient and the competitive allocation. Third, regardless of the availability of macroprudential tools, stabilizing demand is usually not optimal for monetary policy.
Money: Theory and Practice by Jin Cao,Gerhard Illing Pdf
This textbook provides an introduction to modern monetary economics for advanced undergraduates, highlighting the lessons learned from the recent financial crisis. The book presents both the core New Keynesian model and recent advances, taking into account financial frictions, and discusses recent research on an intuitive level based on simple static and two-period models, but also prepares readers for an extension to a truly dynamic analysis. Further, it offers a systematic perspective on monetary policy, covering a wide range of models to help readers gain a better understanding of controversial issues. Part I examines the long-run perspective, addressing classical monetary policy issues such as determination of the price level and interaction between monetary and fiscal policy. Part II introduces the core New Keynesian model, characterizing optimal monetary policy to stabilize short-term shocks. It discusses rules vs. discretion and the challenges arising from control errors, imperfect information and robustness issues. It also analyzes optimal control in the presence of an effective lower bound. Part III focuses on modelling financial frictions. It identifies the transmission mechanisms of monetary policy via banking and introduces models with incomplete markets, principal-agent problems, maturity mismatch and leverage cycles, to show why investors' and intermediaries' own stakes play a key role in lending with pro-cyclical features. In addition, it presents a tractable model for handling liquidity management and demonstrates that the need to sell assets in crisis amplifies the volatility of the real economy. Lastly, the book discusses the relation between monetary policy and financial stability, addressing systemic risk and the role of macro-prudential regulation.
An Overview of Macroprudential Policy Tools by Stijn Claessens Pdf
Macroprudential policies – caps on loan to value ratios, limits on credit growth and other balance sheets restrictions, (countercyclical) capital and reserve requirements and surcharges, and Pigouvian levies – have become part of the policy paradigm in emerging markets and advanced countries alike. But knowledge is still limited on these tools. Macroprudential policies ought to be motivated by market failures and externalities, but these can be hard to identify. They can also interact with various other policies, such as monetary and microprudential, raising coordination issues. Some countries, especially emerging markets, have used these tools and analyses suggest that some can reduce procyclicality and crisis risks. Yet, much remains to be studied, including tools’ costs ? by adversely affecting resource allocations; how to best adapt tools to country circumstances; and preferred institutional designs, including how to address political economy risks. As such, policy makers should move carefully in adopting tools.
Macroprudential Regulation of International Finance by Dongsoo Kang,Andrew Mason Pdf
Recent events, such as capital flow reversals and banking sector crises, have shaken faith in the widely held belief in the benefits of greater financial integration and financial deepening, which are typical in advanced economies. This book shows that emerging economies have often weathered the storm best despite the supposed burden of ‘weak institutions’. It demonstrates that a better policy framework requires reliable indicators of vulnerability to financial instability, as well as improved policy tools and automatic stabilizers that anticipate and limit the vulnerabilities to financial crises.
