This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

« Back to Results

Monetary Policy, Asset Price Spillovers and the Macroeconomy

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Marriott Philadelphia Downtown, Liberty Ballroom Salon B
Hosted By: American Economic Association
  • Chair: Athanasios Orphanides, Massachusetts Institute of Technology

Global Real Rates: A Secular Approach

Pierre-Olivier Gourinchas
,
University of California-Berkeley
Helene Rey
,
London Business School

Abstract

We study the importance of foreign shocks in the dynamics of shorter-term money market rates of the euro area (EA), Japan, the United Kingdom (UK) and the United States (US). The asset price spillovers are identified by combining the appeal of the event-study methodology with the advantages of structural vector autoregression (SVAR) analysis. In the admissible set of structural parameters, we retain those that ensure that at impact the IRFs agree with established event studies. We highlight that the use of event studies sharpens the inference of SVARs and reduces the error bands substantially. We show that the US was less exposed to foreign shocks and the main source of spillover globally. The dynamics of EA short-term interest rates was mainly driven by domestic shocks after the European Central Bank reference rates reached zero, while they were highly affected by developments in the US before the EA sovereign debt crisis.

Monetary and Financial Policies in Emerging Markets

Kosuke Aoki
,
Tokyo University
Gianluca Benigno
,
London School of Economics
Nobuhiro Kiyotaki
,
Princeton University

Abstract

In the past few decades, we have observed significant rises of international financial flows and external assets and liabilities. To what extent does this international financial integration pose challenges for the conduct of monetary and financial policies in open economies, particularly for emerging market economies? How should government conduct policy during global financial booms and recessions? To address such questions, we develop a model of a small open economy with financial intermediaries, which fund capital investment by issuing deposit to home households and borrowing from foreigners. We find that emerging market economies are vulnerable to shocks to their external interest rates. Macro-prudential policy is complementary to monetary policy because it allows monetary authority to pursue macroeconomic stability without worrying about its side effect on financial instability.

The Importance of Foreign Shocks on Money Market Rates: Event-Study Magnitude Restriction

Roberto A. De Santis
,
European Central Bank
Srečko Zimic
,
European Central Bank

Abstract

We show that US short-term money market rates are less exposed to foreign shocks and are the main source of spillovers globally. European rates were mainly driven by domestic shocks only with the intensification of the sovereign debt crisis and the introduction of more aggressive monetary policies. Asset price shocks are identified by combining the appeal of the event-study analysis with the advantages of structural vector autoregressions. In the admissible set of structural parameters, we retain those that ensure that at impact impulse responses agree with established occurrences. This approach sharpens the inference and reduces the error bands substantially.

Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability?

Toni Ahnert
,
Bank of Canada
Kristin J. Forbes
,
Massachusetts Institute of Technology
Christian Friedrich
,
Bank of Canada
Dennis Reinhardt
,
Bank of England

Abstract

Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulation, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich dataset of macroprudential FX regulations. These empirical tests show that FX regulations: (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements, but (4) may not significantly reduce the sensitivity of corporates or the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rates movements and the global financial cycle, but may have the side effect of ''shifting the snowbanks'' of a portion of this vulnerability to other sectors.
Discussant(s)
Giancarlo Corsetti
,
University of Cambridge
Lawrence Christiano
,
Northwestern University
Giorgio E. Primiceri
,
Northwestern University
Frank Smets
,
European Central Bank
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • F4 - Macroeconomic Aspects of International Trade and Finance