CHOICES OF OPTIMAL MONETARY POLICY INSTRUMENTS UNDER THE FLOATING AND THE BASKET-PEG REGIMES

This paper determines whether adopting the basket-peg rather than the floating regime is optimal for emerging market countries. Under the basket-peg regime, there is a trade-off between practical usefulness and welfare losses associated with capital movements across countries. We develop a dynamic stochastic general equilibrium model for small open economies to derive a simple basket weight rule. Although this is suboptimal, we find it practical and easy to implement. With calibration using Singaporean and Thai data for 1997Q3–2006Q2 and comparison among cumulative losses associated with the policy instrument rules, we show that a commitment to the basket weight rule is superior to other instrument rules under the floating regime for small, open emerging market countries like Singapore and Thailand.

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Patterns of Foreign Exchange Intervention under Inflation Targeting

IMF Working Papers ◽

10.5089/9781513536453.001 ◽

2020 ◽

Vol 20 (69) ◽

Author(s):

Gustavo Adler ◽

Kyun Suk Chang ◽

Zijiao Wang

Keyword(s):

Foreign Exchange ◽

Inflation Targeting ◽

Foreign Currency ◽

Emerging Market ◽

Policy Instrument ◽

Emerging Market Economies ◽

Foreign Exchange Intervention ◽

Market Economies ◽

Monetary Regimes ◽

Emerging Market Countries

The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced and emerging market economies, with the former group conducting FXI limitedly and broadly symmetrically, while the use of this policy instrument in emerging market countries is pervasive and mostly asymmetric (biased towards purchasing foreign currency, even after taking into account precautionary motives). Within emerging markets, the use of FXI is common both under IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while there is strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies where FXI is more pervasive.

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Sudden Stops and Capital Controls: When to Apply in Turkey

International Journal of Economics and Finance ◽

10.5539/ijef.v8n4p289 ◽

2016 ◽

Vol 8 (4) ◽

pp. 289

Author(s):

Cenk Gokce Adas ◽

F. Yesim Kartalli

Keyword(s):

Emerging Market ◽

Theoretical Background ◽

Capital Inflows ◽

Sudden Stops ◽

Control Mechanisms ◽

Capital Movements ◽

Emerging Market Countries ◽

Institutional Structures ◽

Domestic Savings ◽

Before And After

Emerging market countries need capital inflows to finance their current account deficits since their domestic savings are not at desired levels. Foreign direct investment is the appreciated form of capital inflows. However, indirect capital inflows can also boost growth if used in a proper manner. If a country has weak fundamentals and institutional structures or there exists an external shock, speculative foreign capital can easily and rapidly fly away while leaving a financial crisis behind. In this study, we summarize the theoretical background of sudden stops, and then try to identify the sudden stops in Turkey for 1996-2009 period and question the reasons of such disruptions. We particularly focus on periods just before and after the global financial crises. To identify a sudden stop period we use “means” and “volatilities” as well as changes in capital inflows/GDP ratios. Finally, we attempt to find out inflow control mechanisms to minimize the volatility of capital movements.

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Rented vs. owner-occupied housing and monetary policy

The B E Journal of Macroeconomics ◽

10.1515/bejm-2016-0110 ◽

2018 ◽

Vol 19 (1) ◽

Cited By ~ 1

Author(s):

Margarita Rubio

Keyword(s):

Monetary Policy ◽

Relative Size ◽

Dynamic Stochastic General Equilibrium ◽

Housing Tenure ◽

Optimal Monetary Policy ◽

Rental Market ◽

Fiscal Incentives ◽

Positive Perspective ◽

Dynamic Stochastic ◽

Model Preference

Abstract The aim of this paper is to show how housing tenure (rented vs.cowner-occupied) affects monetary policy. I propose a dynamic stochastic general equilibrium model with housing, both owned and rented. First, I analyze how, in the model, preference parameters, fiscal incentives, and institutional factors determine the rental market share and the residential debt-to-GDP ratio. Then, within this framework, I study how the transmission and optimality of monetary policy differ depending on these factors. From a positive perspective, impulse responses illustrate differences in the monetary transmission mechanism. I find that of all factors, tax incentives generate the largest differences. In normative terms, results show that when the relative size of the rental market is larger, monetary policy is more stabilizing. An optimal monetary policy analysis also suggests that in this case, monetary policy should respond more aggressively to inflation and disregard output, because the financial accelerator effects are weaker.

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Optimal Monetary Policy Rules in an Estimated Sticky-Information Model

American Economic Journal Macroeconomics ◽

10.1257/mac.1.2.1 ◽

2009 ◽

Vol 1 (2) ◽

pp. 1-28 ◽

Cited By ~ 24

Author(s):

Ricardo Reis

Keyword(s):

Monetary Policy ◽

Optimal Policy ◽

Price Level ◽

Dynamic Stochastic General Equilibrium ◽

Optimal Monetary Policy ◽

Sticky Information ◽

Policy Rules ◽

Monetary Policy Rules ◽

Interest Rate Rule ◽

Dynamic Stochastic

This paper uses a dynamic stochastic general equilibrium (DSGE) model with sticky information as a laboratory to study monetary policy. It characterizes the model's predictions for macro dynamics and optimal policy at prior parameters, and then uses data on five US macroeconomic series to update the parameters and provide an estimated model that can be used for policy analysis. The model answers a few policy questions. How does sticky information affect optimal monetary policy? What is the optimal interest rate rule? What is the optimal elastic price-level targeting rule? How does parameter uncertainty affect optimal policy? Are the conclusions for the Euro area different? (JEL E13, E31, E43, E52)

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Strategic deviations in optimal monetary policy

Swiss Journal of Economics and Statistics ◽

10.1186/s41937-021-00071-3 ◽

2021 ◽

Vol 157 (1) ◽

Author(s):

Fabio Canetg

Keyword(s):

Monetary Policy ◽

Central Bank ◽

Research Question ◽

Dynamic Stochastic General Equilibrium ◽

Time Inconsistency ◽

New Keynesian ◽

Optimal Monetary Policy ◽

Current Period ◽

Dynamic Stochastic ◽

Implementation Of Monetary Policy

AbstractThis paper investigates the circumstances under which a central bank is more or less likely to deviate from the optimal monetary policy rule. The research question is addressed in a simple New Keynesian dynamic stochastic general equilibrium (DSGE) model in which monetary policy deviations occur endogenously. The model solution suggests that higher future central bank credibility attenuates the current period policy trade-off between a stable inflation rate and a stable output gap. Together with the loss of credibility after a policy deviation, this provides the central bank with an incentive to implement past policy commitments. The result is valid even if the central bank may recover credibility with some probability after a policy deviation. My main finding is that the central bank is willing to implement past policy commitments if a sufficient fraction of agents is not aware of the exact end date of the policy commitment. The result challenges the time-inconsistency argument against monetary policy commitments and provides a potential explanation for the repeated implementation of monetary policy commitments in reality.

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OPTIMAL MONETARY POLICY UNDER PARAMETER UNCERTAINTY IN A SIMPLE MICROFOUNDED MODEL

Macroeconomic Dynamics ◽

10.1017/s1365100509090154 ◽

2010 ◽

Vol 14 (2) ◽

pp. 257-268 ◽

Cited By ~ 4

Author(s):

Takushi Kurozumi

Keyword(s):

Monetary Policy ◽

Loss Function ◽

Dynamic Stochastic General Equilibrium ◽

Welfare Loss ◽

Optimal Monetary Policy ◽

Fundamental Parameters ◽

Dynamic Stochastic ◽

Transmission Of Monetary Policy ◽

Policy Multipliers ◽

Proper Account

This paper examines optimal monetary policy under uncertainty about fundamental parameters of a dynamic stochastic general-equilibrium model. In contrast to previous studies, a microfoundation of the model leads this uncertainty to generate uncertainty not only about the transmission of monetary policy but also about the transmission of shocks and about a social welfare loss function. In the presence of such uncertainty, this paper finds conditions under which optimal discretionary policy responds to shocks more aggressively than in the absence of the uncertainty. These conditions depend crucially on the persistence of shocks and the magnitude of policy multipliers. To obtain the conditions, taking proper account of uncertainty about the transmission of shocks and about the welfare loss function is of crucial importance.

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Bayesian Estimation of DSGE Models

10.23943/princeton/9780691161082.001.0001 ◽

2015 ◽

Cited By ~ 45

Author(s):

Edward P. Herbst ◽

Frank Schorfheide

Keyword(s):

Monte Carlo ◽

Sequential Monte Carlo ◽

Likelihood Function ◽

Academic Research ◽

Dynamic Stochastic General Equilibrium ◽

Computational Techniques ◽

Dsge Models ◽

Monte Carlo Techniques ◽

Dynamic Stochastic ◽

Theoretical Foundations

Dynamic stochastic general equilibrium (DSGE) models have become one of the workhorses of modern macroeconomics and are extensively used for academic research as well as forecasting and policy analysis at central banks. This book introduces readers to state-of-the-art computational techniques used in the Bayesian analysis of DSGE models. The book covers Markov chain Monte Carlo techniques for linearized DSGE models, novel sequential Monte Carlo methods that can be used for parameter inference, and the estimation of nonlinear DSGE models based on particle filter approximations of the likelihood function. The theoretical foundations of the algorithms are discussed in depth, and detailed empirical applications and numerical illustrations are provided. The book also gives invaluable advice on how to tailor these algorithms to specific applications and assess the accuracy and reliability of the computations. The book is essential reading for graduate students, academic researchers, and practitioners at policy institutions.

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Harinder S. Kohli (ed.). Growth and Development in Emerging Market Economies: International Private Capital Flows, Financial Markets and Globalisation. New Delhi: Sage Publication 2008. 369 pages. Hardbound. Indian Rs 695.00.

The Pakistan Development Review ◽

10.30541/v47i3pp.304-305 ◽

2008 ◽

Vol 47 (3) ◽

pp. 304-305

Author(s):

Henna Ahsan

Keyword(s):

Capital Flows ◽

Growth And Development ◽

Global Economy ◽

Emerging Market ◽

Balance Sheet ◽

Emerging Market Economies ◽

New Delhi ◽

Infrastructure Development ◽

Market Economies ◽

Emerging Market Countries

The book discusses the different experiences in Asia and Latin America, while covering the closely related areas under the purview of Emerging Market Economies (EMEs). The first chapter, “Introduction and Overview” has written by Harinder S. Kohli gives an excellent review of the existing literature on the subject. The book discusses six related topics which include nine papers presented at the Emerging Markets Forum Meeting held in Jakarta, Indonesia, in September 2006. The book highlights the main factors of growth and development in Emerging Market Economies (EMEs) now closely related with international capital flows, development of financial market, the countries’ ability to integrate successfully with the global economy through trade and investment and their ability to forge public-private partnerships including infrastructure development. Chapter 2, of the book is an article titled “Global Imbalances, Oil Revenues and Capital Flows to Emerging Market Countries” by Jack Boorman explains the favourable global environment and its impact on capital flows to Emerging Market Countries (EMCs). The EMCs got advantage from this benign global economic environment, such as high economic growth rate, increase in exports, better national balance sheet and increase in foreign exchange reserves, but due to high oil prices the situation has been changed.

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