FINANCIAL INTEGRATION AND MACROECONOMIC VOLATILITY: NEW EVIDENCE FROM DSGE MODELING

2019 ◽  
Vol 14 (02) ◽  
pp. 1950007 ◽  
Author(s):  
TAREK GHAZOUANI ◽  
RAMZI DRISSI ◽  
JAMEL BOUKHATEM
Keyword(s):  
Interest Rates ◽  
Capital Mobility ◽  
Financial Integration ◽  
Nominal Exchange Rate ◽  
Empirical Literature ◽  
Macroeconomic Volatility ◽  
Policy Shocks ◽  
Short Run ◽  
Dynamic Stochastic ◽  
Dsge Modeling

This paper provides a brief overview of theoretical and empirical literature on financial integration and macroeconomic volatility nexus highlighting how the degree of financial integration affects the volatility of macroeconomic fundamentals. Using a dynamic stochastic general equilibrium (DSGE) model, our findings show that: (i) higher degree of financial integration tends to decrease short-run volatility; (ii) following monetary policy shocks, financial integration increases nominal exchange rate and output volatility and reduces both nominal and real interest rates and consumption volatility; and (iii) in response to fiscal shocks, financial integration stabilizes all variables under the assumption of perfect capital mobility.

scholarly journals EXOGENOUS INTEREST RATE AND EXCHANGE RATE DYNAMICS UNDER ELASTIC EXPECTATIONS

2021 ◽  
Vol 80 (318) ◽  
pp. 3
Author(s):  
Franklin Serrano ◽  
Ricardo Summa ◽  
Gabriel Aidar
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Interest Rates ◽  
Exchange Rate Regimes ◽  
Nominal Exchange Rate ◽  
Exchange Rate Dynamics ◽  
Policy Variable ◽  
Nominal Exchange Rates ◽  
Floating Exchange Rate ◽  
Short Run

<div class="WordSection1"><h1 align="center"><strong style="font-size: 10px;">ABSTRACT</strong></h1></div><p>A theory analyzing the short run dynamics of nominal exchange rates under exogenous interest rates and free imperfect international capital markets is presented. Introducing elastic exchange rate expectations leads to cumulative changes in the spot and forward exchange rates in the same direction. We find that free floating exchange rate regimes are intrinsically unstable, as the nominal exchange rate is an institutional or policy variable that has no ‘fundamental equilibrium’ level. Implications for monetary policy and exchange market interventions of this potential instability are derived. Our results help to explain both the empirical prevalence of dirty floating exchange rate regimes and some aspects of the uncovered interest parity ‘failure’.</p><p> </p><p align="center">TASA DE INTERÉS EXÓGENA Y DINÁMICA DEL TIPO DE CAMBIO CON EXPECTATIVAS ELÁSTICAS</p><p align="center"><strong>RESUMEN </strong></p><p>Presentamos un análisis teórico de la dinámica de corto plazo de los tipos de cambio nominales con tasas de interés exógenas y libres e imperfecta movilidad internacional de capitales. La introducción de expectativas de tipo de cambio elásticas conduce a variaciones acumulativas en los tipos de cambio <em>spot</em> y <em>forward</em> en la misma dirección. Los regímenes de tipo de cambio de flotación libre son intrínsicamente inestables, dado que el tipo de cambio nominal es una variable institucional o de política que no tiene un nivel de “equilibrio fundamental”. Derivamos implicaciones de esta inestabilidad potencial para la política monetaria y las intervenciones en los mercados cambiarios. Los resultados ayudan a explicar la prevalencia de tipos de cambio de flotación sucia y aspectos de la “falla” de la paridad de tasas de interés descubierta.</p>

MACROECONOMIC VOLATILITY UNDER HIGH ACCUMULATION OF GOVERNMENT DEBT: LESSONS FROM JAPAN

2012 ◽  
Vol 15 (supp02) ◽  
pp. 1250057 ◽  
Author(s):  
PAUL D. McNELIS ◽  
NAOYUKI YOSHINO
Keyword(s):  
Exchange Rate ◽  
Interest Rates ◽  
Open Economy ◽  
Risk Premium ◽  
Government Debt ◽  
Dynamic Stochastic General Equilibrium ◽  
High Accumulation ◽  
Macroeconomic Volatility ◽  
Exchange Rate Dynamics ◽  
Dynamic Stochastic

This paper applies Bayesian estimation to an open-economy Dynamic Stochastic General Equilibrium (DSGE) model of Japan, to assess the effects of expanding government debt on interest rates, real exchange rate dynamics, and real sector performance. We find that the emergence of even a small risk premium on government debt will trigger considerable instability in the real and nominal variables. We show that a switch to an exchange-rate rule for monetary policy would considerably moderate the instability induced by a rising risk premium.

scholarly journals Application of the Bayesian New Keynesian DSGE Model to Polish Macroeconomic Data

2021 ◽  
Vol 32 (2) ◽  
pp. 140-153
Author(s):  
Janusz Sobieraj ◽  
Dominik Metelski
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Significant Degree ◽  
New Keynesian ◽  
Output Gap ◽  
Monetary Policy Shocks ◽  
Dsge Model ◽  
Nominal Interest Rates ◽  
Policy Shocks ◽  
Dynamic Stochastic

In the paper we estimate a simple New Keynesian Dynamic Stochastic General Equilibrium NK DSGE model on the basis of Polish macro data from the period 2000-2019. The model is specified similarly to Galí (2008) with the use of the Bayesian approach. The NK DSGE model combines the advantages of both structural models and time-series models and, therefore, shows a significant degree of alignment with empirical data. The Bayesian estimation is based on the prior distribution of the model input parameters, which are later compared with the posteriors. The results obtained allow for assessing the persistence of responses to technological, inflationary and monetary policy shocks. On the basis of the NK DSGE model, we formulate a perception of macroeconomic interactions, e.g. nominal interest rates’ association with inflation and the output gap. In other words, the NK DSGE model provides a better understanding of the relationship between interest rates, inflation and the output gap. This in turn makes it easier to understand the monetary policy response function.

scholarly journals Monetary and Fiscal Policy in the Presence of Informal Labour Markets: A DSGE Approach

2021 ◽  
Vol 12 (1) ◽  
pp. 213
Author(s):  
Omobola Adu ◽  
Philip Alege ◽  
Oluranti Olurinola
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Informal Economy ◽  
New Keynesian ◽  
Policy Shocks ◽  
Informal Labour ◽  
Short Run ◽  
Dynamic Stochastic ◽  
Monetary Policy Shock ◽  
Monetary And Fiscal Policy

In this paper, we investigate the transmission mechanism of monetary and fiscal policy shocks on inflation and output in the presence of an informal economy in Nigeria. To achieve this, a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model is modified to include informality in the labour and product market. The model is estimated using the Bayesian technique and the findings shows that in the case of a monetary policy shock, formal output tends to decline, while there is an expansion in informal output, at least in the short-run. The results also reveal that a fiscal policy shock brings about an initial decline in informal output. Hence, it is imperative for policymakers to strive to formalise the informal sector in order to ensure the effectiveness of monetary policy.

Do Money Targets Matter for Monetary Policy in Kenya?

2018 ◽  
Author(s):  
Michal Andrle ◽  
Andrew Berg ◽  
Enrico Berkes ◽  
R. Armando Morales ◽  
Rafael Portillo ◽  
...  
Keyword(s):  
Monetary Policy ◽  
Money Demand ◽  
Aggregate Demand ◽  
Demand Forecasting ◽  
Money Growth ◽  
Structural Shocks ◽  
Macroeconomic Volatility ◽  
Ex Post ◽  
Policy Shocks ◽  
General Specification

The framework in Chapter 15 is extended to incorporate an explicit role for money aggregates, with an application to Kenya. The chapter provides a general specification that can nest various types of money targeting (ranging from targets based on optimal money demand forecasts to those derived from simple money growth rules), interest-rate based frameworks, and intermediate cases. A novel interpretation of target misses in terms of structural shocks (aggregate demand, policy, shocks to money demand, etc.) is presented. In the case of Kenya, the authors find that: (i) the setting of money targets is consistent with money demand forecasting, (ii) targets have not played a systematic role in monetary policy, and (iii) target misses mainly reflect shocks to money demand. Simulations of the model under alternative policy specifications show that the stronger the ex post target adherence, the greater the macroeconomic volatility.

Financial Reforms and Consumption Smoothing

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Martin Boileau ◽  
Tianxiao Zheng
Keyword(s):  
South Africa ◽  
South Korea ◽  
Consumer Credit ◽  
Dynamic Stochastic General Equilibrium ◽  
Consumption Smoothing ◽  
Empirical Literature ◽  
Lower Income ◽  
Financial Reforms ◽  
Collateral Constraint ◽  
Dynamic Stochastic

Abstract We study how financial reforms affect the extent of consumption smoothing in a dynamic stochastic general equilibrium model of an emerging economy. Consistent with the empirical literature and reform efforts in South Korea and South Africa, we emphasize the relation between consumer credit and durable purchases, and model reforms as the relaxation of the collateral constraint on lower income households. We find that the relaxation of the collateral constraint accounts for a substantial share of the decline in consumption smoothing experienced in South Korea and South Africa.

scholarly journals Mobile Money Use: The Impact of Macroeconomic Policy and Regulation

Economies ◽  
2021 ◽  
Vol 9 (2) ◽  
pp. 51
Author(s):  
Lorna Katusiime
Keyword(s):  
Exchange Rate ◽  
Interest Rates ◽  
Financial Innovation ◽  
Macroeconomic Policy ◽  
Mobile Money ◽  
Distributed Lag ◽  
Distributed Lag Model ◽  
Long Run ◽  
Short Run ◽  
The Impact

This paper examines the effects of macroeconomic policy and regulatory environment on mobile money usage. Specifically, we develop an autoregressive distributed lag model to investigate the effect of key macroeconomic variables and mobile money tax on mobile money usage in Uganda. Using monthly data spanning the period March 2009 to September 2020, we find that in the short run, mobile money usage is positively affected by inflation while financial innovation, exchange rate, interest rates and mobile money tax negatively affect mobile money usage in Uganda. In the long run, mobile money usage is positively affected by economic activity, inflation and the COVID-19 pandemic crisis while mobile money customer balances, interest rate, exchange rate, financial innovation and mobile money tax negatively affect mobile money usage.

THE EFFECT OF FISCAL POLICY ON THE SHORT-RUN RELATION BETWEEN NOMINAL INTEREST RATES AND INFLATION

1987 ◽  
Vol 25 (1) ◽  
pp. 27-42 ◽  
Author(s):  
VICTOR A. CANTO ◽  
GERALD NICKELSBURG ◽  
PAUL RIZOS
Keyword(s):  
Fiscal Policy ◽  
Interest Rates ◽  
Nominal Interest Rates ◽  
Short Run

Determinants of Treasury-LIBOR Swap Spreads

2005 ◽  
Vol 08 (04) ◽  
pp. 687-705 ◽  
Author(s):  
D. K. Malhotra ◽  
Vivek Bhargava ◽  
Mukesh Chaudhry
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Default Risk ◽  
Yield Curve ◽  
Short Term ◽  
Long Run ◽  
Interest Rate Volatility ◽  
Short Run ◽  
Using Data ◽  
Swap Spreads

Using data from the Treasury versus London Interbank Offer Swap Rates (LIBOR) for October 1987 to June 1998, this paper examines the determinants of swap spreads in the Treasury-LIBOR interest rate swap market. This study hypothesizes Treasury-LIBOR swap spreads as a function of the Treasury rate of comparable maturity, the slope of the yield curve, the volatility of short-term interest rates, a proxy for default risk, and liquidity in the swap market. The study finds that, in the long-run, swap spreads are negatively related to the yield curve slope and liquidity in the swap market. We also find that swap spreads are positively related to the short-term interest rate volatility. In the short-run, swap market's response to higher default risk seems to be higher spread between the bid and offer rates.

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