Following the recent financial crisis, major central banks have introduced several types of unconventional monetary policy measures, including liquidity and credit facilities, asset purchases and forward guidance. To date, these measures appear to have been successful. They restored market functioning, facilitated the transmission of monetary policy and supported economic activity. They have potential costs, however, including challenges related to the greatly expanded balance sheets of central banks and the eventual exit from these measures, as well as the vulnerabilities that can arise from prolonged monetary accommodation.
Topics: Central bank research; Financial markets; International topics; Monetary policy frameworkUsing BoC-GEM-Fin, a large-scale DSGE model with real, nominal and financial frictions featuring a banking sector, we explore the macroeconomic implications of various types of countercyclical bank capital regulations. Results suggest that countercyclical capital requirements have a significant stabilizing effect on key macroeconomic variables, but mostly after financial shocks.
Topics: Economic models; Financial Institutions; Financial stability; International topicsSince 2009, the G-20 Framework for Strong, Sustainable and Balanced Growth has provided a mechanism for international macroeconomic policy coordination. The Framework has had some successes, including agreement on objectives for fiscal consolidation. However, post-crisis global growth has been neither strong nor balanced. Progress has also been slow in developing credible fiscal consolidation plans in some advanced countries and in increasing exchange rate flexibility in certain emerging economies. A stronger peer review process and enhanced analysis of international spillovers would increase the Framework’s influence on member policies.
Topics: Exchange rate regimes; Fiscal Policy; International topics; Recent economic and financial developmentsThe U.S. recovery from the Great Recession has been slow relative to other postwar-era recoveries in the United States. Encouraged by loose lending standards in the pre-crisis period, U.S. households took on unsustainable amounts of debt, making them vulnerable to adverse shocks. Subsequently, a considerable drop in asset prices forced households to repair their balance sheets. While there has been progress in household deleveraging, the government sector now needs to delever, which will restrain growth over the next few years.
Topics: Business fluctuations and cycles; International topics; Recent economic and financial developmentsThe international business cycle is very important for Latin America’s economic performance as the recent global crisis vividly illustrated. This paper investigates how changes in trade linkages between China, Latin America, and the rest of the world have altered the transmission mechanism of international business cycles to Latin America.
Topics: Business fluctuations and cycles; Econometric and statistical methods; International topics; Recent economic and financial developments; Regional economic developmentsFollowing gains during the 1990s, Canada’s global market share of goods exports has declined markedly in recent years. In this regard, the constant market share analysis framework is used to decompose changes in Canada’s global market share into competitiveness and structural effects over the 1990‐2010 period, as well as to draw some comparisons to a number of other countries.
Topics: Balance of payments and components; Exchange rates; International topicsThis paper builds a two-country DSGE model to study the quantitative impact of financial frictions on business cycle co-movements when investors have foreign asset exposure. The investor in each country holds capital in both countries and faces a leverage constraint on her debt.
Topics: Business fluctuations and cycles; International financial markets; International topicsWe examine the relative ability of simple inflation targeting (IT) and price level targeting (PLT) monetary policy rules to minimize both inflation variability and business cycle fluctuations in Canada for shocks that have important consequences for global commodity prices.
Topics: Economic models; Inflation and prices; International topics; Monetary policy frameworkThis article discusses three scenarios for the adjustment of the global economy. In a “baseline” scenario—which encompasses fiscal consolidation in major advanced economies, growth-friendly structural reforms in Europe and Japan, and greater exchange rate flexibility and reforms in the emerging-market economies of Asia to induce rotation of demand away from net exports—global current account imbalances are resolved over the medium term and strong global economic growth resumes. In one alternative scenario, in which these conditions are delayed, global imbalances persist and growth is substantially reduced. In the second alternative scenario, in which advanced economies front-load fiscal consolidation, but no rotation of demand takes place in the emerging-market economies of Asia and no structural reforms are implemented in Europe and Japan, even weaker global economic growth occurs in the near term.
Topics: Balance of payments and components; Exchange rates; Fiscal Policy; International topics; Recent economic and financial developmentsDemand for industrial raw materials from emerging economies, particularly emerging Asia, is widely believed to have fueled the surge in oil and industrial commodity prices during 2002-2008. The paper first presents a simple storage model in which commodity prices respond to market participant’s changing expectations of the future macroeconomic environment.
Topics: Econometric and statistical methods; International topicsWhile the usefulness of factor models has been acknowledged over recent years, little attention has been devoted to the forecasting power of these models for the Japanese economy. In this paper, we aim at assessing the relative performance of factor models over different samples, including the recent financial crisis.
Topics: Econometric and statistical methods; International topicsWe use vector autoregressions with drifting coefficients and stochastic volatility to investigate how the dynamic effects of oil supply shocks on the U.S. economy have changed over time. We find a substantial decline in the short-run price elasticity of oil demand since the mid-eighties.
Topics: Econometric and statistical methods; International topicsRecently, there has been increased interest in real-time forecasts of the real price of crude oil. Standard oil price forecasts based on reduced-form regressions or based on oil futures prices do not allow consumers of forecasts to explore how much the forecast would change relative to the baseline forecast under alternative scenarios about future oil demand and oil supply conditions.
Topics: Econometric and statistical methods; International topicsThis paper examines the effectiveness of international capital controls in India over time by analyzing daily return differentials in the non-deliverable forward (NDF) markets using the self-exciting threshold autoregressive (SETAR) methodology.
Topics: Econometric and statistical methods; International financial markets; International topicsThere has been a systematic increase in the volatility of the real price of crude oil since 1986, followed by a decline in the volatility of oil production since the early 1990s. We explore reasons for this evolution. We show that a likely explanation of this empirical fact is that both the short-run price elasticities of oil demand and of oil supply have declined considerably since the second half of the 1980s.
Topics: Econometric and statistical methods; International topicsThe current international monetary system is in need of reform. This article first provides an assessment of the existing system, highlighting both its strengths and weaknesses. It notes that the system has not facilitated the symmetric and timely adjustment in the real exchange rate necessary to accommodate the integration of China and other emerging-market economies into the global economy. This lack of adjustment contributed to the global financial crisis and recession and, because it is forestalling the required rotation of global demand, is hindering the global recovery. The article then discusses reform of the system that would see all systemically important countries and currency areas adopt market-based and convertible floating exchange rates supported by appropriate monetary, fiscal and financial sector policy frameworks. It also examines the roles of the G-20 countries and major international financial institutions in promoting and facilitating the system’s transition.
Topics: Exchange rate regimes; International topicsIn this paper, we explore the link between stress in the domestic financial sector and the capital flight faced by countries in the 2008-9 global crisis. Both the timing of emergence of internal financial stress in developing economies, and the size of the peak-trough declines in the stock price indices was comparable to that in high income countries, indicating that there was no decoupling, even before Lehman Brothers’ demise.
Topics: Balance of payments and components; Financial markets; International topicsWhen prices are sticky, movements in the nominal exchange rate have a direct impact on international relative prices. A relative price misalignment would trigger an adjustment in consumption and employment, and may help to predict future movements in the exchange rate.
Topics: Exchange rates; International topicsWe construct a monthly real-time data set consisting of vintages for 1991.1-2010.12 that is suitable for generating forecasts of the real price of oil from a variety of models.
Topics: Econometric and statistical methods; International topicsOver the past 10 years, financial firms have increased the size of their positions in the oil futures market. At the same time, oil prices have increased dramatically.
Topics: International topicsIn emerging-market economies, real exchange rate adjustment is critical for maintaining a sustainable current account position and thereby for helping to reduce macroeconomic and financial instability.
Topics: Development economics; Exchange rate regimes; International topicsWe address some of the key questions that arise in forecasting the price of crude oil. What do applied forecasters need to know about the choice of sample period and about the tradeoffs between alternative oil price series and model specifications?
Topics: Econometric and statistical methods; International topicsAs part of their policy response to the financial crisis of 2007–09, central banks introduced numerous unprecedented monetary policy measures to provide monetary easing. This article defines and documents these measures, focusing on central bank asset purchases and their impact on central bank balance sheets. It then discusses the challenges of identifying the effects of these measures and explores possible exit strategies. The potential costs of these policies are also analyzed, as well as the broader implications for monetary policy frameworks.
Topics: Central bank research; Financial markets; International topics; Monetary policy frameworkWe evaluate different approaches for using monthly indicators to predict Chinese GDP for the current and the next quarter (‘nowcasts’ and ‘forecasts’, respectively). We use three types of mixed-frequency models, one based on an economic activity indicator (Liu et al., 2007), one based on averaging over indicator models (Stock and Watson, 2004), and a static factor model (Stock and Watson, 2002).
Topics: Econometric and statistical methods; International topicsWe develop a closed economy model to study the interactions among sovereign risk premia, fiscal limits, and fiscal policy. The stochastic fiscal limits, which measure the ability and willingness of the government to service its debt, arise endogenously from a dynamic Laffer curve.
Topics: Fiscal Policy; International topics
