Abstract This paper examinesthe monetary policy transmission mechanism in four systemically important economies. The impact of monetary policy is found to be broadly comparable for China, the US, the Eurozone, and Japan. Identifying a role for the financial sector is essential to unpacking various channels through which monetary policy operates. Global factors play a significant role and their impact is strongest for China and weakest for Japan. China’s impact is significant with the Eurozone displaying the most interdependence and Japan the least. Time-varying VARs suggest that contrasts in the responses to monetary policy shocks persist highlighting some of the remaining differences in the transmission mechanism. Finally, there is no apparent structural change in the estimated relationships around the time when the Fed intervened after 2008. It is conjectured that Quantitative Easing may well have prevented such a break.
{"title":"Monetary Policy Transmission in Systemically Important Economies and China’s Impact","authors":"D. Lombardi, P. Siklos, Xiangyou Xie","doi":"10.2139/ssrn.3267039","DOIUrl":"https://doi.org/10.2139/ssrn.3267039","url":null,"abstract":"Abstract This paper examinesthe monetary policy transmission mechanism in four systemically important economies. The impact of monetary policy is found to be broadly comparable for China, the US, the Eurozone, and Japan. Identifying a role for the financial sector is essential to unpacking various channels through which monetary policy operates. Global factors play a significant role and their impact is strongest for China and weakest for Japan. China’s impact is significant with the Eurozone displaying the most interdependence and Japan the least. Time-varying VARs suggest that contrasts in the responses to monetary policy shocks persist highlighting some of the remaining differences in the transmission mechanism. Finally, there is no apparent structural change in the estimated relationships around the time when the Fed intervened after 2008. It is conjectured that Quantitative Easing may well have prevented such a break.","PeriodicalId":178626,"journal":{"name":"ERN: Monetary & Fiscal Policies in Emerging Markets (Topic)","volume":"248 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-10-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115004865","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Chile has experienced deep structural changes in the last fifty years. In the 1970s a massive increase in government spending, not financed by an increase in taxes or debt, induced high and unpredictable inflation. Price stability was achieved in the early 1980s, after a fixed exchange rate regime was adopted. This regime, however, generated a sharp real exchange rate appreciation that exacerbated the external imbalances of the economy. The regime was abandoned and nominal devaluations took place. This generated the collapse of the financial system that had to be rescued by the government. There was no debt default, but in order to service the public debt, the fiscal authority had to generate surpluses. Since 1990, this was a systematic policy followed by almost all administrations and helped achieve two different, but related, goals. It contributed to reducing the fiscal debt and enabled the Central Bank to pursue an independent monetary policy aimed at reducing inflation.
{"title":"The Monetary and Fiscal History of Chile: 1960-2016","authors":"R. Caputo, Diego Saravia","doi":"10.2139/ssrn.3238188","DOIUrl":"https://doi.org/10.2139/ssrn.3238188","url":null,"abstract":"Chile has experienced deep structural changes in the last fifty years. In the 1970s a massive increase in government spending, not financed by an increase in taxes or debt, induced high and unpredictable inflation. Price stability was achieved in the early 1980s, after a fixed exchange rate regime was adopted. This regime, however, generated a sharp real exchange rate appreciation that exacerbated the external imbalances of the economy. The regime was abandoned and nominal devaluations took place. This generated the collapse of the financial system that had to be rescued by the government. There was no debt default, but in order to service the public debt, the fiscal authority had to generate surpluses. Since 1990, this was a systematic policy followed by almost all administrations and helped achieve two different, but related, goals. It contributed to reducing the fiscal debt and enabled the Central Bank to pursue an independent monetary policy aimed at reducing inflation.","PeriodicalId":178626,"journal":{"name":"ERN: Monetary & Fiscal Policies in Emerging Markets (Topic)","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-08-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123918777","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-08-01DOI: 10.5089/9781484362990.001
Lusine Lusinyan
The paper uses a supply-side framework based on a production function approach to assess the role of structural reforms in boosting long-term GDP growth in Argentina. The impact of product, labor, trade, and tax reforms on each supply-side channel—capital accumulation, labor utilization, and total factor productivity, proxied with an efficiency estimate—is assessed separately and then combined to derive the total impact on growth. The largest effect of structural reforms, involving regulatory changes that promote competition and facilitate flexible forms of employment, comes through the productivity/efficiency channel. Pro-competition regulation also improves labor utilization, while lower entry barriers and trade tariffs are important for capital accumulation. Structural reforms could have substantial effects on Argentina’s long-term GDP growth; for example, an ambitious reform effort to improve business regulatory environment would add 1–1½ percent to average annual growth of GDP.
{"title":"Assessing the Impact of Structural Reforms Through a Supply-Side Framework: The Case of Argentina","authors":"Lusine Lusinyan","doi":"10.5089/9781484362990.001","DOIUrl":"https://doi.org/10.5089/9781484362990.001","url":null,"abstract":"The paper uses a supply-side framework based on a production function approach to assess the role of structural reforms in boosting long-term GDP growth in Argentina. The impact of product, labor, trade, and tax reforms on each supply-side channel—capital accumulation, labor utilization, and total factor productivity, proxied with an efficiency estimate—is assessed separately and then combined to derive the total impact on growth. The largest effect of structural reforms, involving regulatory changes that promote competition and facilitate flexible forms of employment, comes through the productivity/efficiency channel. Pro-competition regulation also improves labor utilization, while lower entry barriers and trade tariffs are important for capital accumulation. Structural reforms could have substantial effects on Argentina’s long-term GDP growth; for example, an ambitious reform effort to improve business regulatory environment would add 1–1½ percent to average annual growth of GDP.","PeriodicalId":178626,"journal":{"name":"ERN: Monetary & Fiscal Policies in Emerging Markets (Topic)","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132592039","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Latin American countries experienced important changes in the 2000s. The implementation of fiscal reforms, public debt reduction and the high level of accumulated reserves gave them more policy space than in the past. As a result, Latin American countries were able to implement countercyclical policies to face the negative economic and social consequences associated with the recent macroeconomic shock. Some countries performed better than others. In particular, Social Democratic and Centrist governments enjoyed more fiscal space; they had realized larger budget surpluses over the good years and were able to cope with the crisis without impairing their fiscal conditions. Yet, Latin America has experienced a public finance deterioration in the most recent years. While governments are showing an increasing ability on taxation they are still facing some problems on the expenditure side. As a result, fiscal policy returned acyclical after the period of the crisis. The sustainability of public accounts may be strengthened increasing tax pressure on the richest, reducing tax evasion and improving current spending efficiency. However, the increasing political problems are putting many questions about future trends of public finance in the region.
{"title":"Cyclicality of Fiscal Policy in Latin America Over the Period 1990 ‐ 2015","authors":"Bruno Martorano","doi":"10.1111/rode.12329","DOIUrl":"https://doi.org/10.1111/rode.12329","url":null,"abstract":"Latin American countries experienced important changes in the 2000s. The implementation of fiscal reforms, public debt reduction and the high level of accumulated reserves gave them more policy space than in the past. As a result, Latin American countries were able to implement countercyclical policies to face the negative economic and social consequences associated with the recent macroeconomic shock. Some countries performed better than others. In particular, Social Democratic and Centrist governments enjoyed more fiscal space; they had realized larger budget surpluses over the good years and were able to cope with the crisis without impairing their fiscal conditions. Yet, Latin America has experienced a public finance deterioration in the most recent years. While governments are showing an increasing ability on taxation they are still facing some problems on the expenditure side. As a result, fiscal policy returned acyclical after the period of the crisis. The sustainability of public accounts may be strengthened increasing tax pressure on the richest, reducing tax evasion and improving current spending efficiency. However, the increasing political problems are putting many questions about future trends of public finance in the region.","PeriodicalId":178626,"journal":{"name":"ERN: Monetary & Fiscal Policies in Emerging Markets (Topic)","volume":"91 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126184506","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2017-12-05DOI: 10.18860/MEC-J.V1I1.4575
M. Sun’an, A. Husen
This study aim is to test the money neutrality in a narrow sense (M1) and a broad sense (M2) to the growth of output (GDP) in Indonesia, both in short term and long term. This research uses quarterly time series data at 2010 - 2016 periods. The analysis tool used is Error Correction Model (ECM). The results show that short-term money supply (M1 and M2) affect on output growth. However, in the long term, only money circulation in a broad sense (M2) affects on output growth, which also means that money is not neutral because it affects the real sector (GDP). Keywords: M1, M2, Population, Capital, and Economic Growth.
{"title":"The Testing of Money Neutrality in Economic Growth of Indonesia","authors":"M. Sun’an, A. Husen","doi":"10.18860/MEC-J.V1I1.4575","DOIUrl":"https://doi.org/10.18860/MEC-J.V1I1.4575","url":null,"abstract":"This study aim is to test the money neutrality in a narrow sense (M1) and a broad sense (M2) to the growth of output (GDP) in Indonesia, both in short term and long term. This research uses quarterly time series data at 2010 - 2016 periods. The analysis tool used is Error Correction Model (ECM). The results show that short-term money supply (M1 and M2) affect on output growth. However, in the long term, only money circulation in a broad sense (M2) affects on output growth, which also means that money is not neutral because it affects the real sector (GDP). Keywords: M1, M2, Population, Capital, and Economic Growth.","PeriodicalId":178626,"journal":{"name":"ERN: Monetary & Fiscal Policies in Emerging Markets (Topic)","volume":"36 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-12-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128398090","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2017-11-01DOI: 10.5089/9781484328286.001
M. Nose
Public-private partnerships (PPPs) have increased rapidly in emerging and developing countries, creating both opportunities and fiscal challenges. One of the main challenges is that while governments have increased commitments in guarantees and direct subsidies to promote PPPs, contractual disputes remain high with significant costs. This paper examines how fiscal institutions affect the selection of PPP contracts and the probability of contract disputes using about 6,000 PPP contract-level data. The analysis shows that larger government financing needs, lower budget transparency and bureaucratic efficiency are associated with higher probability for governments to offer guarantees. Propensity score matching results show that disputes are more common for guaranteed contracts due to adverse selection and contingent liability effects. PPP management quality and budget transparency are found to be key determinants for a longer survival of PPPs.
{"title":"Enforcing Public-Private Partnership Contract: How Do Fiscal Institutions Matter?","authors":"M. Nose","doi":"10.5089/9781484328286.001","DOIUrl":"https://doi.org/10.5089/9781484328286.001","url":null,"abstract":"Public-private partnerships (PPPs) have increased rapidly in emerging and developing countries, creating both opportunities and fiscal challenges. One of the main challenges is that while governments have increased commitments in guarantees and direct subsidies to promote PPPs, contractual disputes remain high with significant costs. This paper examines how fiscal institutions affect the selection of PPP contracts and the probability of contract disputes using about 6,000 PPP contract-level data. The analysis shows that larger government financing needs, lower budget transparency and bureaucratic efficiency are associated with higher probability for governments to offer guarantees. Propensity score matching results show that disputes are more common for guaranteed contracts due to adverse selection and contingent liability effects. PPP management quality and budget transparency are found to be key determinants for a longer survival of PPPs.","PeriodicalId":178626,"journal":{"name":"ERN: Monetary & Fiscal Policies in Emerging Markets (Topic)","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128131947","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper evaluates the spillovers from U.S. monetary policy to China's domestic interest rates over 1999-2016, focusing on the impacts of long-term interest rate and exchange rate regimes on the capacity of China to moderate external interest rate shocks. We find that China's central bank owns some extent of autonomy as it has a significant preference to control inflation and stimulate the economy even beyond the potential growth. However, China’s interest rates are significantly impacted by U.S. monetary policy especially after the crisis. The transmission from U.S. interest rates to China at the long-end even exists before the crisis, but only for the positive change of U.S. interest rates. The comparison with New Zealand's experience provides some evidence that central banks are more likely facing a "monetary dilemma" and China's fixed exchange rate regime with capital controls might help to mitigate the spillovers of external monetary shocks in a turmoil period.
{"title":"Financial Globalization and the International Transmission of Interest Rate Shocks: The Federal Reserve and China","authors":"Xiaoli Wan","doi":"10.2139/ssrn.3021448","DOIUrl":"https://doi.org/10.2139/ssrn.3021448","url":null,"abstract":"This paper evaluates the spillovers from U.S. monetary policy to China's domestic interest rates over 1999-2016, focusing on the impacts of long-term interest rate and exchange rate regimes on the capacity of China to moderate external interest rate shocks. We find that China's central bank owns some extent of autonomy as it has a significant preference to control inflation and stimulate the economy even beyond the potential growth. However, China’s interest rates are significantly impacted by U.S. monetary policy especially after the crisis. The transmission from U.S. interest rates to China at the long-end even exists before the crisis, but only for the positive change of U.S. interest rates. The comparison with New Zealand's experience provides some evidence that central banks are more likely facing a \"monetary dilemma\" and China's fixed exchange rate regime with capital controls might help to mitigate the spillovers of external monetary shocks in a turmoil period.","PeriodicalId":178626,"journal":{"name":"ERN: Monetary & Fiscal Policies in Emerging Markets (Topic)","volume":"82 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129903042","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Following the world financial crisis beginning in the last quarter of 2008, aggregate demand and commodity prices have declined sharply leading to a fast decline in world inflation. This different and new period reflects the rise in risk appetite leading to high fluctuations in the short term capital flows. World central banks revised their monetary policy to the changing conditions taking into account financial stability. In 2002, the Central Bank of Republic of Turkey adopted inflation targeting (in the implicit form) to maintain price stability. After 2008, parallel to the developments in global markets, the Turkish economy reflects decline in inflation rates. Together with the changes in the economic conditions, estimating monetary policy models in the form of constant-coefficient and symmetric specification may lead to erroneous interpretations. This study analyzes the existence of structural break(s) and asymmetric behavior for the 2003-2016 period. The paper also examines the monetary policy model under the New Keynesian DSGE model. The Turkish monetary policy investigated for the period presents October 2009 as the break point under different models and structural break tests. Asymmetric reactions to interest rate, output and exchange rate are observed which are suggesting changes in the monetary preferences of Central Bank of Republic of Turkey.
{"title":"Asymmetry in Inflation Targeting","authors":"Erhan Aslanoğlu, P. Deniz","doi":"10.2139/ssrn.3247363","DOIUrl":"https://doi.org/10.2139/ssrn.3247363","url":null,"abstract":"Following the world financial crisis beginning in the last quarter of 2008, aggregate demand and commodity prices have declined sharply leading to a fast decline in world inflation. This different and new period reflects the rise in risk appetite leading to high fluctuations in the short term capital flows. World central banks revised their monetary policy to the changing conditions taking into account financial stability. In 2002, the Central Bank of Republic of Turkey adopted inflation targeting (in the implicit form) to maintain price stability. After 2008, parallel to the developments in global markets, the Turkish economy reflects decline in inflation rates. Together with the changes in the economic conditions, estimating monetary policy models in the form of constant-coefficient and symmetric specification may lead to erroneous interpretations. This study analyzes the existence of structural break(s) and asymmetric behavior for the 2003-2016 period. The paper also examines the monetary policy model under the New Keynesian DSGE model. The Turkish monetary policy investigated for the period presents October 2009 as the break point under different models and structural break tests. Asymmetric reactions to interest rate, output and exchange rate are observed which are suggesting changes in the monetary preferences of Central Bank of Republic of Turkey.","PeriodicalId":178626,"journal":{"name":"ERN: Monetary & Fiscal Policies in Emerging Markets (Topic)","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127433617","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Purpose: The purpose of this paper is to analyze and critic on the both positive and negative, short term and long term, macroeconomic impacts that can happen due to one of a kind radical demonetization program that happened in India. Design/Methodology/Approach: The approaches taken to analyze the impacts are qualitative as wells as they are examined through time tested macroeconomic models like IS-LM. Findings: In the study it was found that there is a impact to GDP growth both due to lesser private consumption coming from decreased marginal propensity to consume (MPC) as well as from a decrease in money supply due to the fact that not only the government wasn’t able to refurbish the demonetized currency in an accelerated fashion but also there was a prolonged shortage of lower denomination of currency bills. However the benefits are far reaching given the fact that evidently there indeed was a strong push in digital payment channels, awareness of digital banking and bringing a lot of middle and lower income people in the banking perimeter who had no access to any kind of banking before. Research Implications/Limitations: It is not easy to quantify by what percentage the GDP will drop due to demonetization and also to quantify the benefits arising in the long term. The exact float of black money is very hard to estimate for a country like India as well as given the fact that demonetization was a politically hot topic the numbers were heavily guarded. Hence the quantification is out of scope of this study. Originality/Value: This paper is the first attempt to find the implications of such an event can have analyzing through time tested frameworks like IS-LM. Retrospectively the predictions made by IS-LM model for Indian economy based on this paper have come true.
{"title":"Demonetization: A Case from India","authors":"K. Bhardwaj","doi":"10.2139/ssrn.3139917","DOIUrl":"https://doi.org/10.2139/ssrn.3139917","url":null,"abstract":"Purpose: The purpose of this paper is to analyze and critic on the both positive and negative, short term and long term, macroeconomic impacts that can happen due to one of a kind radical demonetization program that happened in India. Design/Methodology/Approach: The approaches taken to analyze the impacts are qualitative as wells as they are examined through time tested macroeconomic models like IS-LM. Findings: In the study it was found that there is a impact to GDP growth both due to lesser private consumption coming from decreased marginal propensity to consume (MPC) as well as from a decrease in money supply due to the fact that not only the government wasn’t able to refurbish the demonetized currency in an accelerated fashion but also there was a prolonged shortage of lower denomination of currency bills. However the benefits are far reaching given the fact that evidently there indeed was a strong push in digital payment channels, awareness of digital banking and bringing a lot of middle and lower income people in the banking perimeter who had no access to any kind of banking before. Research Implications/Limitations: It is not easy to quantify by what percentage the GDP will drop due to demonetization and also to quantify the benefits arising in the long term. The exact float of black money is very hard to estimate for a country like India as well as given the fact that demonetization was a politically hot topic the numbers were heavily guarded. Hence the quantification is out of scope of this study. Originality/Value: This paper is the first attempt to find the implications of such an event can have analyzing through time tested frameworks like IS-LM. Retrospectively the predictions made by IS-LM model for Indian economy based on this paper have come true.","PeriodicalId":178626,"journal":{"name":"ERN: Monetary & Fiscal Policies in Emerging Markets (Topic)","volume":"132 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-01-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123588405","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the performance of monetary policy rules when the economy finds itself in dark corners. An economic dark corner can occur when the real sector experiences a sequence of negative shocks from world demand, while the central bank faces prolonged low world interest rates on its foreign reserve holdings. We examine variations of the current policy rules, based on variations of the Taylor rule with interest-rate instruments, in the context of strong restrictions on capital flows and a fixed exchange rate, and in the context of less restricted capital flows and a more flexible managed exchange rate. Our results show that a more flexible exchange-rate system with a more open capital account acts as a shock absorber when the economy is in a “dark corner”, thus reducing the fall in real GDP and consumption. However, this benefit comes at a cost. Under the more flexible exchange-rate regime with the more open capital account, during dark corner episodes, employment is much lower than in the more restricted fixed-rate environment. In the more open environment, the real exchange rate appreciates, with an increase in imported inputs, leading to a large loss of foreign exchange reserves and lower employment.
{"title":"Monetary Regime Choice in China: Policy Rules for Navigating in Dark Corners","authors":"Hongyi Chen, P. McNelis","doi":"10.2139/ssrn.2913561","DOIUrl":"https://doi.org/10.2139/ssrn.2913561","url":null,"abstract":"This paper examines the performance of monetary policy rules when the economy finds itself in dark corners. An economic dark corner can occur when the real sector experiences a sequence of negative shocks from world demand, while the central bank faces prolonged low world interest rates on its foreign reserve holdings. We examine variations of the current policy rules, based on variations of the Taylor rule with interest-rate instruments, in the context of strong restrictions on capital flows and a fixed exchange rate, and in the context of less restricted capital flows and a more flexible managed exchange rate. Our results show that a more flexible exchange-rate system with a more open capital account acts as a shock absorber when the economy is in a “dark corner”, thus reducing the fall in real GDP and consumption. However, this benefit comes at a cost. Under the more flexible exchange-rate regime with the more open capital account, during dark corner episodes, employment is much lower than in the more restricted fixed-rate environment. In the more open environment, the real exchange rate appreciates, with an increase in imported inputs, leading to a large loss of foreign exchange reserves and lower employment.","PeriodicalId":178626,"journal":{"name":"ERN: Monetary & Fiscal Policies in Emerging Markets (Topic)","volume":"67 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132790315","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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