To exit the Great Recession, central banks must adapt their policies and models

Marcus Miller, Lei Zhang 10 September 2014

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“Practical men…are usually the slaves…[of] some academic scribbler of a few years back” – John Maynard Keynes.

For monetary policy to be most effective, Michael Woodford emphasised the crucial importance of managing expectations. For this purpose, he advocated that central banks adopt explicit rules for setting interest rates to check inflation and recession, and went on to note that:

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Topics:  Global crisis Macroeconomic policy Monetary policy

Tags:  Taylor rule, forward guidance, great moderation, global crisis, Great Recession, quantitative easing, DSGE models, expectations, tapering, US, UK, Europe, eurozone, ECB, Bank of England, central banking, IMF, unconventional monetary policy

The transmission of Federal Reserve tapering news to emerging financial markets

Joshua Aizenman, Mahir Binici, Michael M Hutchison 04 April 2014

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The quantitative easing (QE) policies of the US Federal Reserve in the years following the crisis of 2008–2009 included monthly securities purchases of long-term Treasury bonds and mortgage-backed securities totalling $85 billion in 2013. The cumulative outcome of these policies has been an unprecedented increase of the monetary base, mitigating the deflationary pressure of the crisis.

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Topics:  Exchange rates International finance Monetary policy

Tags:  exchange rates, Federal Reserve, asset prices, emerging markets, stock markets, Credit Default Swaps, tapering

Turmoil in emerging markets: What’s missing from the story?

Kristin Forbes 05 February 2014

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Emerging markets are going through another period of volatility – and the most popular boogeyman is the US Federal Reserve.

The basic storyline is that less accommodative US monetary policy has caused foreign investors to withdraw capital from emerging markets, causing currency depreciations, equity declines, and increased borrowing costs. In many cases, these adjustments will slow growth and increase the risk of some type of crisis.

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Topics:  International finance

Tags:  Federal Reserve, capital flows, emerging markets, global financial crisis, tapering

Unconventional monetary policy normalisation and emerging-market capital flows

Andrew Burns, Mizuho Kida, Jamus Lim, Sanket Mohapatra, Marc Stocker 21 January 2014

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Quantitative easing (QE), which started in 2008, swelled the Federal Reserve’s balance sheet to an unprecedented $3.4 trillion. In May 2013, the Fed announced that it would evaluate the possibility of a reversal of its unconventional monetary policies – QE in particular .

The event, which has come to be known as ‘tapering’, prompted a sharp, negative response from financial markets (the so-called ‘taper tantrum’):

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Topics:  Financial markets International finance Monetary policy

Tags:  Federal Reserve, quantitative easing, unconventional monetary policy, tapering

The next sudden stop

Sebnem Kalemli-Ozcan 07 January 2014

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The ominous facts are well known – the strongest predictors of financial crises are domestic credit booms and external debts (Reinhart and Rogoff 2011). In emerging markets, credit booms are generally preceded by large capital inflows (Reinhart and Reinhart 2010). Many high-growth emerging markets have been receiving capital inflows for the last five years as the developed economies have been attending to their wounds from the Global Financial Crisis. Now the tide is reversing. Emerging markets are experiencing slowdowns in growth and widening current-account deficits.

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Topics:  Financial markets International finance

Tags:  capital flows, emerging markets, global financial crisis, sudden stops, Turkey, tapering, liability dollarisation

Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets

Barry Eichengreen, Poonam Gupta 19 December 2013

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In May 2013, Federal Reserve officials first began to talk of the possibility of the US central bank tapering its securities purchases from $85 billion a month to something lower. A milestone to which many observers point is 22 May 2013, when Chairman Bernanke raised the possibility of tapering in his testimony to Congress. This ‘tapering talk’ had a sharp negative impact on economic and financial conditions in emerging markets.

Three aspects of that impact are noteworthy:

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Topics:  Exchange rates Monetary policy

Tags:  exchange rates, monetary policy, Federal Reserve, emerging markets, capital controls, Macroprudential policies, Capital inflows, currency war, tapering

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