Monetary policy and long-term trends

Charles A.E. Goodhart, Philipp Erfurth 03 November 2014

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Introduction

There has been a long-term downward trend in the share and strength of labour in national income, which is depressing both demand and inflation. This has prompted ever more expansionary monetary policies. While understandable, indeed appropriate, within a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance (leverage).

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Topics:  Financial markets Macroeconomic policy Monetary policy

Tags:  monetary policy, Inequality, debt, leverage, wages, labour share, globalisation, consumption, propensity to consume, fiscal policy, Ageing, interest rates, investment, asset prices, housing, house prices, exchange rates, global crisis, mortgages, sub-prime crisis, Macroprudential policy, structural reforms, balance sheets, deleveraging, equity, shared-equity mortgages, Help to Buy

Exchange rate pass-through in developing and emerging markets

Janine Aron, John Muellbauer 14 September 2014

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The interest in exchange rate pass-through (ERPT) in developing and emerging market (DEM) countries has burgeoned in the last two decades. By contrast, in the earlier comprehensive empirical survey of ERPT by Menon (1995), the majority of studies covered industrialised countries – largely the US, Japan and European countries – with only a handful of less developed countries, mainly reported in a single cross-country study.

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Topics:  Exchange rates

Tags:  exchange rates, exchange rate pass-through, developing countries, emerging markets, model misspecification

Is the ECB doing QE?

Charles Wyplosz 12 September 2014

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The 4 September announcement by Chairman Mario Draghi has been greeted with enthusiasm by the markets and the media. It has been long awaited, and many believe that the ECB has finally delivered. This is not sure. The ECB intends to buy large amounts of securities backed by bank lending to households (mortgages) and to firms.

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Topics:  Exchange rates Financial markets Monetary policy

Tags:  quantitative easing, QE, monetary policy, unconventional monetary policy, ECB, securitisation, bank lending, Europe, eurozone, Subprime, stress tests, deleveraging, recapitalisation, depreciation, exchange rates, euro, central banking

‘Leaning against the wind’: exchange rate intervention in emerging markets works

Christian Daude, Eduardo Levy Yeyati 01 September 2014

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The economic debate has typically downplayed the exchange rate-smoothing nature of central bank foreign exchange intervention, attributing it to precautionary or prudential motives, or to the goal of keeping the exchange rate undervalued for mercantilist reasons.

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Topics:  Exchange rates Monetary policy

Tags:  Central Banks, exchange rates, exchange rate smoothing, emerging markets, Leaning against the wind

Great Depression recovery: The role of capital controls

Kris James Mitchener , Kirsten Wandschneider 18 August 2014

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The use of capital controls as a policy tool – especially as a stopgap to ward off financial crises – is controversial. For example, in 1998, Malaysia was castigated by policymakers and financial markets for imposing capital controls in response to the East Asian financial crisis. In 2010, however, the IMF revised its stand against capital controls, recognising that sudden capital surges can pose risks for some countries, and acknowledging that controls on capital inflows may be part of a toolkit that countries use to ward off financial crises (Ostry et al. 2010).

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Topics:  Economic history Exchange rates International finance Monetary policy

Tags:  exchange rates, financial crises, capital controls, gold standard, East Asian financial crisis, Great Depression

New price adjustments reshape the world, yet again

Angus Deaton, Bettina Aten 16 July 2014

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When the international comparison project (ICP) published its latest estimates of purchasing power parity (PPP) exchange rates in April (World Bank 2014), there was considerable surprise and some consternation. Poor countries became richer overnight, at least relative to the rich countries; expressed in US dollars, world average GDP increased. There was a large downward revision of global income inequality. By some calculations, e.g. Chandy and Kharas (2014) and Dykstra et al.

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Topics:  Development Exchange rates

Tags:  exchange rates, World Bank, PPP

Eurozone external adjustment and real exchange rate movements: The role of firm productivity distribution

Filippo di Mauro, Francesco Pappadà 02 June 2014

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A corollary of the Eurozone crisis has been an unusually large current-account surplus for the Eurozone as a whole, resulting from a combination of strong external demand and rapid readjustment of external accounts in the Eurozone countries that had previously accumulated large imbalances.

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Topics:  Europe's nations and regions Exchange rates

Tags:  eurozone, exchange rates, productivity, imbalances, exports, rebalancing

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

Managing the exchange rate: It's not how much, but how

Atish R Ghosh, Jonathan D Ostry, Mahvash Saeed Qureshi 02 April 2014

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The choice of exchange rate regime is a perennial issue faced by emerging markets. Conventional wisdom, especially after the emerging markets crises of the late 1990s, was the bipolar prescription: countries should choose between either floats (the soft end of the prescription) or hard pegs (monetary union, dollarisation, currency board). The thinking was that intermediate regimes (conventional pegs, horizontal bands, crawling arrangements, managed floats) left countries more susceptible to crises.

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Topics:  Exchange rates

Tags:  exchange rates, emerging markets, managing floats

The credit cycle and vulnerabilities in emerging economies: the case of Latin America

Julián Caballero, Ugo Panizza, Andrew Powell 02 April 2014

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Over recent years credit growth in Latin America has been very strong, and countries have become more reliant on foreign bond issuances. These phenomena are linked, and in Caballero et al. (2014), we argue that they may have led to vulnerabilities which domestic and international supervisors are not well-equipped to assess.

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Topics:  Exchange rates Financial markets International finance

Tags:  exchange rates, Latin America, carry trade, credit conditions, original sin

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