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Output Gap In Presence Of Financial Frictions And Monetary Policy Trade Offs

Output Gap in Presence of Financial Frictions and Monetary Policy Trade offs PDF
Author: Francesco Furlanetto
Publisher: International Monetary Fund
ISBN: 1498305326
Size: 23.26 MB
Format: PDF, ePub, Mobi
Category : Business & Economics
Languages : en
Pages : 44
View: 7337

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The recent global financial crisis illustrates that financial frictions are a significant source of volatility in the economy. This paper investigates monetary policy stabilization in an environment where financial frictions are a relevant source of macroeconomic fluctuation. We derive a measure of output gap that accounts for frictions in financial market. Furthermore we illustrate that, in the presence of financial frictions, a benevolent central bank faces a substantial trade-off between nominal and real stabilization; optimal monetary policy significantly reduces fluctuations in price and wage inflations but fails to alleviate the output gap volatility. This suggests a role for macroprudential policies.

Financial Factors

Financial Factors PDF
Author: Mr.Pau Rabanal
Publisher: International Monetary Fund
ISBN: 1513512862
Size: 60.81 MB
Format: PDF, Kindle
Category : Business & Economics
Languages : en
Pages : 57
View: 5210

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We suggest a new approach for analyzing the role of financial variables and shocks in computing the output gap. We estimate a two-region DSGE model for the euro area, with financial frictions at the household level, between 2000-2013. After joining the monetary union, a decline in some countries’ borrowing costs contributed to a credit, housing and real boom and bust cycle. We show that financial frictions amplified economic fluctuations and the measure of the output gap in those countries. On the contrary, in countries such as France and Germany, financial frictions played a minor role in output gap measures. We also present evidence of the trade-offs faced by the European Central Bank when trying to stabilize two regions in a currency union with unsynchronized economic cycles.

Beyond Divine Coincidence

Beyond Divine Coincidence PDF
Author: Palek, Jakob
Publisher: kassel university press GmbH
ISBN: 3737600481
Size: 49.44 MB
Format: PDF, ePub, Docs
Category :
Languages : en
Pages : 110
View: 4857

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During the so-called Great Moderation the variability of output, employment and inflation declined substantially in most of the major economies. Because of this positive co-movement the ultimate objective of monetary policy was clear. By stabilizing inflation output will also stay at its potential and the central bank does not face any trade-off between its targets – a situation known as the divine coincidence. With the onset of the financial crisis 2007 these relationships changed. This book contributes to the research on the optimal macroeconomic policy design in the presence of financial frictions. These are incorporated via the cost channel approach into a two-country currency union model. Ultimately, a supply-side effect arises which lowers the efficiency of monetary policy - divine coincidence is not possible any more. Three questions are in the focus of interest of this analysis: What is the optimal monetary policy in the presence of country-specific financial frictions? What role can fiscal policy play? Is macroprudential policy able to improve welfare if the central bank targets a financial stability measure?

Research Bulletin March 2015

Research Bulletin  March 2015 PDF
Author: International Monetary Fund. Research Dept.
Publisher: International Monetary Fund
ISBN: 147555138X
Size: 34.50 MB
Format: PDF, Docs
Category : Business & Economics
Languages : en
Pages : 16
View: 5829

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Articles in the March 2015 Research Bulletin focus on the oil market, energy subsidies, and output. The Research Summary on "An Exploration in Deep Corners of the Oil Market," authored by Rabah Arezki, Douglas Laxton, Armen Nurekyan, and Hou Wang, examines fluctuations in oil prices. "The State Budget May Afford It All," by Christian Ebeke and Constant Lonkeng Ngbouana, reviews energy subsidies and their fiscal, distributional, and environmental costs. In the “Q&A” column Pau Rabanal takes a look at “Seven Questions on Potential Output.” The Bulletin includes a listing of recent IMF Working Papers, Staff Discussion Notes, recommended readings from IMF Publications, and a call for papers for the next Annual Research Conference. A link with information and free access to IMF Economic Review is also included.

Russian Federation

Russian Federation PDF
Author: International Monetary Fund. European Dept.
Publisher: International Monetary Fund
ISBN: 1484308204
Size: 36.12 MB
Format: PDF, ePub, Mobi
Category : Business & Economics
Languages : en
Pages : 94
View: 843

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This paper focuses on the task that may be more complicated when the adjustment in relative prices is driven by a negative terms of trade (ToT) shock. Two sets of factors are explored: disruptiveness of sudden terms-of-trade driven devaluations and issues related to external demand and access to external markets. The argument that a reduction in commodity prices will unwind the Dutch disease assumes symmetry: since increasing commodity prices drove resources out of the non-commodity tradable sector, decreasing commodity prices and ensuing real depreciation should bring resources back into the nontradable sector. Effectively, this implies that the magnitude of the elasticity of non-commodity exports to the real effective exchange rate (REER) is equal regardless of the direction of the REER movement, and is not affected by the phase of the commodity cycle. Deep linkages between the commodity and non-commodity sectors can prevent the non-commodity tradable sector from taking advance of the depreciation caused by a commodity price shock because such depreciation puts under stress the entire economy.

Asset Prices And Monetary Policy

Asset Prices and Monetary Policy PDF
Author: Ichiro Fukunaga
Publisher:
ISBN:
Size: 42.71 MB
Format: PDF, ePub, Mobi
Category : Assets (Accounting)
Languages : en
Pages : 35
View: 2239

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How should central banks take into account movements in asset prices in the conduct of monetary policy? We provide an analysis to address this issue using a dynamic stochastic general equilibrium model incorporating both price rigidities and financial market imperfections. Our findings are twofold. First, in the presence of these two sources of distortion in the economy, central banks face a policy tradeoff between stabilizing inflation and the output gap. With this tradeoff, central banks could strike a better balance between both objectives if they took variables other than inflation, such as asset prices, into consideration. Second, these benefits decrease when central banks rely on limited information about the underlying sources of asset price movements and cannot judge which part of the observed asset price movements reflects inefficiencies in the economy.--Author's abstract.

Steady As She Goes Estimating Potential Output During Financial Booms And Busts

Steady as She Goes   Estimating Potential Output During Financial    Booms and Busts    PDF
Author: Mr.Helge Berger
Publisher: International Monetary Fund
ISBN: 1513503073
Size: 67.28 MB
Format: PDF, Mobi
Category : Business & Economics
Languages : en
Pages : 33
View: 6191

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Potential output—in the sense of the GDP level or path an economy can sustain over the medium term—is a crucial benchmark for policymakers. However, it is difficult to estimate when financial “booms and busts” are driving the real economy. This paper uses a simple multivariate filtering approach to illustrate the role financial variables play in driving potential or sustainable output. The results suggest that it moves more steadily during financial “boom and bust” periods than implied by conventional HP filter estimates, which tend to more closely follow actual GDP. A two-region, multisector New Keynesian DSGE model with financial frictions sheds light on the economic forces that could be behind the results obtained from the filter. This has important implications for policymakers.

Imf Research Bulletin September 2014

IMF Research Bulletin  September 2014 PDF
Author: International Monetary Fund. Research Dept.
Publisher: International Monetary Fund
ISBN: 1498333168
Size: 41.61 MB
Format: PDF, ePub, Mobi
Category : Business & Economics
Languages : en
Pages : 18
View: 7242

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This issue of the IMF Research Bulletin opens with a letter from the new editor, Rabah Arezki. The Research Summaries are a "Primer on 'Global Liquidity'" (Eugenio Cerutti, Stijn Claessens, and Lev Ratnovski); and "Trade Integration adn Business Cycle Synchronization" (Kevin Cheng, Romain Duval, and Dulani Senevirante). The Q&A column looks at "Seven Questions on the Global Housing Markets" (Hites Ahir, Heedon Kang, and Prakash Loungani). September 2014 issue of the Bulletin also includes updates on IMF Working Papers, Staff Discussion Notes, and Recommended Readings from the IMF Bookstore, as well as special announcements on new staff publications and the Fifteenth Annual Jacques Polak Research Conference. Also included is information on the latest issue of “IMF Economic Review” with a link to an article by Paul Krugman.

Systemic Risk

Systemic Risk PDF
Author: Stefan Laseen
Publisher: International Monetary Fund
ISBN: 1513571214
Size: 26.93 MB
Format: PDF, ePub, Docs
Category : Business & Economics
Languages : en
Pages : 46
View: 265

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We introduce time-varying systemic risk in an otherwise standard New-Keynesian model to study whether a simple leaning-against-the-wind policy can reduce systemic risk and improve welfare. We find that an unexpected increase in policy rates reduces output, inflation, and asset prices without fundamentally mitigating financial risks. We also find that while a systematic monetary policy reaction can improve welfare, it is too simplistic: (1) it is highly sensitive to parameters of the model and (2) is detrimental in the presence of falling asset prices. Macroprudential policy, similar to a countercyclical capital requirement, is more robust and leads to higher welfare gains.