Search Results
Working Paper
Credit booms, banking crises, and the current account
What is the marginal effect of an increase in the private sector debt-to-GDP ratio on the probability of a banking crisis? This paper shows that the marginal effect of rising debt levels depends on an economy's external position. When the current account is in surplus or in balance, the marginal effect of an increase in debt is rather small; a 10 percentage point increase in the private sector debt-to-GDP ratio increases the probability of a crisis by about 1 to 2 percentage points. However, when the economy is running a sizable current account deficit, implying that any increase in the debt ...
Working Paper
Optimal monetary policy under financial sector risk
We consider whether or not a central bank should respond directly to financial market conditions when setting monetary policy. Specifically, should a central bank put weight on interbank lending spreads in its Taylor rule policy function? ; Using a model with risk and balance sheet effects in both the real and financial sectors (Davis, "The Adverse Feedback Loop and the Effects of Risk in the both the Real and Financial Sectors" Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper No. 66, November 2010) we find that when the conventional parameters in ...
Working Paper
Inflation targeting and the anchoring of inflation expectations: cross-country evidence from consensus forecasts
Using survey data of inflation expectations across a 36 developed and developing countries, this paper examines whether the adoption of inflation targeting has helped to anchor inflation expectations. We examine the response of inflation expectations following a shock to inflation, inflation expectations, and oil prices. For the 13 countries that adopted inflation targeting midway through the time period used in this study, there is a significant difference in the responses between the earlier and the later subperiods. A shock leads to a positive, significant, and persistent increase ...
Central bank swaps offer dollar crisis lifeline to non-U.S. banks
Starting in late 2007, the Federal Reserve, in partnership with a few major foreign central banks, began offering central bank dollar liquidity swap lines as an important liquidity backstop.
Working Paper
Optimal Foreign Reserve Intervention and Financial Development
We document evidence of a U-shaped relationship between financial development and the adjustments of foreign exchange (FX) reserve holdings in response to a U.S. interest rate increase. Countries with intermediate levels of financial development sell reserves aggressively, while those with low or high development adjust little. Domestic interest rate responses are not systematically related to financial development. A model with borrowing constraints and foreign-currency debt rationalizes these findings: the associated pecuniary externality is maximized at intermediate levels of financial ...
Journal Article
Central bank transparency anchors inflation expectations
A high statistical correlation can be found between the level of policy transparency among central banks and the anchoring of inflation expectations.
Working Paper
The effect of commodity price shocks on underlying inflation: the role of central bank credibility
This paper seeks to document and explain the effect of a commodity price shock on underlying core inflation, and how that effect changes both across time and across countries. Impulse responses derived from a structural VAR model show that across many countries there was a break in the response of core inflation to a commodity price shock. In an earlier period, a shock to commodity prices would lead to a large and significant increase in core inflation, but in later periods, the effect was insignificant. ; To explain this, we construct a large-scale DSGE model with both headline and core ...
Working Paper
A Theory of the Global Financial Cycle
We develop a theory to account for changes in prices of risky and safe assets and gross and net capital flows over the global financial cycle (GFC). The multi-country model features global risk-aversion shocks and heterogeneity of investors both within and across countries. Within-country heterogeneity is needed to account for the drop in gross capital flows during a negative GFC shock (higher global risk-aversion). Cross-country heterogeneity is needed to account for the differential vulnerability of countries to a negative GFC shock. The key vulnerability is associated with leverage. In ...
Blame higher U.S. equity prices for recent moves in U.S. external liabilities
The U.S. net foreign asset position—the value of foreign assets held by U.S. residents minus the value of U.S. assets held by foreign residents—has fallen sharply since the 2008 Global Financial Crisis.
Emerging-market countries insulate themselves from Fed rate hikes
Earlier episodes of sizable Fed tightening preceded destabilizing currency devaluations in emerging markets, precipitating sovereign debt and banking crises in many of those economies