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Working Paper
Global financial conditions, country spreads and macroeconomic fluctuations in emerging countries
This paper uses a panel structural vector autoregressive (VAR) model to investigate the extent to which global financial conditions, i.e., a global risk-free interest rate and global financial risk, and country spreads contribute to macroeconomic fluctuations in emerging countries. The main findings are: (1) Global financial risk shocks explain about 20 percent of movements both in the country spread and in the aggregate activity in emerging economies. (2) The contribution of global risk-free interest rate shocks to macroeconomic fluctuations in emerging economies is negligible. Its role, which was emphasized in the literature, is taken up by global financial risk shocks. (3) Country spread shocks explain about 15 percent of the business cycles in emerging economies. (4) Interdependence between economic activity and the country spread is a key mechanism through which global financial shocks are transmitted to emerging economies.
AUTHORS: Akinci, Ozge
DATE: 2013
Working Paper
Exchange Rate Dynamics and Monetary Spillovers with Imperfect Financial Markets
AUTHORS: Akinci, Ozge; Queraltó, Albert
DATE: 2019-07-23
Working Paper
How Effective are Macroprudential Policies? An Empirical Investigation
In recent years, policymakers have generally relied on macroprudential policies to address financial stability concerns. However, our understanding of these policies and their efficacy is limited. In this paper, we construct a novel index of domestic macroprudential policies in 57 advanced and emerging economies covering the period from 2000:Q1 to 2013:Q4, with tightenings and easings recorded separately. The effectiveness of these policies in curbing bank credit growth and house price inflation is then assessed using a dynamic panel data model. The main findings of the paper are: (1) Macroprudential policies have been used far more actively after the global financial crisis in both advanced and emerging market economies. (2) These policies have primarily targeted the housing sector, especially in the advanced economies. (3) Macroprudential policies are usually changed in tandem with bank reserve requirements, capital flow management measures, and monetary policy. (4) Empirical analysis suggests that macroprudential tightening is associated with lower bank credit growth, housing credit growth, and house price inflation. (5) Targeted policies--for example, those specifically intended to limit the growth of housing credit--seem to be more effective. (6) In emerging economies, capital inflow restrictions targeting the banking sector are also associated with lower credit growth, although portfolio flow restrictions are not.
AUTHORS: Akinci, Ozge; Olmstead-Rumsey, Jane
DATE: 2015-06-01
Working Paper
Banks, Capital Flows and Financial Crises
This paper proposes a macroeconomic model with financial intermediaries (banks), in which banks face occasionally binding leverage constraints and may endogenously affect the strength of their balance sheets by issuing new equity. The model can account for occasional financial crises as a result of the nonlinearity induced by the constraint. Banks' precautionary equity issuance makes financial crises infrequent events occurring along with "regular" business cycle fluctuations. We show that an episode of capital infl ows and rapid credit expansion, triggered by low country interest rates, leads banks to endogenously decrease the rate of equity issuance, contributing to an increase in the likelihood of a crisis. Macroprudential policies directed at strengthening banks' balance sheets, such as capital requirements, are shown to lower the probability of financial crises and to enhance welfare.
AUTHORS: Akinci, Ozge; Queraltó, Albert
DATE: 2014-11-07
Working Paper
Financial Frictions and Macroeconomic Fluctuations in Emerging Economies
Estimated dynamic models of business cycles in emerging markets deliver counterfactual predictions for the country risk premium. In particular, the country interest rate predicted by these models is acyclical or procyclical, whereas it is countercyclical in the data. This paper proposes and estimates a small open economy model of the emerging-market business cycle in which a time-varying country risk premium emerges endogenously. In the proposed model, a firm's borrowing rate adjusts countercyclically as the default threshold of the firm depends on the state of the macroeconomy. I econometrically estimate the proposed model and find that it can account for the volatility and the countercyclicality of country risk premium as well as for other key emerging market business cycle moments. Time varying uncertainty in firm specific productivity contributes to delivering a countercyclical default rate and explains 70 percent of the variances in the trade balance and in the country risk premium. Finally, I find the predicted contribution of nonstationary productivity shocks in explaining output variations falls between the extremely high and extremely low values reported in the literature.
AUTHORS: Akinci, Ozge
DATE: 2014-10-24
Discussion Paper
International Evidence on the Use and Effectiveness of Macroprudential Policies
In recent years, policymakers in advanced and emerging economies have employed a variety of macroprudential policy tools?targeted rules or requirements that enhance the stability of the financial system as a whole by addressing the interconnectedness of individual financial institutions and their common exposure to economic risk factors. To examine the foreign experience with these tools, we constructed a novel macroprudential policy (MAPP) index. This index allows us to quantify the effects of these policies on bank credit and house prices, two variables that are often the target of policymakers because of their links to boom-bust leverage cycles. We then used the index in the empirical analysis to measure the effectiveness of these policies in emerging market countries and advanced economies. Our estimates suggest that macroprudential tightening can significantly reduce credit growth and house price appreciation.
AUTHORS: Akinci, Ozge
DATE: 2016-05-18
Discussion Paper
Revisiting the Case for International Policy Coordination
Prompted by the U.S. financial crisis and subsequent global recession, policymakers in advanced economies slashed interest rates dramatically, hitting the zero lower bound (ZLB), and then implemented unconventional policies such as large-scale asset purchases. In emerging economies, however, the policy response was more subdued since they were less affected by the financial crisis. As a result, capital flows from advanced to emerging economies increased markedly in response to widening interest rate differentials. Some emerging economies reacted by adopting measures to slow down capital inflows, acting under the presumption that these flows were harmful. This type of policy response has reignited the debate over how to moderate international spillovers.
AUTHORS: Acharya, Sushant; Akinci, Ozge; De Paoli, Bianca; Bengui, Julien
DATE: 2016-06-01
Discussion Paper
Financial Crises and the Desirability of Macroprudential Policy
The global financial crisis has put financial stability risks?and the potential role of macroprudential policies in addressing them?at the forefront of policy debates. The challenge for macroeconomists is to develop new models that are consistent with the data while being able to capture the highly nonlinear nature of crisis episodes. In this post, we evaluate the impact of a macroprudential policy that has the government tilt incentives for banks to encourage them to build up their equity positions. The government has a role since individual banks do not internalize the systemic benefit of having more bank equity. Our model allows for an evaluation of the tradeoff between the size of such incentives and the probability of a future financial crisis.
AUTHORS: Queraltó, Albert; Akinci, Ozge
DATE: 2017-04-10
Discussion Paper
Good News, Leverage, and Sudden Stops
One of the major debates in open economy macroeconomics is the extent to which capital inflows are beneficial for growth. In principle, these flows allow countries to increase their consumption and investment spending beyond their income by enabling them to tap into foreign saving. Periods of such borrowing, however, are associated with large trade deficits, external debt accumulation, and, in some cases, overheating when these economies operate beyond their potential output level for an extended period of time. The relevant question in this context is whether the rate at which a country is taking on external debt has useful predictive information about financial crises.
AUTHORS: Chahrour, Ryan; Akinci, Ozge
DATE: 2018-05-30
Report
Credit spreads, financial crises, and macroprudential policy
Credit spreads display occasional spikes and are more strongly countercyclical in times of financial stress. Financial crises are extreme cases of this nonlinear behavior, featuring skyrocketing credit spreads, sharp losses in bank equity, and deep recessions. We develop a macroeconomic model with a banking sector in which banks? leverage constraints are occasionally binding and equity issuance is endogenous. The model captures the nonlinearities in the data and produces quantitatively realistic crises. Precautionary equity issuance makes crises infrequent but does not prevent them altogether. When determining the intensity of capital requirements, the macroprudential authority faces a trade-off between the benefits of reducing the risk of a financial crisis and the welfare losses associated with banks? constrained ability to finance risky capital investments..
AUTHORS: Queraltó, Albert; Akinci, Ozge
DATE: 2016-11-01