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Author:Akinci, Ozge 

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 ...
Staff Reports , Paper 802

Exchange rate dynamics and monetary spillovers with imperfect financial markets

We use a two-country New Keynesian model with financial frictions and dollar debt in balance sheets to investigate the foreign effects of U.S. monetary policy. Financial amplification works through an endogenous deviation from uncovered interest parity (UIP) arising from limits to arbitrage in private intermediation. Combined with dollar trade invoicing, this mechanism leads to large spillovers from U.S. policy, consistent with the evidence. Foreign monetary policies that attempt to stabilize the exchange rate reduce welfare and may exacerbate exchange rate volatility. We document empirically ...
Staff Reports , Paper 849

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, ...
International Finance Discussion Papers , Paper 1121

Good news is bad news: leverage cycles and sudden stops

We show that a model with imperfectly forecastable changes in future productivity and an occasionally binding collateral constraint can match a set of stylized facts about ?sudden stop? events. ?Good? news about future productivity raises leverage during times of expansion, increasing the probability that the constraint binds, and a sudden stop occurs, in future periods. The economy exhibits a boom period in the run-up to the sudden stop, with output, consumption, and investment all above trend, consistent with the data. During the sudden stop, the nonlinear effects of the constraint induce ...
Staff Reports , Paper 738

Discussion Paper
Modeling the Global Effects of the COVID-19 Sudden Stop in Capital Flows

The COVID-19 outbreak has triggered unusually fast outflows of dollar funding from emerging market economies (EMEs). These outflows are known as sudden stop episodes, and are typically followed by economic contractions.
FEDS Notes , Paper 2020-07-02

Journal Article
The Impact of Foreign Slowdown on the U.S. Economy: An Open Economy DSGE Perspective

Over the course of 2018, economic activity in major advanced foreign economies and emerging markets—including the Euro area and China—decelerated noticeably. In parallel, foreign growth projections for 2019 and 2020 were revised down, signaling potentially large headwinds for the U.S economy over the medium term. In this article, we use a multi-country simulation model to quantify economic spillovers to the United States from a slowdown originating in the Euro area. Next, we compare these results with spillovers from a slowdown originating in China. We find that spillovers to the U.S. ...
Economic Policy Review , Volume 26 , Issue 4 , Pages 98-111

The Financial (In)Stability Real Interest Rate, R**

We introduce the concept of a financial stability real interest rate using a macroeconomic banking model with an occasionally binding financing constraint, as in Gertler and Kiyotaki (2010). The financial stability interest rate, r**, is the threshold interest rate that triggers the constraint being binding. Increasing imbalances in the financial sector, measured by an increase in leverage, are accompanied by a lower threshold that could trigger financial instability events. We also construct a theoretical implied financial conditions index and show how it is related to the gap between the ...
Staff Reports , Paper 946

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 ...
International Finance Discussion Papers , Paper 1120

Discussion Paper
Modeling the Global Effects of the COVID-19 Sudden Stop in Capital Flows

The COVID-19 outbreak has triggered unusually fast outflows of dollar funding from emerging market economies (EMEs). These outflows are known as “sudden stop” episodes, and they are typically followed by economic contractions. In this post, we assess the macroeconomic effects of the COVID-induced sudden stop of capital flows to EMEs, using our open-economy DSGE model. Unlike existing frameworks, such as the Federal Reserve Board’s SIGMA model, our model features both domestic and international financial constraints, making it well-suited to capture the effects of an outflow of ...
Liberty Street Economics , Paper 20200518

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, ...
International Finance Discussion Papers , Paper 1085


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