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Author:Davis, Scott 

Working Paper
Monetary Policy Divergence and Net Capital Flows: Accounting for Endogenous Policy Responses

This paper measures the effect of monetary tightening in key advanced economies on net capital flows around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous response of domestic monetary policy depends on each economy's capital account openness and exchange rate ...
Supervisory Research and Analysis Working Papers , Paper RPA 18-5

Working Paper
Capital controls as an instrument of monetary policy

Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset prices and credit supply. In order to lessen the impact of capital flows on financial instability, a number of researchers and policy markers have recently proposed the use of capital controls. This paper considers the benefit of adding capital controls as a potential instrument of monetary policy in a small open economy. In a DSGE framework, we find that when domestic agents are subject to collateral constraints and the value of collateral is subject to fluctuations driven by ...
Globalization Institute Working Papers , Paper 171

Working Paper
International real business cycles with endogenous markup variability

The aggregate impact of decisions made at the level of the individual firm has recently attracted a lot of attention in both the macro and trade literatures. We adapt the benchmark international real business cycle model to a game-theoretic environment to add a channel for the strategic interaction among domestic and foreign firms. We show how the sum of strategic pricing decisions made at the level of the individual firm can have significant effects on the volatility and cross country co-movement of GDP and its components. Specifically we show that the addition of this one channel for ...
Globalization Institute Working Papers , Paper 60

Working Paper
Financial integration and international business cycle co-movement: the role of balance sheets

This paper investigates the effect of international financial integration on international business cycle co-movement. We first show with a reduced form empirical approach how capital market integration (equity) has a negative effect on business cycle co-movement while credit market integration (debt) has a positive effect. We then construct a model that can replicate these empirical results.> ; In the model, capital market integration is modeled as crossborder equity ownership and involves wealth effects. Credit market integration is modeled as cross-border borrowing and lending between ...
Globalization Institute Working Papers , Paper 89

Working Paper
The adverse feedback loop and the effects of risk in both the real and financial sectors

Recessions that are accompanied by financial crises tend to be more severe and are followed by slower recoveries than ordinary recessions. This paper introduces a new Keynesian model with financial frictions on both the demand and supply side of the credit markets that can explain this empirical finding. Following a shock that leads to a decline in economic activity, an adverse feedback loop arises where falling profits and asset values lead to increased defaults in the real sector, and these increased defaults lead to increased loan losses in the banking sector. Following this increase in ...
Globalization Institute Working Papers , Paper 66

Working Paper
Economic fundamentals and monetary policy autonomy

During a time of rising world interest rates, the central bank of a small open economy may be motivated to increase its own interest rate to keep from suffering a destabilizing outflow of capital and depreciation in the exchange rate. This is especially true for a small open economy with a current account deficit, which relies on foreign capital inflows to finance this deficit. This paper will investigate the underlying structural characteristics that would lead an economy with a floating exchange rate to adjust their interest rate in line with the foreign interest rate, and thus adopt a de ...
Globalization Institute Working Papers , Paper 267

Working Paper
Monetary Policy Divergence, Net Capital Flows, and Exchange Rates: Accounting for Endogenous Policy Responses

This paper measures the effect of monetary tightening in key advanced economies on net capital flows and exchange rates around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous responses of domestic monetary policy depends on each economy?s capital account openness ...
Globalization Institute Working Papers , Paper 328

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 ...
Globalization Institute Working Papers , Paper 85

Discussion Paper
Cross-country variation in the anchoring of inflation expectations

This paper develops a method for measuring the anchoring of long-run inflation expectations that does not require estimates of long-run inflation expectations. Such estimates exist for only a few developed economies, and even then only a short time series is available. By not requiring estimates of long-term inflation expectations, this method is able to measure the anchoring of inflation expectations in sixty-four different developed and developing countries. In addition, with rolling-window estimations we can measure the anchoring of expectations across time within a country, and thus we ...
Staff Papers , Issue Oct

Blog
Emerging-Market Economies Face COVID-19 and a 'Sudden Stop' in Capital Flows

A rise in global risk at a time of investor risk aversion led to a rapid flight from emerging-market assets.
Dallas Fed Economics

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