2014 BSP International Research Conference
Theme: The Evolving Role and Limits of Monetary Policy: New Perspectives for Emerging Market Economies
Venue: Manila, Philippines
            Metro Manila, PHILIPPINES
Date   : 28-29 October 2014 (Tuesday and Wednesday)
Website: http://www.bsp.gov.ph/events/2014/irc/about.htm

2014 BSP International Research Conference Papers


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NoAuthor / Title / Abstract
1.Author(s): Paul D. Mcnelis
Affiliation(s): Fordham University

Title: Finding Stability in a Time of Crisis: Lessons of East Asia for Europe

Abstract:

This paper examines the options of a small open economies in Eastern Europe pegged to the Euro, in a time of crisis. Specifically, should Bosnia and Herzegovina, Bulgaria, Latvia and Lithuania move to full Euro area accession, as Estonia, Slovakia, and Slovenia have done, or follow the examples of Poland, the Czech Republic, and Hungary. This paper argues that going forward to full monetary union offers benefits over a pure fixed exchange-rate regime. Specifically, the experience of Hong Kong at the time of

Discussant: Maik Wolters, University of Kiel

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2.Author(s): Nur Ain Shahrier and Chuah Lay Lian
Affiliation(s): Bank Negara Malaysia

Title: Decomposing Capital Flows and Assessing the Impact of Capital Flows on Asset Markets: Empirical Evidence from the ASEAN-4 Countries

Abstract:

International capital flows have played an increasingly important role in the business cycles of high-income and middle-income countries, especially after the episodes of financial crises. Capital flows to the Asian countries in the recent decade have displayed an unpredictable pattern and its volatility intensified during the onset of the Global Financial Crisis (GFC) in 2008. Following the Lehman Brothers failure, risk aversion heightened resulting in a temporary reversal of capital inflows for most Asian countries. However, these capital flows quickly rebounded in mid-2009, partly due to the strong fundamentals of the Asian economies. Undeniably, the benefits of capital inflows are debatable, as one of the main challenges the policy maker has to deal with is the liquidity that could potentially cause asset price booms and the creation of asset bubbles. In this context, the first part of the paper attempts to decompose the capital flows into ASEAN-4 countries pre and post GFC and identify the periods of “surge”, “stop”, “flight” and “retrenchment”. The second part of the paper attempts to establish the link between the pattern of capital flows and the asset price cycles. While findings show that the capital flows have a small impact on asset price boom and subsequently the bust of the asset price cycle after eight quarters, it has however shown that excessive deviations of house prices from its underlying fundamentals causes imbalances in the asset market.

Discussant: Ruperto Majuca, De La Salle University, Philippines

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3.Author(s): Ruperto Majuca and Lawrence Dacuycuy
Affiliation(s): De La Salle University

Title: An Open Economy DSGE-Model for the Philippines

Abstract:

This paper identifies various model elements to constitute the necessary theoretical core of a dynamic macroeconomic model, estimates impulse responses through advanced techniques and analyses how remittances and key macroeconomic outcomes are affected by various shocks, all of which reflect the state of the art in open economy Dynamic Stochastic General Equilibrium (DSGE) modelling. We augment the existing Open Economy DSGE model of Adolfson, Laseen, Linde, and Villani (2007) by distinguishing the nontradable and tradable sectors and including remittances. This makes our model more stylized given the fact that the Philippines remain as one of the top remittance – receiving countries in the world. The objective is to set the stage for an estimable DSGE model that hopefully will capture the features and dynamics of the Philippine economy and will prove as the basis for the construction of other models that explore and explain different macroeconomic problems. Integrated into this paper are some of the essential structures characterizing open economy DSGE models that will help explain macroeconomic dynamics and possibly to provide an analytical platform for future forecasting work and counterfactual analyses. We estimated the dynamics of various macroeconomic variables after individually considering exogenous shock processes. We focused our analysis on the response of remittances on shock processes. This is an important undertaking because of the role remittances play in stabilizing foreign exchange markets and providing support to economic activities involving households and firms.

Discussant: Paul McNelis, Fordham University

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4.Author(s): Shakira Teh Sharifuddin and Loke Po Ling
Affiliation(s): Bank Negara Malaysia

Title: Flattening Yield Curve amidst Rapid Inflows: The Malaysian Experience

Abstract:

Against the background of the euro area sovereign debt crisis, our paper investigates the relationship between public debt and economic growth and adds to the existing literature in the following ways. First, we extend the threshold panel methodology by Hansen (1999) to a dynamic setting in order to analyse the nonlinear impact of public debt on GDP growth. Second, we focus on 12 euro area countries for the period 1990-2010, therefore adding to the current discussion on debt sustainability in the euro area. Our empirical results suggest that the short-run impact of debt on GDP growth is positive and highly statistically significant, but decreases to around zero and loses significance beyond public debt-to-GDP ratios of around 67%. This result is robust throughout most of our specifications, in the dynamic and non-dynamic threshold models alike. For high debt-to-GDP ratios (above 95%), additional debt has a negative impact on economic activity. Furthermore, we can show that the long-term interest rate is subject to increased pressure when the public debt-to-GDP ratio is above 70%, broadly supporting the above findings.

Discussant: Danvee Floro, Bangko Sentral ng Pilipinas

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5.Author(s): Roberto Perrelli and Shaun K. Roache
Affiliation(s): International Monetary Fund)

Title: Time Varying Neutral Interest Rates in Emerging Markets

Abstract:

Emerging markets experienced a sizeable decline in their neutral real interest rates in the decade through mid-2013. In this paper we identify the main factors that contributed to this decline and apply a range of techniques useful for estimating neutral rates in emerging markets using Brazil as a case study. We also assess the implications of incorrectly estimating a time-varying neutral rate using a small structural model with a simple monetary policy instrument rule. We find that policy prescriptions are very different when facing uncertainty of neutral rate and of output gap. Our result contrasts sharply with Orphanides (2002), suggesting that the best response to neutral rate uncertainty is to ensure policy remains highly sensitive to inflation and output variations.

Discussant: Björn van Roye, European Central Bank

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6.Author(s): Qianying Chen, Dong He, Andrew Filardo and Feng Zhu
Affiliation(s): International Monetary Fund, Hong Kong Monetary Authority and Bank for International Settlements (Hong Kong Office)

Title: Global Impact of US Monetary Policy at the Zero Lower Bound

Abstract:

This is a study of the cross-border effects of US monetary policy at the zero lower bound on 17 major advanced and emerging economies. We evaluate various channels of international transmission of US monetary policy both before and after the zero lower bound on the nominal interest rate became binding in late 2008. We estimate a global vector error-correcting macroeconometric (GVECM) model to assess the impact of US monetary policy on various measures of economic activity in these economies, approximating the unconventional policy measures implemented by the Federal Reserve with two types of shadow federal funds rates developed by Lombardi and Zhu (2014) and Wu and Xia (2013). The analysis suggests that US monetary stimulus in the crisis period had sizeable domestic effects. Our counterfactual simulations support the view that, domestically, US monetary policy prevented recessions in 2011 and 2012, and has prevented deflation since 2010. For the other economies, the spillover effects from US monetary policy had in many cases a sizeable and persistent impact on output growth, inflation and equity prices. US monetary policy also led to US dollar depreciation, putting strong appreciation pressures on many currencies (eg the Brazilian real, Indian rupee, Indonesian rupiah and Korean won), and to a diverse set of monetary policy responses in the emerging economies.

Discussant: Shaun K. Roache, International Monetary Fund

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7.Author(s): Danvee Floro and Joselito Basilio and Björn van Roye
Affiliation(s): Bangko Sentral ng Pilipinas and University of Kiel

Title: The Responsiveness of Monetary Policy to Financial Stress: A Dynamic Panel

Abstract:

We examine the nature of monetary policy’s response to increases in financial stress across a panel of advanced and emerging economy central banks by employing a dynamic panel threshold methodology in which we allow for switches between regimes according to an estimated threshold value of financial stress. First, we find that the negative impact of financial stress on interest rate setting is more pronounced when financial stress is low for both advanced and emerging market central banks. Second, advanced economy central banks react to output developments countercyclically regardless of the financial cycle. Third, we find strong evidence of a shift to countercyclical monetary policy responses to financial stress and business cycle fluctuations for emerging market countries in the low-stress regime.

Discussant: Dennis Mapa, University of the Philippines

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8.Author(s): Hoon Kim and Feng Zhu
Affiliation(s): Bank of Korea and Bank for International Settlements

Title: Estimating Macro-Financial Linkages in Asia

Abstract:

The recent global financial crisis and the Great Recession have highlighted the importance of macrofinancial linkages. It has also revealed how little we knew about the interactions between financial sector developments and real activity, which have been essential to the transmission of financial shocks to business cycles. In this paper, we use two approaches to investigate macro-financial linkages in Asian economies. First, we employ frequency-domain techniques to study the relationship between financial variables (credit and asset prices) and real activity across the entire frequency range, estimating cross-spectral density, coherency, gain, phase-to-frequency ratio, and frequency-specific coefficients of correlation and regression. Second, we estimate country-specific Bayesian vector autoregressive (BVAR) models to study the interactions between financial and macro variables, and we evaluate the impact of financial sector shocks on real activity. We find that long-term financial sector developments contributes to trend growth, but real GDP growth affects equity prices and bank lending mainly at the business-cycle and higher frequencies. The business-cycle link between output growth and bank lending growth is weak, in contrast to its link with equity prices. In addition, macro-financial linkages change over time and differ significantly across the emerging Asian economies, which might be attributed to the rather different levels of financial sector development and to distinct policy and institutional frameworks. Nevertheless, macrofinancial linkages play a significant role in economic fluctuations in the region.

Discussant: Nur Ain Shahrier, Bank Negara Malaysia

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9.Author(s): Nils Jannsen, Galina Potjagailo and Maik Wolters
Affiliation(s): Kiel Institute for the World Economy and University of Kiel

Title: Monetary Policy during Financial Crises: Is the Transmission Mechanism Impaired?

Abstract:

We study the effects of monetary policy on output during financial crises. We use a large panel of advanced and emerging economies to guarantee a sufficiently high number of financial crisis episodes. Financial crises dummy variables, which are constructed based on the narrative approach, are interacted with other key macroeconomic variables in a panel VAR. Theory suggests that monetary policy might be more effective during financial crises if it can ease malfunctioning of financial markets for example by loosening credit constraints or restoring confidence. Alternatively, deleveraging and uncertainty might predominate and make the economy less interest rate responsive and monetary policy less effective during financial crises. Taking a sample from the mid 1980s to today, we find that an expansionary monetary policy shock is very effective in raising GDP during the recessionary period of a financial crisis. The effect is stronger than in non-crisis times. In contrast, during the recovery period of a financial crisis, monetary policy has a very small effect on GDP. These differences can be explained by a confidence channel. During the joint occurrence of a recession and a financial crisis an expansionary monetary policy shock increases consumer confidence and GDP. During the following recovery monetary policy has no effects on confidence or GDP. Other variables like credit, housing prices and exchange rates can at most partially explain differences in transmission between the different regimes.

Discussant: Shakira Teh Sharifuddin, Bank Negara Malaysia

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10.Author(s): Shanaka Jayanath Peiris, Rahul Anand and Vic Delloro
Affiliation(s): International Monetary Fund and Bangko Sentral ng Pilipinas

Title: A Credit and Banking Model for Emerging Markets and an Application to the Philippines

Abstract:

The paper develops a small open economy New Keynesian DSGE model with financial frictions and an active banking sector for emerging markets, in order to understand the role of banking intermediation in the transmission of monetary impulses, and to analyze how shocks that originate in credit markets are transmitted to the real economy. The DSGE model builds-in many of the features of emerging markets such as rigidities in interest rate pass-through, “financial accelerator” effects and foreign currency borrowing by firms, a credit supply channel, as well as impact of conventional and unconventional monetary policies. The analysis delivers the following results. First, the presence of financial frictions amplifies the magnitude and the persistence of transitory shocks. Second, market power of monopolistic banking sector amplifies the business cycle. However when interest rates are sticky, banking system attenuate the response to shocks. Third, the tightening of credit markets (modeled by a persistent negative shock to bank capital) can have substantive effects on the economy. Fourth, when the central bank resorts to using non-monetary tools, there is a larger contraction in output and consumption as compared to traditional monetary tightening (operating through nominal interest rate changes). These results are driven by the two channels through which the financial sector interacts with the real economy – the financial accelerator channel, which establishes a link between the balance sheet of the firms (borrowers) and the real economy; and the banking channel, which creates a feedback loop between the real and the financial side of the economy through the bank’s balance sheet.

Discussant: Harmanta, Bank Indonesia

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11.Author(s): Harmanta, Nur M. Adhi Purwanto, Aditya Rachmanto and Fajar Oktiyanto
Affiliation(s): Bank Indonesia

Title: Monetary and Macroprudential Mix under Financial Frictions Mechanism with DSGE Model: Lessons from Indonesian Experience

Abstract:

In this research a DSGE model is developed for the small open economy of Indonesia, complemented with the inclusion of financial frictions in the form of collateral constraints amongst households and a financial accelerator amongst entrepreneurs. In the DSGE model, the banking sector is based on Gerali et al (2010) framework, and the overall model is designed to accommodate the conditions found in Indonesia and meets all the development objectives, namely to simulate monetary policy (the BI rate) and the exchange rate as well as macroprudential policy on financial institutions, in this case the banking sector, in the form of simulating the CAR requirement and LTV ratio requirement for households. Inclusion of the banking sector in the model enables analysis of the policies required to mitigate shocks originating in the banking sector or indeed other shocks as well as their influence on financial intermediaries in the form of banks in the economy. The model demonstrates that shocks in the banking sector, for instance raising the CAR requirement, impacts the real sector through the credit channel, which undermines GDP and lowers the rate of inflation. The financial accelerator mechanism in the model evidences procyclicality in the financial system to economic conditions. An economic contraction elicits a response from the banking industry to reduce the amount of credit allocated, which is the root of the risk faced by the banks. In the face of rising ex-post idiosyncratic shocks, exceeding those ex-ante, indicates that bank assessments of expected return on capital of an entrepreneur are larger than the actual realisation, forcing banks to bear the risk. Such conditions further encourage banks to reduce credit disbursement in order to avoid eroding bank capital. The simulations also show that a policy mix of monetary and macroprudential policy not only achieves sustainable GDP and stable inflation but also helps to control consumption, thereby reducing demand for imported goods. Coupled with stable exports, a slowdown in imports will have a favourable effect on the current account.

Discussant: Shanaka Jayanath Peiris, International Monetary Fund

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