6th BSP International Research Conference
Theme: Revisiting macro-financial linkages: Looking back and looking ahead
Venue: The Peninsula Manila Hotel, Makati City, PHILIPPINES
Date   : 20-21 September 2016 (Tuesday and Wednesday)
Website: http://www.bsp.gov.ph/events/2016/irc/about.htm

6th BSP International Research Conference Papers


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1.Author(s): Georgios Georgiadis and Martina Jancokova
Affiliation(s): European Central Bank

Title: Financial Globalisation, Monetary Policy Spillovers and Macro-modelling: Tales from One Hundred and One Shocks

Abstract:

We show that a structural monetary model that fails to account for empirically relevant financial spillover channels implies domestic monetary policy shock estimates which are contaminated by a global component and thereby inconsistent. We hypothesise that structural monetary models routinely used in policy and academia are subject to this failure. We derive and test predictions from this hypothesis using a database of monetary policy shock estimates from more than 180 monetary models for the time period from 1993 to 2007. Consistent with the predictions from our hypothesis, we find that the structural monetary models in our database produce cross-country correlated monetary policy shock estimates. Moreover, also in line with the predictions from our hypothesis, we find that the cross-country correlations are larger for country pairs that are more susceptible to financial spillovers in the data as re ected by their integration with global and US financial markets. Finally, also consistent with the predictions from our hypothesis, we find that using the shock estimates from the structural monetary models in our database implies implausibly similar estimates for the global output spillovers from monetary policy in the US, the euro area and the UK. Our findings imply that accounting for powerful financial spillover channels is a critical gap in current structural monetary macroeconomic modelling.

Discussant: Paul D. McNelis, Fordham University

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2.Author(s): Marlene Amstad, Eli Remolona and Jimmy Shek
Affiliation(s): Bank for International Settlements

Title: How do Global Investors Differentiate between Sovereign Risks? The New Normal Versus the Old

Abstract:

When global investors go into emerging markets or get out of them, how do they differentiate between economies? Has this behaviour changed since the crisis of 2008 to reflect a “new normal”? We consider these questions by focusing on sovereign risk as reflected in monthly returns on credit default swaps (CDS) for 18 emerging markets and 10 developed countries. Tests for breaks in the time series of such returns suggest a new normal that ensued around October 2008 or soon afterwards. Dividing the sample into two periods and extracting risk factors from CDS returns, we find an “old normal” in which a single global risk factor drives half of the variation in returns and a new normal in which that risk factor becomes even more dominant. Surprisingly, in both the old and new normal, the way countries load on this factor depends not so much on economic fundamentals as on whether they are designated an emerging market.

Discussant: Iman Badrudin, Bank Negara Malaysia

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3.Author(s): Maria Teresa Punzi and Pornpinun Chantapacdepong
Affiliation(s): Vienna University of Economics and Business and Asian Development Bank Institute

Title: Spillover Effects of Uncertainty Shocks on Asia-Pacific Region

Abstract:

This article estimates the effects of uncertainty shocks on several macroeconomic and financial variables for the Asia-Pacific region. We consider two measures of risk: US policy uncertainty and VIX indexes. We find systematic re-allocation of foreign portfolio toward Asia-Pacific region. These countries have responded global uncertainty with accommodative monetary policy. Such lower interest rate was coupled with currency appreciation, asset price inflation and strong movements in capital flows. Foreign investors have shifted their preferences for Asia-Pacific bonds. If prior the Global Financial Crisis (GFC), the global saving glut hypothesis (i.e. Asian savings flight to the U.S.) was one of the major effects on the booming U.S. house prices, it is clear that a reversal effect has dominated the economy after the GFC: funds flight to Asia-Pacific region putting pressure on asset prices, leading to financial vulnerability. Our analysis confirms finding on the recent discussion opened by Rey (2013) on "dilemma", not anymore “trilemma", since central banks appear to lose their monetary policy independency even under floating exchange rates.

Discussant: Lam San Ling, Monetary Authority of Singapore

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4.Author(s): Iman Badrudin
Affiliation(s): Bank Negara Malaysia

Title: The Role of Financial Market Development on Financial Contagion: Evidence from Selected Asian Economies

Abstract:

This paper seeks to examine the role of financial sector development in cushioning the extent of financial contagion in Asian economies since the 2008 Global Financial Crisis. This study looks at Thailand, Indonesia, Malaysia and Korea, countries that were severely affected during the 1997 Asian Financial Crisis. This paper also attempts to distinguish the ability of current Asian financial systems in dealing with global and regional shocks. The empirical results broadly suggest that financial market development has played significant roles in the management of financial contagion for these Asian economies. The effects on equity contagion are comparatively stronger than for currency contagion. In particular, the size of the banking system and the degree of financial openness matters to reduce stock market contagion, while higher levels of adequate reserves do have some offsetting effects during currency shocks. Present market conditions also appear to show signs of greater resilience against a regional equity shock similar to what was experienced in 1997.

Discussant: Lam San Ling, Monetary Authority of Singapore

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5.Author(s): Francesco Molteni
Affiliation(s): European University Institute

Title: Liquidity, Government Bonds and Sovereign Debt Crises

Abstract:

This paper analyses the European financial crisis through the lens of sovereign bond liquidity. Using novel data we show that repo haircuts on peripheral sovereign bonds sharply increased during the crisis reducing their liquidity and amplifying the rise in their yields. We study the systemic impact of a liquidity shock to government securities on the business cycle and asset prices through a DSGE model with financial frictions. The model predicts a drop in economic activity, de ation and a fall in the value of illiquid bonds. We show that liquidity facilities can alleviate the contractionary effect of this shock. Impulse response functions of VAR models confirm empirically the negative impact of a liquidity shock on the value of government bonds.

Discussant: Marcel Bluhm , Xiamen University and Goethe University Frankfurt

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6.Author(s): John Muellbauer, Pierre St-Amant and David Williams
Affiliation(s): Bank of Canada

Title: Credit Conditions and Consumption, House Prices and Debt: What Makes Canada Different

Abstract:

We propose new ways to think about the set of equations governing the household sector in general equilibrium models by incorporating real-financial linkages between consumption, household balance sheets and credit markets. Canada shares similarities with the United States and several other countries in that a long-term easing in credit conditions has increased consumption relative to income and expanded household portfolios. Canada differs in that higher house prices relative to income have an overall negative impact on consumption relative to income, except when offset by an easing in credit conditions. Much of the rise in house prices and debt since the late-1990s can be explained by cheaper and easier access to mortgage credit.

Discussant: Francesco Molteni, European University Institute

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7.Author(s): Marcel Bluhm
Affiliation(s): Xiamen University and Goethe University Frankfurt

Title: Persistent Liquidity Shocks and Interbank Funding

Abstract:

I develop a theory of multiple maturity segments on the interbank market based on banks' liquidity management and persistence of liquidity shocks. The developed framework is embedded in a micro-founded network model which features interbank funding as an over-the-counter phenomenon and replicates financial system phenomena of network formation, monetary policy transmission, and endogenous money creation. This setup is used to shed light on the purpose of the interbank market and its role for allocation and stability in the financial system. I show that the extent of interbank funding depends on persistence and magnitude of liquidity shocks as well as banks liquidity requirement. An optimal policy analysis, in which the policymaker faces a trade-off between credit supply and financial fragility, provides evidence that an efficient interbank market though being a potential channel of contagion allows for considerable gains in economic activity.

Discussant: David Williams, Bank of Canada

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8.Author(s): Andrew Filardo and Pierre L. Siklos
Affiliation(s): Bank for International Settlements, Wilfrid Laurier University and Basillie School of International Affairs

Title: The Cross-Border Credit Channel and Lending Standards Surveys: Implications for the Effectiveness of Unconventional Monetary Policies

Abstract:

The role of credit conditions is critical. This paper argues that an underused indicator, obtained from surveys conducted among Senior Loan Officers and often cited by central bankers, offers some important new insights about the effects of unconventional monetary policies (UMP) and the potential size and impact of cross-border spillovers. Surveys of credit standards or conditions represent a useful proxy to assess whether the transmission mechanism of monetary policy may be impaired, especially under crisis conditions and during the recovery and return to normality phases in monetary conditions. We are able to employ data from 16 economies, 10 of which belong to the Eurozone, for a sample covering the 2002-2014. We then apply the Global VARs (GVAR) methodology that seems best-suited to account for domestic and international real and financial sources of shocks to the aggregate economy. We find that cross-border effects of QE significantly interact with domestic lending conditions. As a result, our approach provides insights into why the credit boom that preceded the GFC was felt more keenly in some economies than in others. Our study also leads to some policy implications. For example, it is important that policy makers survey more than just domestic credit conditions. Cross-border influences on domestic credit conditions need to be separately identified if surveys of the kind that have become more visible are to provide some insights into the evolving monetary policy transmission mechanism.

Discussant: Fang Yao, Reserve Bank of New Zealand

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9.Author(s): Thorvardur Tjörvi Ólafsson
Affiliation(s): Central Bank of Iceland

Title: The Long History of Financial Boom-Bust Cycles in Iceland

Abstract:

Claudio Borio recently quipped that “macroeconomics without the financial cycle is like Hamlet without the Prince” (Borio, 2014, p. 183). We rise to his call to arms and tackle the Prince’s existential question head-on. Our findings suggest that there exists a well-defined financial cycle in Iceland that has gradually become more prominent as the financial deepening and sophistication of the economy has increased. Using a dataset spanning more than a century, including data on credit, house prices, and bank balance sheet size and composition, we find that the aggregate financial cycle is much longer than the typical business cycle, with a median duration of sixteen years. We find that there is a large difference in economic performance over different phases of the financial cycle, suggesting that it has played a prominent role in the country’s macroeconomic development. In fact, we find that almost all of the peaks in the financial cycle coincide with some type of a financial crisis and that cyclical expansions provide a robust early-warning signal for subsequent crises. We find strikingly strong ties between the Icelandic financial cycle and its global counterpart (proxied by the US financial cycle), with almost all of the cyclical peaks in the Icelandic financial cycle occurring close to peaks in the global cycle. Our findings suggest that understanding economic fluctuations in Iceland is hard without understanding the financial cycle and that we ignore the financial cycle at our peril. We conclude with a first attempt at exploring some of the policy questions that our findings raise.

Discussant: Delano Villanueva, Special consultant to the Bangko Sentral ng Pilipinas

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10.Author(s): Tim Robinson and Fang Yao
Affiliation(s): Reserve Bank of New Zealand

Title: Consequences of Loan-to-Value Ratio Policies for Business and Credit Cycles

Abstract:

Setting maximum Loan-To-Value (LTV) ratios is one of the most widely used macropru- dential policies. We examine their implications for the business and credit cycles. This is done using a DSGE model with housing and long-term mortgage debt. Two types of policies are considered: a permanent lowering and activist, \leaning-against-the-wind", policy. The former is found to decrease the proportion of time that the economy is in a recession and the average depth of recessions; these impacts are greater for the credit cycle. Activist LTV ratio policy can also improve the characteristics of business and credit cycles, although care needs to be taken in its design, particularly with respect to which variables the LTV ratio responds to and the aggressiveness of the response.

Discussant: Maria Teresa Punzi , Vienna University of Economics and Business

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11.Author(s): Paul D. McNelis
Affiliation(s): Fordham University

Title: Optimal Policy Rules at Home, Crisis and Quantitative Easing Abroad

Abstract:

This paper examines the international transmission of financial shocks which originate in, and are partially offset by, quantitative easing in a large financially-stressed country. Using a two-country model, we evaluate the adjustment in the non-stressed home country, following recurring negative shocks to productivity and banking-sector balance-sheet/terminal wealth ratios. We first examine the application of QE policies in the stressed foreign country. Coupling quantitative easing with crisis events abroad magnifies the financial instability transmitted to the rest of the world. Our results show that the non-stressed home country can make effective use of tax-rate rules for consumption, or taxes on to stabilize financial- sector net worth in times of prolonged crisis abroad.

Discussant: Thorvardur Tjörvi Ólafsson, Central Bank of Iceland

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