7th BSP International Research Conference
Theme: Expanding the boundaries of central banking in an environment of globalized finance
Venue: The Peninsula Manila Hotel, Makati City, PHILIPPINES
Date   : 24-25 September 2018 (Monday and Tuesday)
Website: http://www.bsp.gov.ph/Media_And_Research/Events/2018/irc/about.aspx

7th BSP International Research Conference Papers

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NoAuthor / Title / Abstract
1.Author(s): John D. Burger, Francis E. Warnock and Veronica Cacdac Warnock
Affiliation(s): Loyola University Maryland, University of Virginia and University of Virginia

Title: Benchmarking Portfolio Flows


To gauge the amount of portfolio inflows a country can expect to receive, we create a benchmark, a longer-term baseline path around which actual flows fluctuate, for 45 countries for the 2000 to 2017 period. For EMEs, there is a significant long-run relationship between actual portfolio flows and our benchmark, flows adjust strongly toward the benchmark, and our benchmark helps predict 1-yearahead changes in inflows. For AEs, the benchmark performs well in directional forecasting exercises. In practical terms, when assessing large movements in portfolio flows it is informative to distinguish between movements toward the benchmark and movements away from the benchmark.

Discussant: Ramon Moreno, (formerly) Bank for International Settlements

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2.Author(s): Gunes Kamber and Eli Remolona
Affiliation(s): Bank for International Settlements

Title: Global inflation and emerging markets


Recent research suggests that inflation is largely a global phenomenon. Borio and Filardo (2007) find that global factors increasingly exerted an influence on domestic inflation rates, especially since the 1990s. Ciccarelli and Mojon (2010) show that a common global factor can explain 70% of the variation of inflation rates in industrialized countries. Moreover, they find that, in the face of shocks, a �robust error-correction mechanism� brings inflation rates back to some long-term global level.

If inflation is a global phenomenon, what does that imply for monetary policy? The answer would require resolving an identification problem. What exactly is the common global factor to which domestic inflation rates tend to revert? To what extent is the factor exogenous? To what extent does it matter to emerging markets? Is it the average worldwide inflation rate resulting from global slack, as emphasized by Borio and Filardo? Or is it just the outcome of the way central banks have come to think about monetary policy? Bean et al (2010) and Clarida (2012), for example, have argued that since the 1990s monetary policy in major economies around the world has been conducted according to the �Jackson Hole consensus.�1

Much of what we know about global inflation is based only on the experience of advanced economies, and the part of this experience that has been analysed is largely one that ends before the great financial crisis (GFC) of 2007-2009. Borio and Filardo, for example, look at inflation in 16 advanced economies, while Ciccarelli and Mojon examine inflation in 22 OECD countries. To shed light on the issue of identification, it may help to consider a more varied sample of countries and to compare the pre-crisis experience with the post-crisis one.

This more varied sample and this comparison between the pre-crisis and post-crisis periods are what this paper provides. Following Ciccarelli and Mojon, we use principal components to extract common factors, or what Stock and Watson (2002) call diffusion indexes, using quarterly inflation series of 38 countries, including 16 emerging markets. We also compare global inflation before the GFC to global inflation after the GFC. Finally, we explore the possible importance of a second common global factor. We then propose to identify these factors by analysing how the sensitivities to them, as measured by the factor loadings, vary across countries.

Our preliminary results are intriguing and confirm the importance of including emerging markets in our sample of countries and of looking also at what happened after the GFC:

  • The first common factor explains 66% of the variation of inflation rates in our sample of 38 countries in the period before the GFC. In the period after the GFC, the common factor explains only 53% of the variation of inflation rates.
  • The second common factor explains 13% of the variation of inflation rates in the period before the GFC and 18% in the period afterwards.
  • As shown in Graph 1, average inflation in OECD countries tends to track the first factor more closely than does average inflation in non-OECD countries.
  • As shown in the table below, average loadings on the first factor reveal a difference between advanced and emerging economies, with inflation in the advanced economies showing more sensitivity to the factor. Indeed, as shown in Graph 2, this difference is quite systematic. All but three emerging markets have loadings smaller than any of the advanced economies.
  • Average loadings on the second factor show an even larger gap, with inflation in advanced economies loading negatively and inflation in emerging markets loading positively. Indeed, as shown in Graph 4, all but three advanced economies show negative loadings.
  • As also shown in the table, these patterns change from the period before the GFC to the period afterwards. The gap in the average loadings on the first factor widens even more. In contrast, the gap in the average loadings on the second factor narrows, with the average loading on inflation in the advanced economies turning positive. The change in patterns is also evident in Graphs 3 and 5, which show somewhat less of a demarcation between advanced economies and emerging markets.

We propose to identify these factors by analysing what explains the cross-sectional variation of their loadings. For explanatory variables, we will consider various country-specific fundamentals. Consistent with Bianchi and Civelli (2015), Auer et al (2017) and Altansukh et al (2017), we will include among these variables the following: (a) terms of trade, (b) financial openness, (c) exchange rate regime, (d) inflation targeting; and (e) participation in global value chains. From an understanding of what fundamentals condition the sensitivities, we will infer what is likely to be behind each of the two common global factors.

Discussant: Roberto Mariano, University of Pennsylvania

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3.Author(s): Naoyuki Yoshino, Farhad Taghizadeh-Hesary and Hiroaki Miyamoto
Affiliation(s): Asian Development Bank Institute and Keio University, Tokyo

Title: The Effectiveness of the Negative Interest Rate Policy in Japan


In April 2013, the Bank of Japan (BOJ), in order to overcome deflation and achieve sustainable economic growth, introduced an inflation target of 2 %. However due to the lower oil prices in the global market, this target could not be achieved for a long-term period. In Feb 2016, the BOJ took further steps, and started a negative interest rate policy, by increasing massive money supply through purchasing long-term Japanese government bonds (JGB). Previously the BOJ only purchased short-term government bonds. This policy has flattened the yield curve of JGBs. Banks started to reduce purchasing government bonds, because the yield of short-term government bonds� became negative, and even for long-term government bonds up to 15 years the interest rates became negative. On the other hand, bank loans to the corporate sector did not grow, due to the vertical investment-saving (IS) curve in the Japanese economy. This paper discusses that first, in the low oil price era, the BOJ has to modify the inflation target of 2 % and reduce it, secondly it argues that the role of monetary policy and the negative interest rate policy in Japan cannot recover from the current recession and deflation situation for the long term. What is important is to make the IS curve downward sloping rather than vertical. That means the rate of return on investment must be positive and companies must be willing to invest if interest rates were set too low. The recession in Japan is coming from structural problems that cannot be solved by the current monetary policy. The last section reports a simulation results of tackling aging population of Japan by introducing productivity based wage rate and postpone retirement age will help the recovery of Japanese economy.

Discussant: Paul D. McNelis, Fordham University

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4.Author(s): Warapong Wongwachara, Bovonvich Jindarak, Sophon Tunyavetchakit, and Chutipa Klungjaturavet
Affiliation(s): Bank of Thailand

Title: Incorporating Financial Stability into Monetary Policy Framework: The Bank of Thailand's Experience


Since the aftermath of the Global Financial Crisis during 2007-2008, financial stability (FS) has become top priority for central banks around the world. The conduct of monetary policy (MP) sees no exception. By leveraging on the existing literature, we propose a systematic approach to incorporate FS considerations into MP framework. This starts with calculating financial cycle (FC) which is a measure of financial imbal- ances and a predictor of financial crises. The interaction between FC and business cycle variables such as output gap provides important information for policy making, for it could stipulate an inter-temporal trade-off between financial and price stability. We then look at an FS dashboard which consolidates pockets of risks facing the financial sector, and show how it may be used in conjunction with FC in FS surveillance. Finally, we consider the calibration of monetary and macroprudential policies in order to design the optimal policy mix. As a demonstration of our approach, we discuss, in each section, an on-going attempt at the Bank of Thailand to systematically incorporate FS into exible in ation targeting.

Discussant: Haykaz Igityan, Central Bank of Armenia and Harvard University

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5.Author(s): Galina Gospodarchuk and Maria Shashkina
Affiliation(s): Lobachevsky State University of Nizhni Novgorod

Title: Consolidation of Price and Financial Stability Goals in the Monetary Policy of Central Banks


The article presents a mechanism for consolidating financial stability goals with the price stability goals in the monetary policy of central banks. The study is based on the analysis of different views on the relation between interest rates, inflation, financial stability, and economic growth, as well as methodological approaches to assessing financial stability at the macro level. We suggest using the real interest rates of debt financial instruments as an indicator of financial stability, which can be used to establish financial stability goals at the macro level. To consolidate the goals of price and financial stability, it is suggested to use a matrix of these goals, formed by combining scales of qualitative assessment of price and financial stability. We suggest using the matrix of consolidation of strategic goals on price and financial stability as a basis for the formation of strategic goals of financial stability, taking into account the target inflation values established by central banks. To achieve the goals of price and financial stability simultaneously, we suggest modifying the monetary rule by including the target value of the IFS indicator in it. According to the modified rule, the key rate should be calculated as the sum of the index of financial stability (IFS) and the general index of price stability (IP) minus the risk premium (RNR). Based on the analysis of time series with information on interest rates and inflation in various markets, we carried out the analysis of the financial stability of the Russian Federation for the period from January 2014 to December 2017 and developed a matrix of consolidation of strategic goals in the monetary policy of the Bank of Russia. Based on the developed matrix, we determined the coordinated target values of financial and target stability and calculated the target level of the key rate for the period of 2018-2020. The results of approbation of the proposed mechanism for coordinating strategic goals on price and financial stability, using the example of the monetary policy of the Bank of Russia, confirm its applicability to the practical operations of central banks. At the same time, they signify of the increasing effectiveness, transparency, and publicity of monetary policy.

Discussant: Lars Other, Friedrich Schiller University

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6.Author(s): Cristeta B. Bagsic and Paul D. McNelis
Affiliation(s): Bangko Sentral ng Pilipinas and Fordham University

Title: Monetary and Macro-Prudential Policy at the BSP: A Bayesian DSGE Approach


This paper develops a small open-economy model with financial frictions to explore the usefulness of additional macro-prudential monetary policy rule for the BSP. Bayesian estimation results that the policy rate is an effective stabilization tool for inflation, while foreign interest rates play a strong role in the volatility of the current account and GDP.

Discussant: Naoyuki Yoshino, Asian Development Bank Institute

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7.Author(s): Nur Ain Shahrier and Chuah Lay Lian
Affiliation(s): Sunway University and the World Bank�s Development Research Group

Title: The Impact of Monetary and Fiscal Policies on Poverty Incidence Using Financial Computable General Equilibrium (FCGE): Case Evidence of Thailand


Purpose: The main objective of this paper is to analyze the impact of monetary and fiscal policies on poverty line and income distribution of the bottom 20 percentile to the top 20 percentile. The worsening or improvement of poverty incidence is then determined by the relative dominance of these two factors: poverty line and income distribution.

Design/Methodology/Approach: To analyze these impacts, we used Financial Computable General Equilibrium (FCGE) model, a model that merge Social Accounting Matrix (2005) and Flow-of-Funds (2005) of Thailand. This approach integrates the real sector and financial sector within an economy and offers economic wide impact when a shock is transmitted.

Findings: Firstly, we conclude that in a short run the expansionary fiscal policy (increase in government spending) is more effective than the expansionary monetary policy in narrowing the income distribution and improving the income of the bottom 20% of the population. Using expansionary monetary policy such as decreasing the interest rate or the reserve requirement in the hope that easy credit will entice businesses to invest in human capital will no longer work due to the alternatives that businesses have such as investment in financial instruments. Secondly, expansionary monetary policies in a short run would improve the income distribution and income of the bottom 20% of the population only until certain threshold before the effects are reversible. In the long run, monetary policy that aimed at low inflation and stable aggregate demand would permanently improve poverty incidence.

Practical Implication: Policy makers should take into account both poverty line and income distribution when analyzing a poverty incidence of a country. A decline in poverty line is not necessarily a positive news when this is accompanied by a large gap in income distribution, vice versa, an increase in poverty line is not necessarily a negative news when the income gap narrows.

Originality: This paper analyzes the economic wide impact of monetary and fiscal policies on poverty incidence using simultaneous equations modelling (FCGE) that look at propagation of shocks transmission through the real sector and financial sector

Discussant: Roehlano M. Briones, Philippine Institute for Development Studies

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8.Author(s): Haykaz Igityan
Affiliation(s): Central Bank of Armenia

Title: Asymmetric Effects of Monetary Policy in Different Phases of Armenia's Business Cycle


This paper develops empirical models and shows the presence of asymmetric responses of inflation and output in Armenia to the same size of positive and negative monetary policy shocks. Tight monetary policy yields more reduction in output compared to the increase of output in a response to the same size of loose monetary policy. On the other hand, relatively more inflation is created by expansionary policy. The theoretical micro founded model with New Keynesian frictions is developed to explain asymmetries in transmission mechanism of policy. The model is estimated for the Armenian economy using fifteen macroeconomic time series and fifteen structural shocks. Impulse response functions of second order approximated theoretical model, based on estimated structural parameters, match asymmetries from empirical models. The methodology of mixed equations is applied to calculate the contribution of the particular friction in a creation of asymmetry in the transmission mechanism. The asymmetric response of inflation is mostly the result of highly convex Phillips curve of importers. Another part of asymmetry in inflation is created by internal economy�s price setting frictions and labor market rigidities. The significant part of asymmetric response in output is created by nonlinearities in capital and labor markets. Adding curvatures of the small open economy into the second order approximated model, the size of asymmetry increases through the channel of the high asymmetric reaction of real exchange rate. Third order theoretical moments of simulated models match directions and sizes of observed data. Variance decomposition of output shows that both demand and supply shocks are important drivers of output. The paper does policy experiments in demand and supply driven business cycle environments. In a demand driven growing economy, the aggressive contractionary monetary policy accelerates the decline of output with diminishing effect on inflation. Aggressive expansionary monetary policy increases the efficiency of creating inflation and decreases the stimulation of output in a demand driven recession. When the economy is in supply driven expansion, the increase in reaction of monetary policy accelerates the decline in output with no significant relative impact on inflation. In a supply driven recession, the aggressive response increases the reaction of output with diminishing effect on inflation.

Discussant: John Nye, George Mason University

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9.Author(s): Naoyuki Yoshino and Paul D. McNelis
Affiliation(s): Asian Development Bank Institute/Fordham University

Title: Household Income Dynamics in a Lower-Income Small Open Economy: A Comparison of Banking and Crowdfunding Regimes


This paper examines asset price and household income/consumption dynamics in a small open economy subject to terms of trade shocks, under two financial regimes. The first is a limited-participation banking (LPB) regime, in which firms borrow from banks for financing costs of labor, investment and intermediate goods for both the relatively riskless natural-resource traded sector and the non-traded sector. The second regime is more financially-inclusive banking/crowdfunding (BCF) regime, in which the households directly receive returns to capital from pooled lending to homegoods firms. Simulation results show that the banking regime better insulates the economy from negative shocks but limits the upside gain from positive shocks which would take place in the banking-crowdfunding regime.

Discussant: Cristeta B. Bagsic, Bangko Sentral ng Pilipinas

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10.Author(s): Imaduddin Sahabat, Tumpak Silalahi, Ratih Indrastuti, and Marizsa Herlina
Affiliation(s): Bank Indonesia

Title: Network Motif of Interbank Payment as Early Warning Signal of Liquidity Crisis


The widespread impact of the global financial crisis has increased the focus of global attention on the transmission of spread risk through interbank connectivity on payment system networks. In its development, changes in interbank connectivity patterns within the network can be identified as early warning signals of future crises. This study aims to identify network motives of large value interbank payment transactions (RTGS) and interbank retail payment transactions (national clearing system) to become early warning signals on financial liquidity conditions. The relationship pattern is estimated using Directed Random Graph (DRG) and Directed Configuration Model (DCM) models. The results indicate that interbank reciprocal network motive, through the RTGS system, has a relationship with the liquidity condition of the financial system so that it can be used as an early warning system. In addition, estimates, using the DCM approach, are better at explaining interbank network relationships compared to the DRG model.

Discussant: Nur Ain Shahrier, Sunway University

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11.Author(s): Lars Other
Affiliation(s): Friedrich Schiller University

Title: Disentangling the Information and Forward Guidance Effect of Monetary Policy Announcements on the Economy


Central bank announcements may comprise different information components. For example, an announcement of monetary easing may either be perceived as an expansive stimulus or, contrary, as a systematic response by the central bank to unfavorable economic news the public is unaware of. This paper presents a novel strategy to decompose the information content of central bank announcements that explicitly accounts for such an information effect regarding economic prospects. Based on a formally derived prediction of the standard New Keynesian model, the identifying assumption reads that the information effect should be correlated with movements in five-year, five-year breakeven inflation rates on announcement days, while forward guidance regarding future interest rates should not be correlated. Disentangling distinct dimensions of monetary policy, the effects of monetary policy announcements on the term structure and on the macroeconomy are investigated. The results provide new insights about the transmission mechanism of monetary policy measures and highlight the effectiveness of forward guidance.

Discussant: Eli M. Remolona , Bank for International Settlements

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