Monetary Policy Transmission Mechanism, Financial Frictions in Closed and Open Economy Dsge Models PDF Download
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Author: Sadia Afrin
Publisher:
ISBN:
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Languages : en
Pages : 0
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Book Description
The broad objective of the thesis is to analyze the monetary policy transmission and relative importance of various shocks in business cycles after considering the financial sector structure for both developing and developed countries in three self-contained chapters (Chapter 2-4). The thesis contributes both theoretically and empirically to the literature relating to monetary policy, financial frictions and competition structure, exchange rate pass through and open economy in general, using Structural Vector Auto-Regression (SVAR) and Dynamic Stochastic General Equilibrium (DSGE) models. Since the global financial crisis, a growing awareness of the roles of financial frictions has led to renewed interests in transmission mechanisms of monetary policy and other shocks. Two different financial frictions are incorporated in the DSGE models of Chapter 3-4 while Chapter 2 does not explicitly model financial friction and uses SVAR model to analyze the research questions. The effectiveness of monetary policy and its economy wide transmission mechanism are relatively unexplored in Bangladesh where financial sector is still developing. Hence, in Chapter 2, I investigate the effectiveness of monetary policy and its transmission mechanism with special emphasis on the lending channel. A SVAR model for Bangladesh is constructed, taking into account the exchange rate and monetary policy regimes in the identification scheme. The estimated model finds support for empirical regularities and existence of the bank lending channel. However, exchange rate channel appears less effective, reflecting a high degree of market intervention by the Bangladesh Bank. Frictions complicate the role of the financial sector particularly in the advanced financial markets. Therefore, in Chapter 3, I analyze the transmission mechanism of investment specific technology (IST) shock in presence of frictions between depositors and bankers (a la Gertler and Karadi, 2009) and implications of considering the capital quality and the net worth shocks as financial shocks. I use a DSGE framework in Chapter 3 as it allows to design and experiment shocks and frictions explicitly. The estimated model with a closed economy representation for the US shows that, financial friction weakens the impacts of IST shocks in business cycles. Also, the financial sector is important not only as amplifier of shocks originating in the real sector, but also as an independent source of shocks affecting the real economy substantially. Financial sector in many countries are not as competitive as in the US. Therefore, the financial friction discussed in Chapter 3 may not be relevant in those countries. Highly concentrated structure of the financial sector itself creates frictions affecting bank credits in important ways. Thus, in Chapter 4, I construct an open economy DSGE model with an oligopolistically competitive banking sector, considering Australia as an example. Oligopolistic competition is measured through interest markup which depends on the number of competing banks. The number of competitors is determined endogenously. The estimated model for Australia finds a strong stock market effect in presence of oligopolistic banks after a monetary policy shock making the shock less effective and such banks may amplify external shocks. Also, these banks appear to be more resilient to financial shocks indicating healthy bank balance sheet positions. The big picture projected by the dissertation is, the depth and complexity of the financial sector affect the way intermediaries contribute to cyclical fluctuations when shocks including monetary policy hit the economy. For example, IST shock's impacts on output are weakened by the financial frictions through a bank balance sheet effect when intermediaries are highly competitive. However, under oligopolistic bank competition, the IST shock may not trigger effective enough balance sheet effects due to strategic behavior among the banks, leaving a large role for the shock to play. Policy implications of the thesis along with a discussion on future research directions are summarized in Chapter 5.
Author: Sadia Afrin
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
The broad objective of the thesis is to analyze the monetary policy transmission and relative importance of various shocks in business cycles after considering the financial sector structure for both developing and developed countries in three self-contained chapters (Chapter 2-4). The thesis contributes both theoretically and empirically to the literature relating to monetary policy, financial frictions and competition structure, exchange rate pass through and open economy in general, using Structural Vector Auto-Regression (SVAR) and Dynamic Stochastic General Equilibrium (DSGE) models. Since the global financial crisis, a growing awareness of the roles of financial frictions has led to renewed interests in transmission mechanisms of monetary policy and other shocks. Two different financial frictions are incorporated in the DSGE models of Chapter 3-4 while Chapter 2 does not explicitly model financial friction and uses SVAR model to analyze the research questions. The effectiveness of monetary policy and its economy wide transmission mechanism are relatively unexplored in Bangladesh where financial sector is still developing. Hence, in Chapter 2, I investigate the effectiveness of monetary policy and its transmission mechanism with special emphasis on the lending channel. A SVAR model for Bangladesh is constructed, taking into account the exchange rate and monetary policy regimes in the identification scheme. The estimated model finds support for empirical regularities and existence of the bank lending channel. However, exchange rate channel appears less effective, reflecting a high degree of market intervention by the Bangladesh Bank. Frictions complicate the role of the financial sector particularly in the advanced financial markets. Therefore, in Chapter 3, I analyze the transmission mechanism of investment specific technology (IST) shock in presence of frictions between depositors and bankers (a la Gertler and Karadi, 2009) and implications of considering the capital quality and the net worth shocks as financial shocks. I use a DSGE framework in Chapter 3 as it allows to design and experiment shocks and frictions explicitly. The estimated model with a closed economy representation for the US shows that, financial friction weakens the impacts of IST shocks in business cycles. Also, the financial sector is important not only as amplifier of shocks originating in the real sector, but also as an independent source of shocks affecting the real economy substantially. Financial sector in many countries are not as competitive as in the US. Therefore, the financial friction discussed in Chapter 3 may not be relevant in those countries. Highly concentrated structure of the financial sector itself creates frictions affecting bank credits in important ways. Thus, in Chapter 4, I construct an open economy DSGE model with an oligopolistically competitive banking sector, considering Australia as an example. Oligopolistic competition is measured through interest markup which depends on the number of competing banks. The number of competitors is determined endogenously. The estimated model for Australia finds a strong stock market effect in presence of oligopolistic banks after a monetary policy shock making the shock less effective and such banks may amplify external shocks. Also, these banks appear to be more resilient to financial shocks indicating healthy bank balance sheet positions. The big picture projected by the dissertation is, the depth and complexity of the financial sector affect the way intermediaries contribute to cyclical fluctuations when shocks including monetary policy hit the economy. For example, IST shock's impacts on output are weakened by the financial frictions through a bank balance sheet effect when intermediaries are highly competitive. However, under oligopolistic bank competition, the IST shock may not trigger effective enough balance sheet effects due to strategic behavior among the banks, leaving a large role for the shock to play. Policy implications of the thesis along with a discussion on future research directions are summarized in Chapter 5.
Author: Matthieu Darracq Paries
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
The Thesis aims at evaluating monetary policy in presence of financial frictions both from an empirical and structural perspective. Along those lines, multi-variate time-series framework as well as model with more explicit theoretical foundations will be deployed. The Thesis presents original contributions in various fields of monetary and financial macroeconomics.The main motivation for the applied research presented in this Thesis are twofold. It responded both to the need for deeper research on macro-financial linkages and to the growing interest of policy institutions for the model-based policy advise. First, the Great recession and in particular, the typology of crisis episodes in Europe over the last decade, unveiled new challenges for monetary policy conduct, notably related to the prevalence of financial factors in cyclical fluctuations, the design of non-standard measures and the interactions with financial service policies. The second motivation has to do with the growing role for structural models in the preparation of monetary policy within central banks. Over the last decades, academic research and central bank practices have mutually benefited from strong synergies, whereby quantitative methods and theoretical advances have had a lasting influence on main preparation avenues for monetary policy making.In Chapter 1, a set of empirical studies intend to demonstrate the prevalence of financial shocks underlying the euro area macroeconomic performance during the Great recession. In particular, BVAR models can identify credit supply shocks and quantify their contribution to the various recessionary episodes over the last decade.Thereafter, Chapter 2 explores more structurally the transmission mechanism of financial shocks together with their heterogeneity across the euro area through the lens of DSGE models featuring a relevant set of demand-side as well as supply-side credit frictions.Against this background, the Thesis examine more normative aspects of monetary policy conduct starting with derivation of optimal monetary policy in selected DSGE models, which is the focus of Chapter 3. The Ramsey approach to optimal monetary provides a clear benchmark for formulating normative prescriptions. We analyse the main properties of the Ramsey allocation within a set of quantitative DSGE models, thereby bring new insight on various closed economy and open economy policy challenges.At times of crisis, as financial-driven recessions bring the monetary policy interest rates to their effective lower bound, central bank deployed a set of non-standard measures in order to engineer the intended policy accommodation. Chapter 4 presents several studies which extend DSGE models to analyse the role of non-standard monetary policy measures like asset purchase programmes or long-term liquidity operations. The credit channel of those measures will be the focus of the analysis. From a more normative standpoint, the optimal central bank asset purchase strategy will be derived.Finally, in Chapter 5, the normative assessment of monetary policy conduct in presence of financial frictions calls for considering strategic interactions with other policies, and notably macroprudential policy. Such interactions are all the more relevant when analysed in a monetary union context through multi-country DSGE models.
Author: Pierre-Richard Agenor
Publisher: MIT Press
ISBN: 0262044226
Category : Business & Economics
Languages : en
Pages : 601
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Book Description
An integrated analysis of how financial frictions can be accounted for in macroeconomic models built to study monetary policy and macroprudential regulation. Since the global financial crisis, there has been a renewed effort to emphasize financial frictions in designing closed- and open-economy macroeconomic models for monetary and macroprudential policy analysis. Drawing on the extensive literature of the past decade as well as his own contributions, in this book Pierre-Richard Agénor provides a unified set of theoretical and quantitative macroeconomic models with financial frictions to explore issues that have emerged in the wake of the crisis. These include the need to understand better how the financial system amplifies and propagates shocks originating elsewhere in the economy; how it can itself be a source of aggregate fluctuations; the extent to which central banks should account for financial stability considerations in the conduct of monetary policy; whether national central banks and regulators should coordinate their policies to promote macroeconomic and financial stability; and how much countercyclical macroprudential policies should be coordinated at the international level to mitigate financial spillovers across countries. Agénor focuses on upper middle-income countries, which differ from advanced economies in terms of both their structural features (which include a financial sector dominated by banks, weak supervisory capacity, and a high degree of vulnerability to external shocks) and their long-standing policy challenges (such as managing volatile capital flows). Some of the analytical insights and broad policy lessons that can be drawn from the book will be of relevance to advanced economies as well.
Author: Mr.Jaromir Benes
Publisher: International Monetary Fund
ISBN: 1475524986
Category : Business & Economics
Languages : en
Pages : 59
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Book Description
This paper presents the theoretical structure of MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of financial cycles. A companion paper studies the simulation properties of MAPMOD.
Author: Marzie Taheri Sanjani
Publisher: International Monetary Fund
ISBN: 1498320759
Category : Business & Economics
Languages : en
Pages : 33
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Book Description
This paper estimates a New Keynesian DSGE model with an explicit financial intermediary sector. Having measures of financial stress, such as the spread between lending and borrowing, enables the model to capture the impact of the financial crisis in a more direct and efficient way. The model fits US post-war macroeconomic data well, and shows that financial shocks play a greater role in explaining the volatility of macroeconomic variables than marginal efficiency of investment (MEI) shocks.
Author: Gan-Ochir Doojav
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Examining the business cycle and the monetary transmission mechanism in a small open economy based on the macroeconomic models is vital for successfully implementing forward-looking and counter-cyclical macroeconomic policies. In the context, this thesis focuses on the importance of various modelling implications (i.e., frictions and shocks) in developing empirically viable small open economy dynamic stochastic general equilibrium (DSGE) models. The thesis comprises three self-contained chapters on formulating, estimating and evaluating the DSGE models using Bayesian methods and data for Australia and the United States (US) (or G7 for Chapter 2), as well as a general thesis introduction and conclusion. Chapter 2 investigates the quantitative role of a cost channel of monetary policy and an uncovered interest rate parity (UIP) modification in an estimated small open economy DSGE model. For this purpose, a small open economy New Keynesian DSGE model developed by Justiniano and Preston (2010a) (i.e., benchmark model for the thesis) is augmented to incorporate the cost channel and the UIP modification based on a forward premium puzzle. The empirical analysis shows that introducing the cost channel and the UIP modification into the estimated model improves its ability to fit business cycle properties of key macroeconomic variables and to account for the empirical evidence on the monetary transmission mechanism. Chapter 3 assesses the importance of news shocks in a small open economy DSGE model for analysing business cycle properties of macroeconomic aggregates, including labour market variables. To this end, the model in Chapter 2 is enlarged in Chapter 3 to include (i) the theory of invoulntary unemployment proposed by Galí (2011), (ii) an endogenous preference shifter, similar to that used by Galí et al. (2011), and (iii) both news (anticipated) and unanticipated components in each structural shock. The results show that the estimated model is able to qualitatively replicate the existing VAR-based results (e.g., Kosaka 2013, Kamber et al. 2014 and Theodoridis and Zanetti 2014) on news driven business cycles, and the presence of news shocks has the potential to improve the model fit. Another important finding is that news shocks have been the main drivers of the Australian business cycle in the inflation-targeting period. Chapter 4 examines the significance of financial frictions and shocks in a small open economy DSGE model for explaining macroeconomic fluctuations. In doing so, Chapter 4 has further extended the model in Chapter 3 to a rich DSGE model in the two-country setting with involuntary unemployment, financial frictions and shocks. The main results include (i) the presence of financial accelerator improves the model fit, (ii) the financial accelerator amplifies and propagates the effects of monetary policy shocks on output, but dampens the effects of technology and labour supply shocks in Australia and the US, and (iii) financial shocks (i.e., shocks to the credit spread) are important for explaining investment and output fluctuations in both countries. Finally, this thesis provides implications for designing macroeconomic policies and building empirically viable open economy DSGE models to analyse the transmission mechanism of monetary policy and the business cycle.
Author: Martin Feldstein
Publisher: University of Chicago Press
ISBN: 0226241807
Category : Business & Economics
Languages : en
Pages : 500
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Book Description
Recent changes in technology, along with the opening up of many regions previously closed to investment, have led to explosive growth in the international movement of capital. Flows from foreign direct investment and debt and equity financing can bring countries substantial gains by augmenting local savings and by improving technology and incentives. Investing companies acquire market access, lower cost inputs, and opportunities for profitable introductions of production methods in the countries where they invest. But, as was underscored recently by the economic and financial crises in several Asian countries, capital flows can also bring risks. Although there is no simple explanation of the currency crisis in Asia, it is clear that fixed exchange rates and chronic deficits increased the likelihood of a breakdown. Similarly, during the 1970s, the United States and other industrial countries loaned OPEC surpluses to borrowers in Latin America. But when the U.S. Federal Reserve raised interest rates to control soaring inflation, the result was a widespread debt moratorium in Latin America as many countries throughout the region struggled to pay the high interest on their foreign loans. International Capital Flows contains recent work by eminent scholars and practitioners on the experience of capital flows to Latin America, Asia, and eastern Europe. These papers discuss the role of banks, equity markets, and foreign direct investment in international capital flows, and the risks that investors and others face with these transactions. By focusing on capital flows' productivity and determinants, and the policy issues they raise, this collection is a valuable resource for economists, policymakers, and financial market participants.
Author: International Monetary Fund
Publisher: INTERNATIONAL MONETARY FUND
ISBN: 9781513558769
Category : Business & Economics
Languages : en
Pages : 54
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Book Description
Policymakers often face difficult tradeoffs in pursuing domestic and external stabilization objectives. The paper reflects staff’s work to advance the understanding of the policy options and tradeoffs available to policymakers in a systematic and analytical way. The paper recognizes that the optimal path of the IPF tools depends on structural characteristics and fiscal policies. The operational implications of IPF findings require careful consideration. Developing safeguards to minimize the risk of inappropriate use of IPF policies will be essential. Staff remains guided by the Fund’s Institutional View (IV) on the Liberalization and Management of Capital Flows.
Author: Jean-Pierre Danthine
Publisher: Elsevier
ISBN: 0080509029
Category : Business & Economics
Languages : en
Pages : 391
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Book Description
The second edition of this authoritative textbook continues the tradition of providing clear and concise descriptions of the new and classic concepts in financial theory. The authors keep the theory accessible by requiring very little mathematical background. First edition published by Prentice-Hall in 2001- ISBN 0130174467.The second edition includes new structure emphasizing the distinction between the equilibrium and the arbitrage perspectives on valuation and pricing, as well as a new chapter on asset management for the long term investor."This book does admirably what it sets out to do - provide a bridge between MBA-level finance texts and PhD-level texts....many books claim to require little prior mathematical training, but this one actually does so. This book may be a good one for Ph.D students outside finance who need some basic training in financial theory or for those looking for a more user-friendly introduction to advanced theory. The exercises are very good." --Ian Gow, Student, Graduate School of Business, Stanford University - Completely updated edition of classic textbook that fills a gap between MBA level texts and PHD level texts - Focuses on clear explanations of key concepts and requires limited mathematical prerequisites - Updates includes new structure emphasizing the distinction between the equilibrium and the arbitrage perspectives on valuation and pricing, as well as a new chapter on asset management for the long term investor
Author: Mr.Jaromir Benes
Publisher: International Monetary Fund
ISBN: 1475515200
Category : Business & Economics
Languages : en
Pages : 55
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Book Description
This paper, together with a technical companion paper, presents MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of both the pre-crisis and crisis phases of financial cycles.
