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14 posts from November 2013

November 13, 2013

On the Design of Monetary and Macroprudential Policies

Bianca De Paoli

The financial crisis, recession, and slow recovery have emphasized the interactions between financial markets and the real economy. These developments have also motivated macroeconomists, central bankers, and financial regulators to think of new policy instruments that could help limit “systemic” or “systemwide” financial risks, as the Bank for International Settlements and the Financial Stability Board describe them. But apart from finding the right tools, policymakers are also interested in understanding how such instruments should be set in conjunction with monetary policy. In this post, we discuss the issues that arise when deciding how to design institutions for monetary and macroprudential policymaking. It turns out that the answer to this question hinges on a key issue in monetary policy: the ability of a decisionmaker to make binding commitments regarding his or her future behavior.

Continue reading "On the Design of Monetary and Macroprudential Policies" »

Posted by Blog Author at 7:00 AM in Euro Area, Macroecon, Monetary Policy, Regulation | Permalink | Comments (0)

November 08, 2013

Crisis Chronicles: The South Sea Bubble of 1720—Repackaging Debt and the Current Reach for Yield

James Narron and David Skeie

In 1720, the South Sea Company offered to pay the British government for the right to buy the national debt from debtholders in exchange for shares backed by dividends to be paid from the company’s debt holdings and South Sea trade profits. The Bank of England countered the proposal and the two then competed for the right to buy the debt, with South Sea ultimately winning through bribes to the government. Later that year, the government moved to divert more capital to South Sea shares by hampering investment opportunities for rival companies in what became known as the Bubble Act, and public confidence was shaken. In this edition of the Crisis Chronicles, we explore the rise and fall of the South Sea Company and offer a cautionary look at the current reach for yield.

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Posted by Blog Author at 7:00 AM in Crisis Chronicles | Permalink | Comments (2)

November 06, 2013

(Unmet) Credit Demand of American Households

Basit Zafar, Max Livingston, and Wilbert van der Klaauw

One of the direct effects of the 2008 financial crisis on U.S. households was a sharp tightening of credit. Households that had previously been able to borrow relatively freely through credit cards, home equity loans, or personal loans suddenly found those lines closed off—just when they needed them the most. In recent months, aggregate statistics such as the Federal Reserve’s Consumer Credit series and the Senior Loan Officer Opinion Survey have shown a gradual improvement in consumer credit. The former series is an indicator of interaction of credit supply and demand, while the latter shows only short-term changes in demand and supply (as reported by lenders) separately. It is, therefore, not entirely clear whether the observed trends are a result of fluctuations in demand or supply. Are those demanding credit getting it? What differences are there among U.S. consumers in their demand for and access to credit?

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Posted by Blog Author at 11:59 AM in Household Finance, Unemployment | Permalink | Comments (2)

November 04, 2013

Japan's Missing Wall of Money

Thomas Klitgaard

The Bank of Japan announced an open-ended asset purchase program in January 2013 and an unexpectedly ramped-up version of the program was implemented in early April. Market commentary at that time suggested that flooding the economy with liquidity would lead to a “wall of money” flowing out of Japan in search of higher yields, affecting asset prices worldwide. So far, however, Japan’s wall of money remains missing in action, with no pickup in Japanese foreign investment since the April policy shift. Why is this? Here we explain that while economic theory does not offer clear guidance on how financial outflows might respond to the injection of cash from central bank asset purchases, it does point to an important constraint on the potential size. In particular, monetary expansion will not cause a surge in financial outflows unless it also induces a similar surge in capital flowing into the country.

Continue reading "Japan's Missing Wall of Money" »

Posted by Blog Author at 7:00 AM in Balance of Payments, Current Account, Exchange Rates, Exports, International Economics | Permalink | Comments (1)

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