Determinants of credit-less recoveries

This paper aims to shed light on the characteristics and particularly the determinants of credit-less recoveries. After building a dataset and documenting some stylised facts of credit-less recoveries in emerging market economies, this paper uses panel probit models to analyse key determinants of credit-less recoveries. Our main findings are the following. First, our frequency analysis confirms earlier findings that credit-less recoveries are not at all rare events. Moreover, our analysis shows that the frequency of credit-less recoveries doubles after a banking or currency crisis. Second, results from estimated panel probit models suggest that credit-less recoveries are typically preceded by large declines in economic activity and financial stress, in particular if private sector indebtedness is high and the country is reliant on foreign capital inflows. Finally, we find that the predicted probability of a credit-less recovery in central and eastern European EU Member States during the coming years varies across countries, but is relatively high in the Baltic States. JEL Classification: C23, C25, E32, E51, G01Credit-less Recoveries, Financial crises, Panel Probit Models

Monetary policy transmission during financial crises: An empirical analysis

This paper studies the effects of a monetary policy expansion in the United States during times of high financial stress. The analysis is carried out by introducing a smooth transition factor model where the transition between states "normal" and high financial stress) depends on a financial conditions index. Employing a quarterly data set over the period 1970Q1 to 2009Q2 containing 108 U.S. macroeconomic and financial time series, I find that a monetary policy shock during periods of high financial stress has stronger and more persistent effects on macroeconomic variables such as output, consumption, and investment than it has during "normal" times. Differences in effects among the regimes seem to originate from non-linearities in the credit channel.L’auteure étudie les effets d’une politique monétaire expansionniste aux États-Unis en périodes de fortes tensions financières. Pour procéder à son analyse, elle élabore un modèle factoriel à transition lisse dans lequel le passage d’un état à l’autre (d’une situation « normale » à un régime de fortes tensions) dépend d’un indice des conditions financières. À partir de données trimestrielles allant du premier trimestre de 1970 au deuxième trimestre de 2009, soit 108 séries chronologiques de données macroéconomiques et financières américaines, l’auteure observe qu’un choc de politique monétaire a des répercussions plus importantes et persistantes sur des variables macroéconomiques comme la production, la consommation et l’investissement s’il survient en période de fortes tensions plutôt que lorsque la conjoncture est « normale ». L’incidence différente selon le régime (« normal » / fortes tensions) semble attribuable à la non-linéarité du canal du crédit par lequel se transmettent les mesures de politique monétaire

The Impact of U.S. Monetary Policy Normalization on Capital Flows to Emerging-Market Economies

The Federal Reserve's path for withdrawal of monetary stimulus and eventually increasing interest rates could have substantial repercussions for capital flows to emerging-market economies (EMEs). This paper examines the potential impact of U.S. monetary policy normalization on portfolio flows to major EMEs by using a vector autoregressive model that explicitly accounts for market expectations of future monetary policy. The "policy normalization shock" is defined as a shock that increases both the yield spread of U.S. long-term bonds and monetary policy expectations while leaving the policy rate per se unchanged. Results indicate that the impact of this shock on portfolio flows as a share of GDP is expected to be economically small. The estimated impact is closely in line with that seen during the end-May to August 2013 episode in response to a comparable rise in the yield spread of U.S. long-term bonds. However, as the events during the summer of 2013 have shown, relatively small changes in portfolio flows can be associated with significant financial turmoil in EMEs. Further, there is also a strong association between the countries that are identified by our model as being the most affected and the ones that saw greater outflows of portfolio capital over May to September 2013

Determinants of credit-less recoveries

This paper aims to shed light on the characteristics and particularly the determinants of credit-less recoveries. After building a dataset and documenting some stylised facts of credit-less recoveries in emerging market economies, this paper uses panel probit models to analyse key determinants of credit-less recoveries. Our main findings are the following. First, our frequency analysis confirms earlier findings that credit-less recoveries are not at all rare events. Moreover, our analysis shows that the frequency of credit-less recoveries doubles after a banking or currency crisis. Second, results from estimated panel probit models suggest that credit-less recoveries are typically preceded by large declines in economic activity and financial stress, in particular if private sector indebtedness is high and the country is reliant on foreign capital inflows. Finally, we find that the predicted probability of a credit-less recovery in central and eastern European EU Member States during the coming years varies across countries, but is relatively high in the Baltic States

International Transmission Channels of U.S. Quantitative Easing: Evidence from Canada

The U.S. Federal Reserve responded to the great recession by reducing policy rates to the effective lower bound. In order to provide further monetary stimulus, they subsequently conducted large-scale asset purchases, quadrupling their balance sheet in the process. We assess the international spillover effects of this quantitative easing program on the Canadian economy in a factor-augmented vector autoregression (FAVAR) framework, by considering a counterfactual scenario in which the Federal Reserve's long-term asset holdings do not rise in response to the recession. We find that U.S. quantitative easing boosted Canadian output, mainly through the financial channel

Nowcasting BRIC+M in Real Time

Emerging-market economies have become increasingly important in driving global GDP growth over the past 10 to 15 years. This has made timely and accurate assessment of current and future economic activity in emerging markets important for policy-makers not only in these countries but also in advanced economies. This paper uses state-of-theart dynamic factor models (DFMs) to nowcast real GDP growth in five major emerging markets - Brazil, Russia, India, China and Mexico ("BRIC+M"). The DFM framework allows us to efficiently handle data series characterized by different publication lags, frequencies and sample lengths. This framework is particularly suitable for emerging markets for which many indicators are subject to significant publication lags and/or have been compiled only recently. The methodology also allows us to extract model-based "news" from a data release and assess the impact of this news on nowcast revisions. Results show that the DFMs generally outperform simple univariate benchmark models for the BRIC+M. Overall, our results suggest that the DFM framework provides reliable nowcasts for GDP growth for the emerging markets under consideration

Networking the Yield Curve: Implications for Monetary Policy

PublicFinanceIn this working paper, authors Tatevik Sekhposyan, Tatjana Dahlhaus, and Julia Schaumburg introduce a flexible, time-varying network model to trace the propagation of interest rate surprises across different maturities. First, the authors develop a novel econometric framework that allows for unknown, potentially asymmetric contemporaneous spillovers across panel units, and establish the finite sample properties of the model via simulations. Second, this innovative framework is employed to jointly model the dynamics of interest rate surprises and to assess how various monetary policy actions, for example, short-term, long-term interest rate targeting and forward guidance, propagate across the yield curve. Findings show that the network of interest rate surprises is indeed asymmetric, and defined by spillovers between adjacent maturities. Spillover intensity is high, on average, but shows strong time variation. Forward guidance is an important driver of the spillover intensity. Pass-through from short-term interest rate surprises to longer maturities is muted, yet there are stronger spillovers associated with surprises at medium- and long-term maturities. The authors illustrate how our proposed framework helps our understanding of the ways various dimensions of monetary policy propagate through the yield curve and interact with each other

Noisy monetary policy

We introduce limited information in monetary policy. Agents receive signals from the central bank revealing new information ("news") about the future evolution of the policy rate before changes in the rate actually take place. However, the signal is disturbed by noise. We employ a non-standard vector autoregression procedure to disentangle the economic and financial effects of news and noise in US monetary policy since the mid- 1990s. Using survey- and market-based data on federal funds rate expectations, we find that the noisy signal plays a relatively important role for macroeconomic dynamics. A signal reporting news about a future policy tightening shifts policy rate expectations upwards and decreases output and prices. A sizable part of the signal is noise surrounding future monetary policy actions. The noise decreases output and prices and can explain up to 16% and 13% of their variations, respectively. Furthermore, it significantly increases the excess bond premium, the corporate spread and financial market volatility, and decreases stock prices