Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries

Emerging economies with inflation targets (IT) face a dilemma between fulflling the theoretical conditions of "strict IT", which implies a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with forex interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, forex interventions in some IT countries have been more effective in reducing volatility than in non-IT countries, which may justify the use of "flexible IT" by policymakers.inflation targeting; exchange rate volatility; foreign exchange interventions; emerging economies

Theories on the scope for foreign exchange market intervention

Exchange Rate;Foreign Exchange Market;Interventions;Models

Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries

Las economías emergentes con metas de inflación (MI) se enfrentan a un dilema entre cumplir las condiciones teóricas de una «MI estricta», lo que implica un tipo de cambio totalmente flexible, o seguir una gestión más activa de su moneda («MI flexible»), lo que supone implementar intervenciones cambiarias para moderar su volatilidad. Utilizando un modelo de datos de panel para 37 países, mostramos que, a pesar de que las MI implican una mayor inestabilidad del tipo de cambio que regímenes alternativos, las intervenciones realizadas por algunos países con MI han sido más eficaces para reducir la volatilidad que aquellas de países sin MI. Este resultado puede justificar la utilización de «MI flexibles» por parte de los bancos centrale

Fiscal Consolidation, Public Debt Containment and Disinflation – (Hungary’s Experience in Transition)

The study analyses the relationship between public debt, external and internal disequilibrium and inflation in Hungary through changes in the public sector borrowing requirement and in the structure of budget financing. The analysis is based on data from the 1986-1997 period in order to put the changes in true perspective. Policy constraints stemming from high indebtedness and their macroeconomic consequences are analysed by comparing different measures of fiscal deficit, as well as by quantifying the factors determining the evolution of the public debt/GDP ratio. We focus on the operational deficit (which is derived from the nominal deficit by eliminating the inflation compensation component of interest payments) and on its financing. The study presents a detailed empirical analysis of the evolution of the financing structure (seigniorage - debt) as well as of the role and structural changes of debt financing. The calculations are based on net consolidated public debt, which includes the combined debt of the budget and the central bank to other sectors net of claims. The consolidation of budget and central bank balances is unavoidable in order to get reliable indicators of the fiscal stance since in Hungary the central bank has been responsible for borrowing abroad in its own name. We introduced the category of ?extended??consolidated public debt (including the stock of central bank’s sterilisation instruments) which enabled us to analyse the past eleven years in a consistent framework, and to reveal the trends as well as the dynamic relationships of the debt accumulation process. The analysis shows that the shift to a new regime of deficit financing based on issuing marketable government securities (in 1992) did not increase the fiscal burden, it merely revealed its true magnitude by separating monetary and fiscal functions and by increasing transparency. The analysis of consolidated debt revealed that throughout the last ten years the implicit real interest rates on public debt exceeded the growth rate of the economy, which led to the continuous increase of the debt ratio (the gross debt/GDP around 90% in the middle of nineties). This effect was mitigated only from 1995 by the fiscal adjustment resulting a primary surplus in the budget. The seigniorage did not play an important role in financing after 1992, it amounted to 1-2% of GDP. However, the major element in the significant (over 15 percentage points) reduction in the debt-to- GDP ratio over the last three years was the devotion of privatisation revenues to retire public debt. Analysing past developments, we came to the conclusion that despite the significant reduction in the debt-to-GDP ratio in the last few years, the debt burden is still significant and a further reduction of the debt to GDP ratio is inevitable in order to create the conditions for sustainable growth and to ensure the continuous convergence to developed countries. This requires a structural primary surplus of 1.5-2% of GDP in the medium run, if we take into account the requirement of sustainability, the goal of further reductions in the inflation rate and the fact that with the end of the privatisation process privatisation revenues will not provide additional sources for financing.

The Japanese Quantitative Easing Policy under Scrutiny: A Time-Varying Parameter Factor-Augmented VAR Model

Interest rates in several countries have recently been decreased to exceptionally low levels and a Quantitative Easing Monetary Policy (QEMP) has been adopted by most major central banks. In this context this paper is very actual, as it sheds some light on the effectiveness of the Japanese use of QEMP, which is the only experience we can learn from. This paper employs a Time Varying Parameters Factor-Augmented VAR (TVP-FAVAR) model to analyse monetary policy shocks in Japan. This model allows us to explore the effect of QEMP on a large number of variables. Our analysis delivers four main results. First, unsurprisingly, our results suggest that the best model to specify the Japanese monetary policy during the two last decades is a model where all of parameters vary over time. Second, the effect of QEMP on activity and prices is stronger than previously found. In particular, we find a significant price reaction to a monetary policy shock. Third, in contrast to previous work, there is a detectable efficiency of the portfolio-rebalancing channel, which could have a role in transmitting the monetary policy shocks. Fourth, while the policy commitment succeeds in controlling private and business expectations, these effects are not transmitted to the long-end of the yield curve.Time varying parameters; Factor-Augmented VAR; Japan; Quantitative Easing; Transmission channels

History of monetary policy in India since independence

An SIIO paradigm, based on structure and ideas that become engraved in institutions and affect outcomes, is developed to examine and assesses monetary policy in India after independence. Narrative history, data analysis, and reporting of research demonstrate the dialectic between ideas and structure. Exogenous supply shocks are used to identify policy shocks and isolate their effects. It turns out policy was sometimes exceedingly tight when the common understanding was of a large monetary overhang. Fiscal dominance made policy procyclical. But the three factors that cause a loss of monetary autonomy-governments, markets and openness-are moderating each other. Markets moderate fiscal profligacy and global crises moderate markets and openness. Greater current congruence between ideas and structure is improving institutions and contributing to India's better performance.Monetary policy history, Structure, Ideas, Institutions, Outcomes, India

Contribution to Financial Modeling and Financial Forecasting

This thesis consists of three chapters. Each chapter is independent research that is conducted during my study. This research is concentrated on financial time series modeling and forecasting. On first chapter, the research aims to prove that any abnormal behavior in debt level is a signal of future unexpected return for firms that is listed in indexes in this study, hence it is a signal to buy. In order to prove this theory multiple indexes from around the world were taken into consideration. This behavior is consistent in most of indexes around the word. The second chapter investigate the effect of United State president speech on value of United State Currency in Foreign Exchange Rate market. In this analysis it is shown that during the time the president is delivering a speech there is distinctive changes in USD value and volatility in global markets. This chapter implies that this effect cannot be captured by linear models, and the impact of the presidential speech is short term. Finally, the third chapter which is the major research of this thesis, suggest two new methods that potentially enhance the financial time series forecasting. Firstly, the new ARMA-RNN model is presented. The suggested model is inheriting the process of Autoregressive Moving Average model which is extensively studied, and train a recurrent neural network based on it to benefit from unique ability of ARMA model as well as strength and nonlinearity of artificial neural network. Secondly the research investigates the use of different frequency of data for input layer to predict the same data on output layer. In other words, artificial neural networks are trained on higher frequency data to predict lower frequency. Finally, both stated method is combined to achieve more superior predictive model

Approximating Monetary Policy: Case Study for the ASEAN-5

Empirical studies on the process of monetary policy making in a number of advanced economies have shown that a simple policy reaction function (PRF) performs well in explaining the setting of monetary policy. This paper examines an application of a simple PRF in an attempt to broaden the understanding of monetary policy making processes in five developing ASEAN countries. As found to be the case in the more advanced economies, a simple PRF is also found to perform well in explaining the setting of monetary policy in these countries. Moreover, the findings uncover the main drivers behind the conduct of monetary policy and provide a relatively consistent explanation about the monetary policy episodes in the sample economies.Monetary policy, policy reaction function, ASEAN

Systemic risk: A survey

This paper develops a broad concept of systemic risk, the basic economic concept for the understanding of financial crises. It is claimed that any such concept must integrate systemic events in banking and financial markets as well as in the related payment and settlement systems. At the heart of systemic risk are contagion effects, various forms of external effects. The concept also includes simultaneous financial instabilities following aggregate shocks. The quantitative literature on systemic risk, which was evolving swiftly in the last couple of years, is surveyed in the light of this concept. Various rigorous models of bank and payment system contagion have now been developed, although a general theoretical paradigm is still missing. Direct econometric tests of bank contagion effects seem to be mainly limited to the United States. Empirical studies of systemic risk in foreign exchange and security settlement systems appear to be non-existent. Moreover, the literature surveyed reflects the general difficulty to develop empirical tests that can make a clear distinction between contagion in the proper sense and joint crises caused by common shocks, rational revisions of depositor or investor expectations when information is asymmetric ('information-based' contagion) and 'pure' contagion as well as between 'efficient' and 'inefficient' systemic events. JEL Classification: G21, G29, G12, E49banking crises, Contagion, currency crises, financial markets, financial stability, payment and settlement systems, systemic risk