Reserves, Liquidity and Money: An Assessment of Balance Sheet Policies

The financial crisis and its aftermath has stimulated a vigorous debate on the use of macro-prudential instruments for both regulating the banking system and for providing additional tools for monetary policy makers. The widespread adoption of non-conventional monetary policies has provided some evidence on the efficacy of liquidity and asset purchases for offsetting the lower zero bound. Central banks have thus been reminded as to the effectiveness of extended open market operations as a supplementary tool of monetary policy. These tools are essentially fiscal instruments, as they issue central bank liabilities backed by fiscal transfers. And so having written these tools into the fiscal budget constraint, we can examine the consequences of these operations within the context of a micro-founded macroeconomic model of banking and money. We can mimic the responses of the Federal Reserve balance sheet to the crisis. Specifically, we examine the role of reserves for bond and capital swaps in stabilising the economy and also the impact of changing the composition of the central bank balance sheet. We find that such policies can significantly enhance the ability of the central bank to stabilise the economy. This is because balance sheet operations supply (remove) liquidity to a financial market that is otherwise short (long) of liquidity and hence allows other .nancial spreads to move less violently over the cycle to compensate

Macroeconomic Effects of Credit Deepening in Latin America

This paper augments a relatively standard dynamic general equilibrium model with financial frictions in order to quantify the macroeconomic effects of the credit deepening process observed in many Latin American (LA) countries in the last decade, most notably in Brazil. In the model, a stylized banking sector intermediates credit from patient households to impatient households and firms. The key novelty of the paper, motivated by the Brazilian experience, is to model the credit constraint faced by (impatient) households as a function of future labor income. In the calibrated model, credit deepening generates only modest abovetrend growth in consumption, investment, and GDP. Since Brazil has experienced one of the most intense credit deepening processes in Latin America, it is argued that the quantitative effects for other LA economies are unlikely to be sizeable

Central Bank Policy Paths and Market Forward Rates: A Simple Model

Increasingly many central banks announce likely paths for future policy rates. Recent experience suggest that market forward rates can differ substantially from those announced. Models commonly adopted in policy analysis ignore such differences. This paper studies a simple model that can capture deviations between announced paths and market forward rates. We detail the macroeconomic transmission of such deviations both in the model and in the data and show how the model can inform policy deliberations

Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?

This paper demonstrates that an estimated, structural, small open-economy model of the Canadian economy cannot account for the substantial influence of foreign-sourced disturbances identified in numerous reduced-form studies. The benchmark model assumes uncorrelated shocks across countries and implies that U.S. shocks account for less than 3 percent of the variability observed in several Canadian series, at all forecast horizons. Accordingly, model-implied cross-correlation functions between Canada and U.S. are essentially zero. Both findings are at odds with the data. A specification that assumes correlated cross-country shocks partially resolves this discrepancy, but still falls well short of matching reduced-form evidence

Fiscal Divergence, Current Account and TARGET2 Imbalances in the EMU

The paper scrutinizes the reasons for the European debt crisis, the implications for TARGET2 imbalances and options for surplus liquidity absorption within an asymmetric EMU. It is argued that starting from the turn of the millennium diverging fiscal policy paths and diverging unit labour costs were the driving force of rising intra-European current account imbalances within the euro area, which were enhanced by post-2001 low interest rate policies and changing financing conditions for the German banking sector. The paper shows how since the outbreak of the crisis the adjustment of intra-EMU current account imbalances is postponed by a rising divergence of TARGET2 balances, as the repatriation of private international credit and deposit flight from the crisis economies is substituted by central bank credit. Given that this process has brought Deutsche Bundesbank into a debtor position to the domestic financial system, we discuss options for liquidity absorption by Deutsche Bundesbank to forestall asset price bubbles in Germany

Deep macrobenthic communities from Nazaré submarine canyon (NW Portugal)

Macrofauna community structure within Nazare Submarine Canyon is analysed and used to assess the potential effects of natural enrichment in this area subjected to accumulation of coastal sediments. A transect including three stations (2894. 3514 and 4141 in) was carried out in the Nazare Submarine Canyon (NW Portugal) during a cruise of OMEX 11 programme (Ocean Margin Exchange), in the winter season of 1999. Although data was not collected in order to calculate sedimentation rates. sampling station at 2894 m is located in an area characterised by high levels of sedimentation, thus a high amount of organic matter is expected to be available for the local communities. Faunistic data are discussed in the context of the different features of the stations sampled. Multivariate analysis clearly separates the shallowest station from the other ones. which otherwise appear to be very similar. It also revealed a perceptible gradient along sediment depth at all stations. from shallow to deeper layers. Exceptionally depressed species richness and low evenness Values were observed at the 2894 m station. The high number of individuals of a single species, Cossura sp. A. and the atypical diversity, dominance and evenness values obtained for this station Support the hypothesis of community disturbance due to organic enrichment.OMEX II EU programm