The Monetary Transmission Mechanism in The United Kingdom: Pass-Through & Policy Ru

A number of recent papers have used policy simulations from small empirical macro models to assess the efficacy of inflation-forecast targeting. The macro models used to undertake the simulations differ significantly with the assumed degree of openness, an important factor for the analysis. However, the open economy models typically approach the pass-through from exchange rate to import prices and ultimately retail prices in a stylized manner, assuming full and instantaneous pass-through. This paper modifies the open economy macro model presented in Batini and Haldane (1999) to accommodate a variety of pass-through representations, considering time and state-(cycle)-dependent pass-through rules. While the model’s dynamics are affected, the main result of Batini and Haldane – that targeting an inflation forecast dominates targeting current inflation – is robust to the assumed rate of pass-through.

Bail-Out or Work-Out? Theoretical Considerations

In recent years, we appear to have entered an era of capital account crises. In response, a number of new crisis resolution ideas have been put forward, including the establishment of supranational institutions such as an international lender of last resort or an international bankruptcy court, temporary payments standstills and the inclusion of collective action clauses in debt contracts. This paper assesses these proposals using a theoretical model of crisis. The model underscores the importance of adapting policy interventions to the nature of the crisis at hand. For example, it finds that payments standstills and last-resort lending are an equally efficient means of dealing with liquidity crises, both ex-ante and ex-post, while creditor committees are second-best. It finds that debt-write-downs are a preferred means of dealing with solvency crises than subsidized IMF financing because of the negative moral hazard implications of the latter tool. And it finds that international bankruptcy court proposals may be superior to contractual approaches in securing such write-downscrisis resolution, international lender of last resort, standstills, IMF

La pregunta de los 100 mil millones

This article examines the costs of banking pollution and the role of regulation and restrictions on the financial system in tackling it. It studies the benefits of such restrictions in terms of modularity, robustness and incentives, and the costs in terms of the economies of scale and the economies of scope that are exhausted at relatively modest levelfinancial crisis, systemic risk

Operationalising a macroprudential regime: goals, tools and open issues

Artículo de revist

Volatility transmission along the money market yield curve

In this paper we look to model the volatility of money market interest rates -and the transmission of volatility- along the money market yield curve in four countries: the UK, Germany, France and Spain. We use a conditional variance specification which is based on Nelson's Exponential ARCH. We find a significant volatility transmission effect from overnight to longer term money markets for France, Spain and the UK. We also find that, in our small cross section of countries, those with lower (higher) reserve requirements tend to have higher (lower) interbank interest rate volatility. However, reserve requirements generate a perverse seasonal effect: at the end of the maintenance period, both the level of the overnight interest rate volatility and the magnitude of the transmission effect to the rest of the yield curve are higher. References.(jah)(agh)(frl)(jha

Un modelo interdisciplinario para la macroeconomía

La modelación macroeconómica está bajo intenso escrutinio desde la gran crisis financiera, que dejó al descubierto los graves defectos de la metodología utilizada para entender la economía en su conjunto. Se critican los supuestos empleados en los modelos dominantes, en particular que los agentes económicos son homogéneos y optimizadores y que la economía se equilibra. Este escrito explora un enfoque interdisciplinario de modelación macroeconómica con técnicas tomadas de otras ciencias, y examina la modelación basada en agentes como ejemplo de esas técnicas. Los modelos basados en agentes complementan los enfoques existentes y son adecuados para responder preguntas macroeconómicas donde la complejidad, la heterogeneidad, las redes y las heurísticas cumplen un papel importante

Um modelo interdisciplinar para a macroeconomia

Macroeconomic modelling has been under intense scrutiny since the Great Financial Crisis, when serious shortcomings were exposed in the methodology used to understand the economy as a whole. Criticism has been levelled at the assumptions employed in the dominant models, particularly that economic agents are homogeneous and optimising and that the economy is equilibrating. This paper seeks to explore an interdisciplinary approach to macroeconomic modelling, with techniques drawn from other (natural and social) sciences. Specifically, it discusses agent-based modelling, which is used across a wide range of disciplines, as an example of such a technique. Agent-based models are complementary to existing approaches and are suited to answering macroeconomic questions where complexity, heterogeneity, networks, and heuristics play an important role.La modelación macroeconómica está bajo intenso escrutinio desde la gran crisis financiera, que dejó al descubierto los graves defectos de la metodología utilizada para entender la economía en su conjunto. Se critican los supuestos empleados en los modelos dominantes, en particular que los agentes económicos son homogéneos y optimizadores y que la economía se equilibra. Este escrito explora un enfoque interdisciplinario de modelación macroeconómica con técnicas tomadas de otras ciencias, y examina la modelación basada en agentes como ejemplo de esas técnicas. Los modelos basados en agentes complementan los enfoques existentes y son adecuados para responder preguntas macroeconómicas donde la complejidad, la heterogeneidad, las redes y las heurísticas cumplen un papel importante.A modelagem macroeconômica está sob intensa análise desde a grande crise financeira, que expôs as graves falhas da metodologia utilizada para entender a economia como um todo. As premissas utilizadas nos modelos dominantes são criticadas, em particular, que os agentes econômicos são homogêneos e otimizadores, e que a economia é equilibrada. Este artigo explora uma abordagem interdisciplinar da modelagem macroeconômica com técnicas emprestadas de outras ciências e examina a modelagem baseada em agentes como um exemplo dessas técnicas. Os modelos baseados em agentes complementam as abordagens existentes e são adequados para responder a questões macroeconômicas em que complexidade, heterogeneidade, redes e heurísticas desempenham um papel importante

El mecanismo de transmisión de los tipos de interés en España : estimación basada en desagregaciones sectoriales

Ofrece estimaciones sectoriales del mecanismo de transmision monetaria en España. Utilizando la metodologia VAR, se cuantifican los efectos que un impulso monetario exogeno tiene sobre las variables intermedias y finales que son el objetivo de la politica monetaria. Partiendo de que la separacion entre instrumento (exogeno) y variables objetivo (endogenas) intermedias y finales es factible, se ofrecen estimaciones significativas del tamaño y velocidad de los efectos de una perturbacion monetaria sobre el nivel de actividad y los precios, y se aporta informacion sobre los mecanismos dominantes a traves de los cuales se propagan los efectos de la politica monetaria. Este ejercicio resulta particularmente relevante cuando la conduccion de la politica monetaria se basa en la fijacion de objetivos en terminos de una variable intermedia. Incluye bibliografia.(jeb)(ah)(jha

Forward-Looking Rules for Monetary Policy

This paper evaluates a class of simple monetary policy rules which feed back from explicit forecasts of future inflation - inflation forecast-based (IFB) rules. These rules aim to mimic current monetary policy practices among the inflation-targeting countries, where policy decisions are based on inflation forecasts. The rules themselves are evaluated using simulations from a small, rational expectations, open-economy macro-model. IFB rules are found to perform well in comparison with other simple rules, such as the Taylor rule. The reasons for this are: first, because they embody the lags in monetary transmission, aligning explicitly the control and the feedback variables of the policymaker; second, because IFB rules are capable of smoothing output by as much as is possible with rules which target output directly - for example, through variations in the forecast horizon; and third, because IFB rules implicitly condition on all state variables, and thus are information-efficient. For these reasons, inflation-targeting rules with an explicitly forward-looking dimension are found to take us within reach of the fully-optimal rule.

Some Costs and Benefits of Price Stability in the United Kingdom

In a previous attempt to articulate the costs of inflation (Leigh-Pemberton (1992)), the Bank of England outlined the following costs of a fully-anticipated inflation: - the cost of economising on real money balances -- so-called shoe-leather' effects; - the costs of operating a less-than-perfectly indexed tax system; - the costs of front-end loading' of nominal debt contracts; - the cost of constantly revising price lists -- so called menu costs' Feldstein (1996) quantified the first two of these costs when moving from 2% inflation to price stability in the U.S. Feldstein concluded that the permanent welfare gains through these two channels -- suitably discounted -- alone exceeded the transient costs of doing so. This paper aims to replicate Feldstein's analysis for the U.K. Welfare effects are quantified using deadweight loss analysis familiar from public finance economics. Because inflation exacerbates tax distortions that exist even without inflation, the welfare costs are trapezoids rather than the usual triangles, or, alternatively, first-order rather than second-order losses. We find that the welfare gains from moving to price stability through the two channels identified above are lower in