• Home
  • Areas
  • Blog
  • Conferences
  • Research
  • Team & Contact
  • Home
  • Areas
  • Blog
  • Conferences
  • Research
  • Team & Contact
  BCC
  • Home
  • Areas
  • Blog
  • Conferences
  • Research
  • Team & Contact

BCC BLOG

    About the blog

    The BCC blog is a space of exchange among BCC stakeholders about topics of interest in the realm of central banking. It offers a space where latest trends can be discussed, practical experiences be shared, and a BCC community be developed. 

    Archives

    January 2021
    November 2020
    October 2020
    September 2020
    July 2020
    June 2020
    May 2020
    April 2020
    February 2020
    December 2019
    November 2019
    October 2019
    September 2019

    Categories

    All
    1. Monetary Policy And Implementation

    RSS Feed

    The BCC programme, funded by SECO and implemented by The Graduate Institute, Geneva aims to support partner central banks in emerging countries in building the analytical and technical expertise to conduct effective monetary policy, promote stable and efficient financial sector, and be more operationally sustainable.
Back to Blog

BCC Technical Workshop on Financial Stability Framework and the Role of Central Banks - by Robert Sheehy

17/11/2019

 

Robert Sheehy, BCC external expert and moderator of the workshop

The central banks’ financial stability mandate has become more important over the last decade, with the development of a battery of macro-prudential tools aimed at preventing imbalances. To share experiences on the use of these tools among the BCC countries, a technical workshop on “The general financial stability framework, with special emphasis on macro-prudential policies and instruments for which the Central Bank is responsible” was held in Bogotá, Colombia, in October 2019. The event was under the sponsorship of the Banco de la República and the BCC programme. Participants from the central banks of Albania, Colombia, Peru, Tunisia and Ukraine discussed a wide range of issues relating to financial stability and agreed on several basic principles. These are discussed below.
 
The institutional framework should ensure that relevant data is shared and that financial stability risks are identified and analysed. In addition, it should promote the building of consensus among policymakers on those risks, as well as on the actions needed and the appropriate mix of macroeconomic, micro-prudential and macro-prudential policies to address risks. It is important that the institutional arrangements counter the bias to inaction or delay and ensure that policymakers can act. Policymakers should be enabled to implement corrective measures by clear decision making and the necessary policy tools.
 
Central banks must have a key role in financial stability due to their responsibility for monetary policy, their status as lender of last resort, and their management of systemic liquidity.[1] Some central banks are also the micro-prudential regulator and supervisor, while others provide back-up funding for the payments systems that underpin the financial sector. Most central banks have well-established expertise in the identification and analysis of systemic risk, capabilities often not available elsewhere.
 
Some financial stability risks cannot be adequately addressed by traditional macroeconomic or micro-prudential policies owing to externalities particular to the financial system. These include the tendency of financial firms to amplify shocks due to leverage and limited capital, the pro-cyclical feedback between asset prices and credit, and the increasing structural linkages among financial institutions. Many of these externalities are directly relevant for the effectiveness of central bank policy actions. The purpose of macro-prudential measures is to address these and other externalities not covered by traditional policy instruments.
 
Macro-prudential policies should promote economic efficiency and limit distortions by focusing on specific externalities not addressed by other measures. Tools that allow adjustment through prices are usually more efficient than quantitative restrictions. The general level of knowledge about the impact of macro-prudential measures is still expanding rapidly and their effects are likely to vary considerably among countries. This implies that adjustment costs should be mitigated by phasing in new measures over time, and that careful monitoring of the impact of macro-prudential policies is necessary to assess their effectiveness and calibration.
 
The identification, analysis and measurement of systemic risk requires the monitoring of data for a wide range of variables. The early warning characteristics of each variable should be evaluated and the most reliable indicators followed on an ongoing basis, with particular attention to signs of emerging liquidity risk. It is useful to summarize the results, but important to do so in a manner that preserves intuitive value so as to facilitate communication with senior policymakers and the general public. The overall vulnerability index employed by the Banco de la República is one way to do so.[2] More sophisticated tools to evaluate systemic risk - such as credit-gap or growth-at-risk analysis - are a useful supplement to the monitoring exercise.[3] Regular reporting to policymakers and the public on developments in systemic risk (e.g., through a periodic financial stability report) should be undertaken.
 
The design of macro-prudential policies should take into account the specific circumstances of the financial sector concerned. There is no one-size-fits-all solution, as the financial structure and associated externalities vary widely among countries. Given the developing state of understanding of the individual and cumulative effects of macro-prudential measures, it is not generally necessary to use sophisticated models to design and calibrate such tools. A more intuitive and flexible approach, supplemented by careful ongoing monitoring and analysis, is likely to be more efficient and effective.
 


[1] Historically, central banks were initially established mainly to promote financial stability.

[2] Banco de la República (2019), Reporte de Estabilidad Financiera – I semestre de 2019, Bogotá.

[3] A good description of credit-gap analysis can be found in Drehmann, Mathias, and Kostas Tsatsaronis, “The Credit-to-GDP Gap and Countercyclical Capital Buffers: Questions and Answers”, Bank of International Settlements, BIS Quarterly Review, March 2014, pp. 55-73. See Prasad, Ananthakrishnan, et al., Growth at Risk: Concept and Application in IMF Country Surveillance, International Monetary Fund, Working Paper WP/19/36, February 2019, for a general explanation of the growth-at-risk methodology and its application.

0 Comments
read more
Back to Blog

The size of fiscal multipliers and the stance of monetary policy in developing economies - by Jair Ojeda-Joya and Oscar Guzman

17/11/2019

 

Jair N. Ojeda-Joya, Banco de la Republica, Colombia
Oscar E. Guzman, National Department of Planning, Colombia

How does fiscal policy impact overall economic activity in emerging economies? This effect – the so-called fiscal multiplier – is a major element for Planning Departments and Finance Ministries to compute the expected impact of higher (or lower) government consumption on Gross Domestic Product (GDP) at various time horizons. For instance, a fiscal multiplier equal to 1 implies that changes in government consumption are translated one to one on GDP.
In this paper, we compute flexible estimates of the fiscal multipliers over a panel of 23 developing economies using quarterly data from 2000 until 2017. Our work extends the literature on fiscal multipliers in developing economies along two main dimensions. First, we allow the fiscal multipliers to differ across alternative monetary-policy stances, namely, expansive and contractive episodes. Second, we perform counterfactual exercises in which we calculate the effect of fiscal policy on GDP, controlling for the monetary policy reaction to the fiscal shock through interest rates. Both exercises provide us with a better understanding of the interaction between fiscal and monetary policies during fiscal shocks.
Our estimates rely on a Panel Vector Autoregression (PVAR). We consider the following variables: government consumption, monetary policy rate, GDP, real money balances (M2), inflation and real exchange rates. The identification of shocks is performed through the Choleski decomposition using the same ordering of variables, so that policy related variables have a lagged reaction to macroeconomic news. This helps to identify fiscal shocks and exclude government consumption movements that do not correspond to exogenous fiscal policy, following the approach of Blanchard and Perotti (2002). In addition, we construct a country-specific classification of periods of expansive and contractionary monetary policy based on the real interest rate relative to its estimated natural level. The estimation is performed using a GMM approach following Abrigo and Love (2016).
A fiscal stimulus has a stronger impact when the monetary policy stance is expansive. Our main results show that the estimated size of the fiscal multiplier crucially depends on the monetary-policy stance at the time of the shock. Specifically, the multiplier is equal to 0.39 during expansive episodes (10 quarters after the fiscal shock) compared to 0.16 during contractionary ones. On the other hand, the counterfactual simulations show that the multiplier is not much affected by the interest reaction to the fiscal shock. Taking out that interest-rate reaction only reduces the multiplier from 0.39 to 0.36 during expansive stances.
Our paper brings a clear message on policy coordination lesson for developing economies with flexible exchange rates, namely that fiscal stimulus is enhanced by an expansive monetary policy stance that facilitates credit access by household and firms. However, the estimated multipliers are still low when compared with those obtained for economies with a fixed exchange rate regime. A related point is made by Huidrom et al (2019) who document the role of fiscal positions on the size of the multiplier.
 
References
  • Abrigo, M. R., and I. Love. “Estimation of Panel Vector Autoregression in Stata,” The Stata Journal, 16(3), 2016, 778-804.
  • Blanchard, O., and R. Perotti. “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output,” Quarterly Journal of Economics, 117, 2002, 1329-1368.
  • Huidrom, R., Kose, M., Lim, J., and Ohnsorge, F. “Why Do Fiscal Multipliers Depend on Fiscal Positions?” Journal of Monetary Economics, in press, https://doi.org/10.1016/j.jmoneco.2019.03.004
  • Ojeda-Joya, J., and O. Guzman. “The Size of Fiscal Multipliers and the Stance of Monetary Policy in Developing Economies” Contemporary Economic Policy, 37(4), 2019, 621-640. 

​FULL REPORT HERE
0 Comments
read more