Does monetary policy stabilize the exchange rate following a currency crisis?

This paper provides evidence on the relationship between rnonetary policy and the exchange rate in the aftermath of currency crises. It ana1yzes a large data set of currency crises in 80 countries in the period 1980 to 1998. The rnain question addressed is: can rnonetary policy significantly alter the probability of reversing the post-crisis undervaluation through nominal appreciation rather than higher int1ation? We find that tight rnonetary policy facilitates the reversal of currency undervaluation through nominal appreciation rather than inflation. When the econorny is also facing a banking crisis, depending on the specification, tight rnonetary policy rnay not have the same effect.

Implications of ernbodied technological change for development economics

Employing a embodied technologic change model in which the time decision of scrapping old vintages of capital and adopt newer one is endogenous we show that the elasticity of substitutions among capital and labor plays a key role in determining the optimum life span of capital. In particular, for the CD case the life span of capital does not depend on the relative price of it. The estimation of the model's long-run investment function shows, for a Panel data set consisting of 125 economies for 25 years, that the price elasticity of investment is lower than one; we rejected the CD specification. Our calibration for the US suggests 0.4 for the technical elasticity of substitution. In order to get a theoretical consistent concept of aggregate capital we derive the relative price profile for a shadow second-hand market for capital. The shape of the model's theoretical price curve reproduces the empírical estimation of it. \lVe plug the calibrate version of the long-run solution of the model to a cross-section of economies data set to get the implied TFP, that is, the part of the productivity which is not explained by the model. We show that the mo dei represent a good improvement, comparing to the standard neoc!assical growth model with CD production function and disembodied technical change, in accounting the world diversity in productivity. In addition the model describes the fact that a very poor economy can experience fast growth based on capital accumulation until the point of becoming a middle income economy; from this point on it has to rely on TFP increase in order to keep growing.

Welfare characterization of monetary-applied models and three implications

This paper demonstrates that the applied monetary mo deIs - the Sidrauski-type models and the cash-in-advance models, augmented with a banking sector that supplies money substitutes services - imply trajectories which are P8,reto-Optimum restricted to a given path of the real quantity of money. As a consequence, three results follow: First, Bailey's formula to evaluate the wclfare cost of inflation is indeed accurate, if the long-run capital stock does not depend on the inflation rate and if the compensate demand is considered. Second, the relevant money demand concept for this issue - the impact of inflation on welfare - is the monetary base, Third, if the long-run capital stock depends on the inflation rate, this dependence has a second-order impact ou wclfare, and, conceptually, it is not a distortion from tite social point of vicw. These three implications moderatc some evaluations of the wclfare cost of the perfect predicted inflation.

Robust monetary policy with the consumption - wealth channel

Robust Monetary Policy with the Consumption - Wealth Channel

A monetary mechanism for sharing capital: Diamond and Dybvig meet Kiyotaki and Wright

Historically, payment systems and capital intermediation interact. Friedman (1959), and many observers of bank instabilities, have ad- vocated separating depositary from credit institutions. His proposal meets today an ever-increasing provision of inside money, and a short- age of monetary models of bank intermediation. In this paper, we eval- uate the proposal from a new angle, with a model in which isolating a safe payments system from commercial intermediation undermines information complementarities in banking activities. Some features of the environment resemble the models in Diamond and Dybvig (1983), and Kiyotaki and Wright (1989).

Monetary dynamics in a general equilibrium version of the Baumol-Tobin model

I study the welfare cost of inflation and the effect on prices after a permanent increase in the interest rate. In the steady state, the real money demand is homogeneous of degree one in income and its interest-rate elasticity is approximately equal to −1/2. Consumers are indifferent between an economy with 10% p.a. inflation and one with zero inflation if their income is 1% higher in the first economy. A permanent increase in the interest rate makes the price level to drop initially and inflation to adjust slowly to its steady state level.

Diretor da London School of Economics, Craig Calhoun, é recebido pela FGV/DAPP durante visita institucional

O Diretor da London School of Economics and Political Science (LSE), Craig Calhoun, foi recebido na terça-feira (29) pelo Presidente da Fundação Getulio Vargas, Carlos Ivan Simonsen Leal, durante visita institucional à FGV. Pela manhã, os presidentes das duas instituições tiveram uma reunião com a presença do Secretário-Executivo da LSE, Hugh Martin, do Diretor da DAPP, Marco Aurélio Ruediger, do Diretor da EPGE (Escola Brasileira de Economia e Finanças), Rubens Cysne, da Diretora-Executiva da Editora FGV, Marieta de Moraes Ferreira, e do Prof. Antônio Carlos Porto Gonçalves, também da EPGE. No encontro, foi discutido o maior intercâmbio de alunos entre a LSE e a FGV e em projetos de pesquisa. À tarde, Calhoun realizou uma visita à sede da DAPP, onde participou de uma reunião de apresentação dos métodos de monitoramento e análise de rede desenvolvidos pela DAPP. Participaram da reunião, além do Diretor da DAPP, os pesquisadores Roberta Novis, Amaro Grassi e Pedro Lenhard.

Robustness and stabilization properties of monetary policy rules in Brazil

Based on three versions of a small macroeconomic model for Brazil, this paper presents empirical evidence on the effects of parameter uncertainty on monetary policy rules and on the robustness of optimal and simple rules over different model specifications. By comparing the optimal policy rule under parameter uncertainty with the rule calculated under purely additive uncertainty, we find that parameter uncertainty should make policymakers react less aggressively to the economy's state variables, as suggested by Brainard's "conservatism principIe", although this effect seems to be relatively small. We then informally investigate each rule's robustness by analyzing the performance of policy rules derived from each model under each one of the alternative models. We find that optimal rules derived from each model perform very poorly under alternative models, whereas a simple Taylor rule is relatively robusto We also fmd that even within a specific model, the Taylor rule may perform better than the optimal rule under particularly unfavorable realizations from the policymaker' s loss distribution function.

Firm financial constraints and the impact of monetary policy: evidence from financial conglomerates

Building on recent evidence on the functioning of internal capital markets in financial conglomerates, this paper conducts a novel test of the balance sheet channel of monetary policy. It does so by comparing monetary policy responses of small banks that are affiliated with the same bank holding company, and this arguably face similar constraints in accessing internal/external sources of funds, but that operate in different geographical regions, and thus face different pools of borrowers. Because these subsidiaries typically concentrate their lending with small local businesses, we can use cross-sectional differences in state-level economic indicators at the time of changes of monetary policy to study whether or not the strength of borrowers' balance sheets influences the response of bank lending. We find evidence that the negative response of bank loan growth to a monetary contraction is significantly stronger when borrowers have 'weak balance sheets. Our evidence suggests that the monetary authority should consider the amplification effects that financial constraints play following changes in basic interest rates and the role of financial conglomerates in the transmission of monetary policy.

Public debt management, monetary policy and financial institutions

Despite the large size of the Brazilian debt market, as well the large diversity of its bonds, the picture that emerges is of a market that has not yet completed its transition from the role it performed during the megainflation years, namely that of providing a liquid asset that provided positive real returns. This unfinished transition is currently placing the market under severe stress, as fears of a possible default from the next administration grow larger. This paper analyzes several aspects pertaining to the management of the domestic public debt. The causes for the extremely large and fast growth ofthe domestic public debt during the seven-year period that President Cardoso are discussed in Section 2. Section 3 computes Value at Risk and Cash Flow at Risk measures for the domestic public debt. The rollover risk is introduced in a mean-variance framework in Section 4. Section 5 discusses a few issues pertaining to the overlap between debt management and monetary policy. Finally, Section 6 wraps up with policy discussion and policy recommendations.

A política da política monetária no Brasil, 1930-1993

Este relatório explora fontes primárias e análises secundárias na economia, na ciência política, e na sociologia para uma análise política da gestão monetária e financeira brasileira de 1930-1993. Fontes secundárias da economia financeira, da ciência política e da historiografia permitem distinguir quatro períodos diferentes em termos da relação entre o processo político e a gestão macroeconômica e financeira.

Household borrowing constraints and monetary policy in emerging economies

Credit markets in emerging economies can be distinguished from those in advanced economies in many respects, including the collateral required for households to borrow. This work proposes a DSGE framework to analyze one peculiarity that characterizes the credit markets of some emerging markets: payroll-deducted personal loans. We add the possibility for households to contract long-term debt and compare two different types of credit constraints with one another, one based on housing and the other based on future income. We estimate the model for Brazil using a Bayesian technique. The model is able to solve a puzzle of the Brazilian economy: responses to monetary shocks at first appear to be strong but dissipate quickly. This occurs because income – and the amount available for loans – responds more rapidly to monetary shocks than housing prices. To smooth consumption, agents (borrowers) compensate for lower income and for borrowing by working more hours to repay loans and erase debt in a shorter time. Therefore, in addition to the income and substitution effects, workers consider the effects on their credit constraints when deciding how much labor to supply, which becomes an additional channel through which financial frictions affect the economy.