Stochastic growth and monetary policy: the impacts on the term structure of interest rates

This paper builds a simple, empirically-verifiable rational expectations model for term structure of nominal interest rates analysis. It solves an stochastic growth model with investment costs and sticky inflation, susceptible to the intervention of the monetary authority following a policy rule. The model predicts several patterns of the term structure which are in accordance to observed empirical facts: (i) pro-cyclical pattern of the level of nominal interest rates; (ii) countercyclical pattern of the term spread; (iii) pro-cyclical pattern of the curvature of the yield curve; (iv) lower predictability of the slope of the middle of the term structure; and (v) negative correlation of changes in real rates and expected inflation at short horizons.

Fiscal policy in Brazil: from counter-cyclical response to crisis

The main goal of this article is to identify the dynamic effects of fiscal policy on output in Brazil from 1997 to 2014, and, more specifically, to estimate those effects when the output falls below its potential level. To do so, we estimate VAR (vector autoregressive) models to generate impulse-response functions and causality/endogeneity tests. Our most remarkable results indicate the following channel of economic policy in Brazil: to foster output, government spending increases causing increases in both tax rates and revenue and the short-term interest rate. A fiscal stimulus via spending seems efficient for economic performance as well as monetary policy; however, the latter operates pro-cyclically in the way we defined here, while the former is predominantly countercyclical. As the monetary shock had a negative effect on GDP growth and GDP growth responded positively to the fiscal shock, it seems that the economic policy has given poise to growth with one hand and taken it with the other one. The monetary policy is only reacting to the fiscal stimuli. We were not able to find any statistically significant response of the output to tax changes, but vice versa seems work in the Brazilian case.

Balance of payments dominance: its implications for macroeconomic policy

This paper defines “balance of payments dominance” as a macroeconomic regime in which the short-term macroeconomic dynamics is essentially determined by external shocks, positive or negative. It argues that this is the predominant regime in emerging and developing countries. Trade shocks play an important role but the major procyclical shocks are associated with boom-bust cycles in external financing. Policy challenges are associated not only with the management of such shocks but also with the need to enhance the space for countercyclical macroeconomic policies, as boom-bust cycles tend to pressure macroeconomic policies to behave in a procyclical way. Under these conditions, the best bet is to design policies to reduce external vulnerabilities through a mix of administered exchange rate policies, very active foreign exchange reserve management, reduced reliance on external borrowing, and macroprudential regulations, including those directly affecting capital flows. Countercyclical fiscal policy can also play a role but face strong economic and political economy challenges.

Balance of payments dominance : its implocations for macroeconomic policy

This paper defines “balance of payments dominance” as a macroeconomic regime in which the short-term macroeconomic dynamics is essentially determined by external shocks, positive or negative. It argues that this is the predominant regime in emerging and developing countries. Trade shocks play an important role but the major procyclical shocks are associated with boom-bust cycles in external financing. Policy challenges are associated not only with the management of such shocks but also with the need to enhance the space for countercyclical macroeconomic policies, as boom-bust cycles tend to pressure macroeconomic policies to behave in a procyclical way. Under these conditions, the best bet is to design policies to reduce external vulnerabilities through a mix of administered exchange rate flexibility, very active foreign exchange reserve management, reduced reliance on external borrowing, and macroprudential regulations, including those directly affecting capital flows. Countercyclical fiscal policy can also play a role but face strong economic and political economy challenges.