No abstract

The international financial crisis and the euro-area sovereign debt crisis brought to the fore the importance of financial conditions to the macroeconomy. The complexity of the financial sector means that a wide range of financial variables is needed to fully characterize its functioning in real time. In this paper we construct a financial conditions index (FCI) for the euro area following the studies by Hatzius et al. and Brave and Butters. Our FCI successfully tracks both worldwide and euro-areaspecific financial events. We then incorporate the FCI into a VAR model comprising output, inflation, the monetary policy rate, bank loans and bank lending spreads to identify credit supply shocks with sign restrictions. These shocks are estimated to have caused around one-fifth of the decline in euro-area manufacturing production at the trough of the financial crisis and a rise in bank lending spreads of around 30 basis points.14 Our results are similar to those of Angelopoulou et al. (2013). 15 Unlike the other two indicators, our FCI encompasses a large range of financial series. For more details, see ECB (2012).

While the global financial crisis revealed a need for macroprudential policy tools to mitigate the build-up of risk in the financial system, the impact of such policies on the banking sector and the macroeconomy remains largely uncertain. We contribute to the empirical literature that estimates the impact of shocks to bank capital buffers on bank lending and the macroeconomy by estimating a Bayesian VAR model identified with sign restrictions. We use bank-level data for large euro area listed banks to construct an aggregate bank capital buffer for the euro area, which is included as another variable in the model. We estimate three shocks affecting the euro area economy, namely a demand shock, a monetary policy shock and a shock to bank capital buffers. We find that banks curtail lending and reduce their relative exposure to riskier assets in response to a shock to the bank capital buffer. Historical shock decomposition analysis shows that shocks to bank capital buffers have contributed to impair bank lending growth and to widen bank lending spreads, hence depressing economic activity.

This paper uses multiple cointegration analysis to estimate simultaneously a monetary reaction function and the determinants of expected inflation for Brazil, Chile, Colombia, and Mexico. In addition, M-GARCH modeling is used to test for the presence of volatility spillovers between the monetary stance and inflation expectations. The analysis shows that there are long-term relationships between the interest rate, expected inflation, and the inflation target, and that greater volatility in the monetary stance increases the volatility of expected inflation in Brazil, Colombia, and Mexico. Copyright (c) 2009 The Ohio State University.

JEL classification: C15 C22 E52 O52 Keywords: Brazil Chile Colombia Mexico Inflation targeting Structural model Impulse response functions Counterfactual analysis a b s t r a c tIn 1999, new monetary policy regimes were adopted in Brazil, Chile, Colombia and Mexico, combining inflation targeting with floating exchange rates. These regime changes have been accompanied by lower volatility in the monetary stance in Brazil, Colombia and Mexico, despite higher inflation volatility in Brazil and Colombia. This paper estimates a conventional New Keynesian model for these four countries and shows that: i) the post-1999 regime has been associated with greater responsiveness by the monetary authority to changes in expected inflation in Brazil and Chile, while in Colombia and Mexico monetary policy has become less counter-cyclical, ii) lower interest-rate volatility in the post-1999 period owes more to a benign economic environment than to a change in the policy setting, and iii) the change in the monetary regime has not yet resulted in a reduction in output volatility in these countries.