Countercyclical capital rules for small open economies

Clancy, Daragh; Merola, Rossana

doi:10.1016/j.jmacro.2017.04.009

Cited by 32 publications

(20 citation statements)

References 89 publications

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“…Reserve requirements should be used as a systematic countercyclical macroprudential instrument instead of an ad-hoc policy tool on which policy-makers can rely only during episodes of capital inflows. This finding is in line with the literature that, considering a wider set of macroprudential instruments, recommends the adoption of more aggressive policy rules (Gertler and Karadi, 2011;Ferreira and Nakane, 2015;Clancy and Merola, 2017). The combination of those policies yields the highest welfare improvement to the society.…”

Section: Introductionsupporting

confidence: 88%

“…Under a wider macroprudential environment, others policy instruments, such as capital requirements (Ferreira and Nakane, 2015), capital regulation in the form of Basel III-type rules (Clancy and Merola, 2017), and central bank loans to nonfinancial firms (Gertler and Karadi, 2011), also yielded smaller welfare losses under more aggressive policy rules. Kiley and Sim (2017), however, warn that countercyclical macroprudential instruments might enhance welfare, but simple-rule approaches must be cautious not to limit credit expansions associated with efficient investment opportunities.…”

Section: Welfare Analysismentioning

confidence: 99%

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Monetary Policy and Reserve Requirements in a Small Open Economy

Haraguchi

Divino

2020

Macroecon. Dynam.

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This paper investigates how a combination of monetary and macroprudential policies might affect the dynamics of a small open economy (SOE) with financial frictions under alternative discretionary shocks. Discretionary shocks in productivity and domestic and foreign monetary policies identify the roles of alternative interest rate and reserve requirement rules to stabilize the economy. The model is calibrated for the Brazilian economy. The exchange rate channel of transmission is relevant for foreign but not for domestic shocks. The interest rate rule should target domestic inflation and should not react to the exchange rate. The countercyclical reserve requirements rule, in its turn, should aggressively react to the credit-gap and not include a fixed component. Under both domestic and foreign shocks, the countercyclical effectiveness of the macroprudential policy improves when the degree of openness increases. There is a complementarity between monetary and macroprudential policy rules to stabilize the SOE.

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Section: Introductionsupporting

confidence: 88%

Section: Welfare Analysismentioning

confidence: 99%

Monetary Policy and Reserve Requirements in a Small Open Economy

Haraguchi

Divino

2020

Macroecon. Dynam.

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“…This is related to the result in Kumhof (2015, 2020) that the deterministic steady states of these two model classes are identical. Clancy and Merola (2017) People's Bank of China (Sun and He (2018)). Non-technical explanations of money creation through the banking system have recently been offered by the Bank of England (McLeay et al (2014a,b)), the Bank for International Settlements (see e.g.…”

Section: Macroeconomic Models With Financial Frictionsmentioning

confidence: 99%

Banks, Money, and the Zero Lower Bound on Deposit Rates

Kumhof

Wang

2020

SSRN Journal

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We develop a New Keynesian model where all payments between agents require bank deposits through deposits-in-advance constraints, bank deposits are created through disbursement of bank loans, and banks face a convex lending cost. At the zero lower bound on deposit rates (ZLBD), changes in policy rates affect activity through both real interest rates and banks' net interest margins (NIM). At estimated credit supply elasticities, the Phillips curve is very flat at the ZLBD, because inflationary pressures increase NIM. This strongly increases credit and thereby output, but it dampens inflation by relaxing price setters' credit rationing constraint. At the ZLBD, monetary policy has far larger effects on output relative to inflation, and Taylor rules stabilize output less effectively than rules that also respond to credit. For post-COVID-19 policy, this suggests urgency in returning inflation to targets, avoidance of negative policy rates, and a strong influence of credit conditions on rate setting.

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“…To the best of our knowledge this is the …rst paper that quanti…es all the main tax-spending multipliers for Ireland using a medium scale SOE-DSGE model with a rich …scal sector, analyses the associated …scal transmission mechanism, provides an Irish …scal instrument ranking with respect to their e¤ect in the Irish GDP and computes the e¤ects of …scal policy on the composition of aggregate output and the competitiveness of the Irish economy. DSGE models for Ireland 17 include EIRE Mod, see Clancy and Merola (2016b), which however does not incorporate an explicit …scal sector. Klein and Ventura (2018) This paper also contributes to the vast literature on …scal multipliers using DSGE models by quantifying …scal multipliers in Ireland for the main tax-spending instruments 18 .…”

Section: Related Literaturementioning

confidence: 99%

“…Our contribution also lies in the …eld of …scal policy e¤ects on the trade balance and the composition of output, e.g. Monacelli and Perotti (2008) and Monacelli and Perotti (2010) Clancy and Merola (2016a) and Lozej, Onorante, and Rannenberg (2018) develop SOE-DSGE models with …nancial frictions for Ireland focusing on macroprudential policies.…”

Section: Related Literaturementioning

confidence: 99%

FIR-GEM: A SOE-DSGE Model for Fiscal Policy Analysis in Ireland

Varthalitis

2019

SSRN Journal

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This paper presents FIR-GEM: Fiscal IRish General Equilibrium Model. FIR-GEM is a small open economy DSGE model designed as …scal toolkit for …scal policy analysis in Ireland. To illustrate the model's potential for …scal policy analysis, we conduct three types of experiments. First, we analyse the …scal transmission mechanism through which Irish …scal policy a¤ects the Irish economy. Second, we compute …scal multipliers for the main tax-spending instruments, namely government consumption, public investment, public wage bill, public transfers, consumption, labour and capital tax. We focus on a …scal policy stimulus that is either implemented through spending increases or tax cuts. Third, we perform robustness analysis on key structural characteristics that can a¤ect quantitatively the size of …scal multipliers. We …nd that the size of …scal multipliers in the Irish economy heavily depends on its degree of openness, the method of …scal …nancing employed, the elasticity of the sovereign risk premia to Irish debt dynamics and the ‡exibility of Irish labour and product markets.

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Countercyclical capital rules for small open economies

Cited by 32 publications

References 89 publications

Monetary Policy and Reserve Requirements in a Small Open Economy

Monetary Policy and Reserve Requirements in a Small Open Economy

Banks, Money, and the Zero Lower Bound on Deposit Rates

FIR-GEM: A SOE-DSGE Model for Fiscal Policy Analysis in Ireland

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