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International Monetary Fund

An important aim of this paper is to take shifts in the long-term anchor in the empirical specifications. The study examines exchange-rate pass-through and external adjustment in the euro area. The impact on third-country trade and investment is also discussed. A better understanding of the economic behavior underlying limited pass-through is an important consideration for investigating the implications of currency fluctuations and the pattern of external adjustment. The impulse-response patterns suggest a high degree of local currency pricing in import prices and producer currency pricing in export prices.

Mr. Hamid Faruqee

Exchange rate pass-through in a set of euro area prices along the pricing chain is examined in this paper. First, a vector autoregression (VAR) approach is used to analyze the joint time-series behavior of the euro exchange rate and a system of area-wide prices in response to an exchange rate shock. Second, the impulse-response functions from the VAR estimates are used to identify—in a “new open-economy macroeconomics model”—the key behavioral parameters that best replicate the pattern of exchange rate pass-through in the euro area. A key finding is that traded goods—both extra-area exports and imports—behave as though they are predominately priced in euros. The area-wide findings are compared with those for other major industrial economies.

Rupa Duttagupta and N. Barrera
This paper builds a Bayesian VAR estimation model of growth for Canada, by focusing specifically on the role of external and domestic financial indicators, including credit conditions. A variance decomposition shows that financial conditions explain one-third of the total variability in Canada's real GDP growth, although changes in U.S. real GDP growth still account for a larger share of volatility in Canadian growth. A macro-financial conditions index built from the VAR's impulse responses shows that U.S. real GDP growth and lending standards will increasingly bear on Canada's growth, implying that a normalization of the U.S. economic and financial conditions is key for a sustained recovery in Canada.
International Monetary Fund
In this paper we identify some of the main factors behind systemic risk in a set of international large-scale complex banks using the novel CoVaR approach. We find that short-term wholesale funding is a key determinant in triggering systemic risk episodes. In contrast, we find no evidence that a larger size increases systemic risk within the class of large global banks. We also show that the sensitivity of system-wide risk to an individual bank is asymmetric across episodes of positive and negative asset returns. Since short-term wholesale funding emerges as the most relevant systemic factor, our results support the Basel Committee's proposal to introduce a net stable funding ratio, penalizing excessive exposure to liquidity risk.
Marcella Lucchetta and Mr. Gianni De Nicolo
This paper presents a modeling framework that delivers joint forecasts of indicators of systemic real risk and systemic financial risk, as well as stress-tests of these indicators as impulse responses to structural shocks identified by standard macroeconomic and banking theory. This framework is implemented using large sets of quarterly time series of indicators of financial and real activity for the G-7 economies for the 1980Q1-2009Q3 period. We obtain two main results. First, there is evidence of out-of sample forecasting power for tail risk realizations of real activity for several countries, suggesting the usefulness of the model as a risk monitoring tool. Second, in all countries aggregate demand shocks are the main drivers of the real cycle, and bank credit demand shocks are the main drivers of the bank lending cycle. These results challenge the common wisdom that constraints in the aggregate supply of credit have been a key driver of the sharp downturn in real activity experienced by the G-7 economies in 2008Q4- 2009Q1.
Mr. Hamid Faruqee
Exchange rate pass-through in a set of euro area prices along the pricing chain is examined. Using a vector autoregression (VAR) approach, the empirics analyze the joint time-series behavior of the euro exchange rate and a system of euro-area prices in response to an exchange rate shock. The impulse-response functions from the VAR estimates are used to identify-in a 'new open economy macroeconomics model'-those key behavioral parameters that best replicate the pattern of exchange rate pass-through in the euro area. Area-wide prices are found to display incomplete pass-through, consistent with euro currency-pricing and pricing-to-market behavior. The results are compared to those for the other major industrial economies, and suggest that, as with the United States, "expenditure-switching" effects on the current account still operate but are generally small.
Mr. Jorge Roldos
This paper studies changes in Canada's monetary policy transmission, associated with the important changes in financial structure experienced in the 1990's, using two methodologies. First, VAR models show a clear break in monetary transmission beginning in 1988, after changes in financial regulation initiated the process of financial disintermediation. Second, estimates of the interest rate elasticity of aggregate demand in IS equations increase in the 1990's, suggesting that the systematic component of monetary policy has become more relevant. The ratio of direct to indirect finance, a measure of disintermediation, contributes to explain changes in the interest rate elasticity, suggesting an increased effectiveness of monetary policy associated with a larger use of market-based sources of finance.
Mr. Tamim Bayoumi and Mr. Andrew J Swiston
This paper examines linkages across North America by estimating the size of spillovers from the major regions of the world-the United States, euro area, Japan, and the rest of the world-to Canada and Mexico, and decomposing the impact of these spillovers into trade, commodity price, and financial market channels. For Canada, a one percent shock to U.S. real GDP shifts Canadian real GDP by some ¾ of a percentage point in the same direction- with financial spillovers more important than trade in recent decades. Thus, a large proportion of the reduction in Canadian output volatility since the 1980s can be accounted for by the "Great Moderation" in U.S. growth. Before 1996, domestic volatility in Mexico swamped the contribution of external factors to the business cycle. After 1996, the response of Mexican GDP is 1½ times the size of the U.S. shock-"when the U.S. sneezes, Mexico catches a cold". These spillovers are transmitted through both trade and financial channels.
Mr. Mauricio Vargas and Daniela Hess
Using data from 1980-2017, this paper estimates a Global VAR (GVAR) model taylored for the Caribbean region which includes its major trading partners, representing altogether around 60 percent of the global economy. We provide stilyzed facts of the main interrelations between the Caribbean region and the rest of the world, and then we quantify the impact of external shocks on Caribbean countries through the application of two case studies: i) a change in the international price of oil, and ii) an increase in the U.S. GDP. We confirmed that Caribbean countries are highly exposed to external factors, and that a fall in oil prices and an increase in the U.S. GDP have a positive and large impact on most of them after controlling for financial variables, exchange rate fluctuations and overall price changes. The results from the model help to disentangle effects from various channels that interact at the same time, such as flows of tourists, trade of goods, and changes in economic conditions in the largest economies of the globe.
International Monetary Fund
This paper reviews the first five years’ experience with inflation targeting in the United Kingdom. It concludes that inflation performance was not significantly different under inflation targeting than predicted by a VAR model estimated in the period prior to participation in the exchange rate mechanism (ERM). Both short- and long-term interest rates were lower than predicted, however, which is consistent with the interpretation that some gains in credibility were achieved under the inflation targeting regime.