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Business and Economics > Production and Operations Management

You are looking at 1 - 10 of 15 items for :

  • Type: Journal Issue x
  • Policy Objectives; Policy Designs and Consistency; Policy Coordination x
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Cover IMF Working Papers
The Consequences of Falling Behind the Curve: Inflation Shocks and Policy Delays Under Rational and Behavioral Expectations
Mai Hakamada
and
Carl E. Walsh
Central banks in major industrialized economies were slow to react to the surge in inflation that began in early 2021. The proximate causes of this surge were the supply chain disruptions associated with the easing of COVID restrictions, fiscal policies designed to cushion the economic impact of COVID, and the impact on commodity prices and supply chains of the war in Ukraine. We investigate the consequences of policy delay in responding to inflation shocks. First, using a simple three-period model, we show how policy delay worsens inflation outcomes, but can mitigate or even reverse the output decline that occurs when policy responds without delay. Then, using a calibrated new Keynesian framework and two measures of loss that incorporate a “balanced approach” to weigh inflation and the output gap, we find that loss is monotonically increasing in the length of the delay. Loss is reduced if policy, when it does react, is more aggressive. To investigate whether these results are sensitive to the assumption of rational expectations, we consider cognitive discounting as an alternative assumption about expectations. With cognitive discounting, forward guidance is less powerful and results in a reduction in the costs of delay. Under either assumption about expectations, the costs of a short delay can be eliminated by adopting a less inertial policy rule and a more aggressive response to inflation.
Keywords:
monetary policy; inflation policy delay; behavioral expectations; falling behind the curve; Policy delay; inflation outcome; inflation shock; supply chain disruption; trend inflation; Inflation; Output gap; Rational expectations; Central bank policy rate; Real interest rates
Cover Regional Economic Outlook, Middle East and Central Asia, October 2023
Regional Economic Outlook, Middle East and Central Asia, October 2023
Building Resilience and Fostering Sustainable Growth
International Monetary Fund. Middle East and Central Asia Dept.

Abstract

Across the Middle East and Central Asia, the combined effects of global headwinds, domestic challenges, and geopolitical risks weigh on economic momentum, and the outlook is highly uncertain. Growth is set to slow this year in the Middle East and North Africa region, driven by lower oil production, tight policy settings in emerging market and middle-income economies, the conflict in Sudan, and other country-specific factors. In the Caucasus and Central Asia, although migration, trade, and financial inflows following Russia’s war in Ukraine continue to support economic activity, growth is set to moderate slightly this year. Looking ahead, economic activity in the Middle East and North Africa region is expected to improve in 2024 and 2025 as some factors weighing on growth this year gradually dissipate, including the temporary oil production cuts. But growth is expected to remain subdued over the forecast horizon amid persistent structural hurdles. In the Caucasus and Central Asia, economic growth is projected to slow next year and over the medium term as the boost to activity from real and financial inflows from Russia gradually fades and deep-seated structural challenges remain unsolved. Inflation is broadly easing, in line with globally declining price pressures, although country-specific factors—including buoyant wage growth in some Caucasus and Central Asia countries—and climate-related events continue to make their mark. Despite some improvement since April, the balance of risks to the outlook remains on the downside. In this context, expediting structural reforms is crucial to boost growth and strengthen resilience, while tight monetary and fiscal policies remain essential in several economies to durably bring down inflation and ensure public debt sustainability.

Keywords:
growth; inflation; public debt; external financing; commodity prices; structural reforms; investment; labor productivity; financial stability; stress testing; governance reform; GCC country; credit market reform; government effectiveness; reform package; Policy space; Emerging and frontier financial markets; Credit; Labor force participation; Middle East and Central Asia; Central Asia and the Caucasus; Middle East; North Africa; oil exporter; IMF staff calculation; CCA bank; sovereign-bank nexus; Fiscal stance; Current account balance; Commercial banks; Oil exports; Global
Cover IMF Working Papers
The Negative Mean Output Gap
Mr. Shekhar Aiyar
and
Simon Voigts
We argue that in an economy with downward nominal wage rigidity, the output gap is negative on average. Because it is more difficult to cut wages than to increase them, firms reduce employment more during downturns than they increase employment during expansions. This is demonstrated in a simple New Keynesian model with asymmetric wage adjustment costs. Using the model's output gap as a benchmark, we further show that common output gap estimation methods exhibit a systematic bias because they assume a zero mean. The bias is especially large in deep recessions when potential output tends to be most severely underestimated.
Keywords:
WP; mean output gap; standard deviation; time series; Output gap estimation; business cycles; fiscal policy; monetary policy; output gap estimate; adjustment cost; nominal wage rigidity; output gap concept; output gap filter; output gap definition; Output gap; Potential output; Wage adjustments; Wage rigidity; Sticky prices; Global
Cover IMF Working Papers
Monetary and Macroprudential Policy Coordination Among Multiple Equilibria
Mr. Itai Agur
The notion of a tradeoff between output and financial stabilization is based on monetary-macroprudential models with unique equilibria. Using a game theory setup, this paper shows that multiple equilibria lead to qualitatively different results. Monetary and macroprudential authorities have tools that impose externalities on each other's objectives. One of the tools (macroprudential) is coarse, while the other (monetary policy) is unconstrained. We find that this asymmetry always leads to multiple equilibria, and show that under economically relevant conditions the authorities prefer different equilibria. Giving the unconstrained authority a weight on "helping" the constrained authority ("leaning against the wind") now has unexpected effects. The relation between this weight and the difficulty of coordinating is hump-shaped, and therefore a small degree of leaning worsens outcomes on both authorities' objectives.
Keywords:
WP; monetary policy; first mover; central bank
Cover IMF Working Papers
Italy: Quantifying the Benefits of a Comprehensive Reform Package
Michal Andrle
,
Mr. Alvar Kangur
, and
Mr. Mehdi Raissi
This paper seeks to quantify the net benefits of a comprehensive reform package aimed at addressing Italy’s inter-related challenges. Specifically, it simulates the growth and competitiveness effects of a package of fiscal, financial, wage bargaining, and other structural reforms. Credible implementation of such a package yields substantial mediumterm dividends at negligible near-term growth costs. Real GDP growth is estimated to be substantially higher over the medium term, while the real effective exchange rate depreciates notably.
Keywords:
WP; GDP; Italy; reform; real GDP; OECD estimate; growth; competitiveness; fiscal policy; wage bargaining; labor market reforms; product market reforms; banking sector; DSGE models; GIMF simulation; IMF's Global Integrated Monetary and Fiscal; competitiveness gain; NPL ratio; Structural reforms; Nonperforming loans; Total factor productivity; Global
Cover IMF Working Papers
Designing a Simple Loss Function for Central Banks: Does a Dual Mandate Make Sense?
Davide Debortoli
,
Mr. Jinill Kim
,
Jesper Lindé
, and
Mr. Ricardo C Nunes
Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.
Keywords:
WP; central bank; Central banks’ objectives; simple loss function; monetary policy design; sticky prices and sticky wages; DSGE models; loss function; inflation-output gap mandate; wage inflation; output gap fluctuation; inflation-output gap trade-off; Output gap; Inflation; Wages; Production growth; Labor markets; Europe
Cover IMF Working Papers
The EU Services Directive: Gains from Further Liberalization
Emilio Fernández Corugedo
and
Mrs. Esther Perez Ruiz
The EU Services Directive was adopted in 2006 to foster competition in services across Europe. However, progress in liberalizing services has fallen short of expectations due to the article 15 of the Directive, which allows countries to maintain pre-existing restrictions if judged necessary to protect the public interest. Through input output analysis, this paper finds important multiplier effects of greater efficiency services to the rest of the economy. A renewed impulse to the liberalization process could be given by enhancing the advocacy role of national competition authorities in interpreting the notion of public interest underpinning existing regulations.
Keywords:
WP; multiplier effect; production function; Services sectors; Services Directive; Input-output economics; Growth theory; Competition authorities; productivity improvement; input-output economy; TFP shock; liberalization process; amplification effect; sector economy; Competition; Productivity; Services sector; Total factor productivity; Europe
Cover IMF Working Papers
To Cut or Not to Cut? That is the (Central Bank’s) Question In Search of the Neutral Interest Rate in Latin America
Mr. Nicolas E Magud
and
Ms. Evridiki Tsounta
This paper estimates neutral real interest rate (NRIR) ranges for 10 Latin American countries that either have full-fledged inflation targeting regimes in place or have recently adopted them, using an array of methodologies commonly used in the literature. We find that NRIRs have declined in the last decade, with more economically and financially developed economies exhibiting lower NRIR levels. Based on the estimated NRIRs, we assess that the current monetary stance (measured by the interest rate gap) is appropriately neutral in most of the considered economies, in line with closing output gaps. We also observe that the interest rate gap can be a good predictor of future inflation dynamics and economic growth. In addition, looking at the recent experiences in Brazil and Peru, we suggest that macro-prudential policies could affect the monetary stance even in the absence of direct interest rate changes, through affecting the NRIR.
Keywords:
WP; monetary policy; real interest rate; central bank; neutral interest rate; monetary stance; macrorpudential policies; interest rate gap; monetary policy rate; potential GDP; output gap estimate; rate of inflation; stimulus withdrawal; interest rate observation; economic growth; accommodative monetary policy; utility function; interest rate hike; monetary policy tightening; Output gap; Real interest rates; Central bank policy rate; Inflation; Global
Cover IMF Working Papers
Incorporating Financial Sector Risk Into Monetary Policy Models: Application to Chile
Mr. Leonardo Luna
,
Mr. Dale F Gray
,
Jorge Restrepo
, and
Carlos Garcia
This paper builds a model of financial sector vulnerability and integrates it into a macroeconomic framework, typically used for monetary policy analysis. The main question to be answered with the integrated model is whether or not the central bank should include explicitly the financial stability indicator in its monetary policy (interest rate) reaction function. It is found in general, that including distance-to-default (dtd) of the banking system in the central bank reaction function reduces both inflation and output volatility. Moreover, the results are robust to different model calibrations: whenever exchange-rate pass-through is higher; financial vulnerability has a larger impact on the exchange rate, as well as on GDP (or the reverse, there is more effect of GDP on bank's equity - i.e., what we call endogeneity), it is more efficient to include dtd in the reaction function.
Keywords:
WP; interest rate; monetary policy; Financial vulnerability; central banking; asset volatility; bank assets; risk indicator; reaction function; monetary policy interest rate; Inflation; Asset valuation; Output gap; Financial sector risk; Stocks; Asia and Pacific
Cover IMF Working Papers
Optimal Monetary Policy with Overlapping Generations of Policymakers
Maral Shamloo
In this paper I study the effect of imperfect central bank commitment on inflationary outcomes. I present a model in which the monetary authority is a committee that consists of members who serve overlapping, finite terms. Older and younger generations of Monetary Policy Committee (MPC) members decide on policy by engaging in a bargaining process. I show that this setup gives rise to a continuous measure of the degree of monetary authority's commitment. The model suggests that the lower the churning rate or the longer the tenure time, the closer social welfare will be to that under optimal commitment policy.
Keywords:
WP; MPC member; monetary policy; objective function; standard deviation; Monetary Policy Committee; Commitment; Discretion; Optimal Monetary Policy; loss function; inflation-output gap trade-off; output gap volatility; cost-push shock; member tenure; efficient frontier; members result; Output gap; Inflation