Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

References

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1

We are grateful to Erlend Nier, Luis Jacome, John Geanakoplos, Michael Woodford, and William Brainard for helpful comments, and suggestions made at Yale and the MCM Policy Forum. We remain responsible for any errors.

2

Federal Open Market Committee, February meeting minutes (released, March 2017): “that a change to the Committee’s reinvestment policy would likely be appropriate later this year.”

3

We take the U.S. as an example of AEs for illustrative purposes. Our model is general and should apply to the situation between other AEs (e.g., the Eurozone) and EMs.

4

Our assumption that all borrowing must be collateralized is for simplicity; it can be relaxed without affecting key results. For example, it could equally be assumed that only part of the private borrowing must be collateralized. Similarly, the assumption that only UST can serve as collateral can also be relaxed, so long as UST are assumed to have higher collateral value than EMB.

5

An extension of the model suggests that removing capital control in EMs would further increase the collateral premium of UST.

6

Here the Federal Reserve, a financial intermediary, is capable of affecting asset prices because it is not subject to any collateral requirement, which represents a significant advantage over private financial intermediaries. Collateral requirements are a form of financial friction in the model, and, therefore, “Wallace Neutrality” does not hold.

7

Although we use capital controls interchangeably with CFM (capital flow management), the IMF’s institutional view considers CFM as a broader concept and comprises residency based measures including taxes and regulations that impact cross-border financial activity. CFM also includes non-residency based measures that limit capital flows. Macroprudential measures are designed to limit financial stability risks that are associated with capital flows.

8

Central Bank Operating Frameworks and Collateral Market, CGFS Publications No. 53.

9

Readers can refer to Geanakoplos and Wang (2017) for more details about the model setup. The model is abstract and may not be applicable to all practical policy choices.

10

We do not seek to model the maturity structure of long-term government bonds. Instead we focus on its riskiness (risk premium) relative to short-term government bonds.

11

As mentioned in footnote 3, the assumptions here are for simplicity and can be relaxed without changing our key results.

12

We assume that one unit of YAE delivers dsAE units of consumption good in state s of period 1. ps is the price of the consumption good in state s.

13

For simplicity, capital control here is only imposed on capital outflow from EMs. It can be similarly imposed on capital inflow to EMs and generates similar results. In fact, many EMs resort to capital controls asymmetrically.

14

The X-axis indicates the share of YAE acquired by the AE central bank through QE.

15

Changes in the price gap between EMB and UST (i.e., πEM − πAE) are analogous to the changes in long-term yield gaps.

16

Such investors include financial institutions that profit from maturity transformation, and other investors who borrow at the short-term rate and invest to earn the long-term term premium.

17

As mentioned earlier, this is for simplicity since our focus is on the effects of unconventional monetary policy.

18

To be precise, the total UST and MBS held by the Federal Reserve as of April 22, 2014, was $4.2 trillion, of which $750 billion were held as of end 2007. Excess reserves as of April 22, 2014, were $2.9 trillion, essentially all of which was added after end 2007.

19

Lawrence Summers’ remarks at the Annual IMF Research Conference (November, 2016) suggest that money, in the Friedman sense, no longer plays a significant role in macroeconomics; He also mentioned that money is a hot potato and everyone tries to get rid of the hot potato, and money is equal to floating rate public sector debt.

20

The arithmetic of remunerating excess reserves is quite different when policy rates are increasing; this rate cycle is envisaged to end lower than the past cycles, but consensus expects a 3% target (300 bps on $2.5 trillion, at present, is $75 billion; 25 bps on $3 trillion, a couple of years ago, was $7.5 billion).

Central Bank Balance Sheet Policies and Spillovers to Emerging Markets
Author: Mr. Manmohan Singh and Haobin Wang