Global Monetary Policy Research Articles

Optimal currency carry trade strategies

This paper studies the optimal asset allocation problem of an investor with a portfolio given by the U.S. risk-free asset and a carry trade benchmark comprising the currencies of the G10 countries. Our optimal strategy is able to adapt to macroeconomic conditions and avoid the so-called crash risk inherent in standard carry trade strategies by constructing a vector of dynamic weights that depends on a set of state variables. We find that the U.S. Ted spread, the U.S. average forward discount, the CRB Industrial return, and a global monetary policy indicator are the key drivers of optimal currency carry trade strategies.

Understanding global liquidity

We explore the concept of global liquidity based on a factor model estimated using a large set of financial and macroeconomic variables from 24 advanced and emerging market economies. We measure global liquidity conditions based on the common global factors in the dynamics of liquidity indicators. By imposing theoretically motivated sign restrictions on factor loadings, we achieve a structural identification of the factors. The results suggest that global liquidity conditions are largely driven by three common factors and can therefore not be summarised by a single indicator. These three factors can be identified as global monetary policy, global credit supply and global credit demand.

Vietnam’s macroeconomic instability from monetary policy perpecstive

Macroeconomic instability Indices of Vietnam shows that Viet Nam actually falls in macroeconomic instability. In addition to the effect of external factors such as increased capital inflow fluctuation and global economic crisis, easy monetary and fiscal policy also lead to estate and stock price boom and finally expose Vietnam economy to instability. Among them, monetary policy is one of the main causes leading to this situation because of frequency change in policy, inconsistency of inflation targeting, lack of long-term policies and administrative measures. This paper also points out some policy recommendations for effectively controlling the instability.

Global House Price Fluctuations: Synchronization and Determinants

We examine the properties of house price fluctuations across eighteen advanced economies over the past forty years. We ask two specific questions: First, how synchronized are housing cycles across these countries? Second, what are the main shocks driving movements in global house prices? To address these questions, we first estimate the global components in house prices and various macroeconomic and financial variables. We then evaluate the roles played by a variety of global shocks, including shocks to interest rates, monetary policy, productivity, credit, and uncertainty, in explaining house price fluctuations using a wide range of FAVAR models. We find that house prices are synchronized across countries, and the degree of synchronization has increased over time. Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not appear to have a sizeable impact. Interestingly, uncertainty shocks seem to be important in explaining fluctuations in global house prices.

Understanding Global Liquidity

We explore the concept of global liquidity based on a factor model estimated using a large set of financial and macroeconomic variables from 24 advanced and emerging market economies. We measure global liquidity conditions based on the common global factors in the dynamics of liquidity indicators. By imposing theoretically motivated sign restrictions on factor loadings, we achieve a structural identification of the factors. The results suggest that global liquidity conditions are largely driven by three common factors and can therefore not be summarised by a single indicator. These three factors can be identified as global monetary policy, global credit supply and global credit demand.

Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel

This paper reconsiders the effects of fiscal policy on long-term interest rates employing a Factor Augmented Panel (FAP) to control for the presence of common unobservable factors. We construct a real-time dataset of macroeconomic and fiscal variables for a panel of OECD countries for the period 1989-2012. We find that two global factors — the global monetary and fiscal policy stances — explain more than 60 percent of the variance in the long-term interest rates. Compared to the estimates from models which do not account for global factors, we find that the importance of domestic variables in explaining long-term interest rates is weakened. Moreover, the propagation of global fiscal shocks is larger in economies characterized by macroeconomic and institutional weaknesses.

Does Fiscal Policy Affect Interest Rates? Evidence from a Factor-Augmented Panel

This paper reconsiders the effects of fiscal policy on long-term interest rates employing a Factor Augmented Panel (FAP) to control for the presence of common unobservable factors. We construct a real-time dataset of macroeconomic and fiscal variables for a panel of OECD countries for the period 1989-2012. We find that two global factors—the global monetary and fiscal policy stances—explain more than 60 percent of the variance in the long-term interest rates. Compared to the estimates from models which do not account for global factors, we find that the importance of domestic variables in explaining long-term interest rates is weakened. Moreover, the propagation of global fiscal shocks is larger in economies characterized by macroeconomic and institutional weaknesses.

Global House Price Fluctuations: Synchronization and Determinants

We examine the properties of house price fluctuations across 18 advanced economies over the past 40 years. We ask two specific questions: First, how synchronized are housing cycles across these countries? Second, what are the main shocks driving movements in global house prices? To address these questions, we first estimate the global components in house prices and various macroeconomic and financial variables. We then evaluate the roles played by a variety of global shocks, including shocks to interest rates, monetary policy, productivity, credit, and uncertainty, in explaining house price fluctuations using a wide range of FAVAR models. We find that house prices are synchronized across countries, and the degree of synchronization has increased over time. Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not appear to have a sizeable impact. Interestingly, uncertainty shocks seem to be important in explaining fluctuations in global house prices.

Global House Price Fluctuations: Synchronization and Determinants

We examine the properties of house price fluctuations across 18 advanced economies over the past 40 years. We ask two specific questions: First, how synchronized are housing cycles across these countries? Second, what are the main shocks driving movements in global house prices? To address these questions, we first estimate the global components in house prices and various macroeconomic and financial variables. We then evaluate the roles played by a variety of global shocks, including shocks to interest rates, monetary policy, productivity, credit, and uncertainty, in explaining house price fluctuations using a wide range of FAVAR models. We find that house prices are synchronized across countries, and the degree of synchronization has increased over time. Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not appear to have a sizeable impact. Interestingly, uncertainty shocks seem to be important in explaining fluctuations in global house prices.

The European Central Bank and Why Things are the Way They Are: A Historic Monetary Policy Pivot Point and Moment of (Relative) Clarity

Not since the Great Depression have monetary policy matters and institutions weighed so heavily in commercial, financial, and political arenas. Apart from the eurozone crisis and global monetary policy issues, for nearly two years all else has counted for little more than noise on a relative risk basis. In major developed economies, a hypermature secular decline in interest rates is pancaking against a hard, roughly zero lower-rate bound (i.e., barring imposition of rather extreme policies such as a tax on cash holdings, which could conceivably drive rates deeply negative). Relentlessly mounting aggregate debt loads are rendering monetary – and fiscal policy – impaired governments and segments of society insolvent and struggling to escape liquidity quicksands and stubbornly low or negative growth and employment trends.At the center of the current crisis is the European Monetary Union (EMU) – a monetary union lacking fiscal and political integration. Such partial integration limits policy alternatives relative to either full federal integration of member-states or no integration at all. As we have witnessed since spring 2008, this operationally constrained middle ground progressively magnifies economic divergence and political and social discord across member-states.Given the scale and scope of the eurozone crisis, policy and actions taken (or not taken) by the European Central Bank (ECB) meaningfully impact markets large and small, and ripple with force through every major monetary policy domain. History, for the moment, has rendered the ECB the world’s most important monetary policy pivot point.Since November 2011, the ECB has taken on an arguably activist liquidity-provider role relative to private banks (and, in some important measure, indirectly to sovereigns) while maintaining its long-held post as rhetorical promoter of staunch fiscal discipline relative to sovereignty-encased “peripheral” states lacking full monetary and fiscal integration. In December 2011, the ECB made clear its intention to inject massive liquidity when faced with crises of scale in future. Already demonstratively disposed toward easing due to conditions on their respective domestic fronts, other major central banks have mobilized since the third quarter of 2011. The collective global central banking policy posture has thus become more homogenized, synchronized, and directionally clear than at any time since early 2009.

The (Other) Deleveraging

Deleveraging has two components--shrinking of balance sheets due to increased haircuts/shedding of assets, and the reduction in the interconnectedness of the financial system. We focus on the second aspect and show that post-Lehman there has been a significant decline in the interconnectedness in the pledged collateral market between banks and nonbanks. We find that both the collateral and its associated velocity are not rebounding as of end-2011 and still about $4-5 trillion lower than the peak of $10 trillion as of end-2007. This paper updates Singh (2011) and we use this data to compare with the monetary aggregates (largely due to QE efforts in US, Euro area and UK), and discuss the overall financial lubrication that likely impacts the conduct of global monetary policy.

Triebkräfte und Lösungsansätze Globaler und Europäischer Leistungsbilanzungleichgewichte (Determinations of and Economic Policy Solutions for Global and Intra-European Imbalances)

The paper scrutinizes the determinants of global and intra-European current account imbalances, which have continued to grow since the turn of the millennium up to the recent crisis. For Europe, the reasons of the current account imbalances are identified to originate in the German attempts to consolidate public finances and to restore the international competitiveness of the enterprise sector after the end of its reunification boom. On a global level, expansionary monetary and fiscal policies of the US, which interact with the macroeconomic policies of the countries at the periphery of the world dollar standard, are seen to be at the root of the global imbalances. Based on the different types of current account imbalances in Europe and the informal dollar standard different crisis and adjustment scenarios are discussed. Due to the pivotal role of the dollar in the international monetary system, a fundamental consolidation of US monetary and fiscal policies is seen as the prerequisite for a reduction of global and intra-European imbalances.

Gold Dreams, Gold Nightmares: The Social Construction of Inflation as Delegitimation Discourse

Using archival data from the four most popular gold investment websites, this study is a content analysis of gold investment enthusiast (‘gold bug’) commentaries over a six-month time period, from November 2007 to April 2008. We examine gold bug discourse as a conspiracy narrative whose central tenet is the criticism of inflationary monetary policy. Gold bugs argue that the continual presence of inflation demonstrates the fundamental flaws of global capitalism and the illegitimacy of the administrative system that operates it. The invocation of inflation is the primary way in which gold bugs forecast economic conditions and the inevitable failure of those who control global monetary policy. Based upon the ontological claim that gold is the only ‘true’ store of value, gold bugs posit a sharp rebuke of monetary policy, predicting a drastic increase in the price of gold and a consequent collapse of the world's fiat currencies.

Velocity of Pledged Collateral: Analysis and Implications

Large banks and dealers use and reuse collateral pledged by nonbanks, which helps lubricate the global financial system. The supply of collateral arises from specific investment strategies in the asset management complex, with the primary providers being hedge funds, pension funds, insurers, official sector accounts, money markets and others. Post-Lehman, there has been a significant decline in the source collateral for the large dealers that specialize in intermediating pledgeable collateral. Since collateral can be reused, the overall effect (i.e., reduced ?source' of collateral times the velocity of collateral) may have been a $4-5 trillion reduction in collateral. This decline in financial lubrication likely has impact on the conduct of global monetary policy. And recent regulations aimed at financial stability, focusing on building equity and reducing leverage at large banks/dealers, may also reduce financial lubrication in the nonbank/bank nexus.

Velocity of Pledged Collateral: Analysis and Implications

Large banks and dealers use and reuse collateral pledged by nonbanks, which helps lubricate the global financial system. The supply of collateral arises from specific investment strategies in the asset management complex, with the primary providers being hedge funds, pension funds, insurers, official sector accounts, money markets and others. Post-Lehman, there has been a significant decline in the source collateral for the large dealers that specialize in intermediating pledgeable collateral. Since collateral can be reused, the overall effect (i.e., reduced ‘source’ of collateral times the velocity of collateral) may have been a $4-5 trillion reduction in collateral. This decline in financial lubrication likely has impact on the conduct of global monetary policy. And recent regulations aimed at financial stability, focusing on building equity and reducing leverage at large banks/dealers, may also reduce financial lubrication in the nonbank/bank nexus.

Eurocurrency interest rate linkages: A frequency domain analysis

We investigate relations between Eurocurrency interest rates using frequency domain methods, which permit us to decompose test statistics into short-term and long-term causality measures. We document significant linkages between international interest rates. Specifically, we show that the euro plays an increasingly important role in global money markets. In fact, a subperiod analysis suggests that the euro interest rate leads the US dollar rate during the recent financial crisis. We discuss the implications of the findings for understanding global monetary policy dynamics as well as modeling and forecasting of short-term interest rates.

NIFA-II or ‘Bretton Woods-II’?: The G-20 (Leaders) summit process on managing global financial markets and the world economy – quo vadis?

Since November 2008, there have been four historic G-20 Leaders meetings (with a fifth scheduled for Korea in November 2010), in lieu of the traditional G-8 Heads of State meeting format, to address the current Global Financial Crisis and other related economic matters of global concern. This new global governance rubric has been denominated by the G-20 Leaders (representing 80 per cent of the world's population and 90 per cent of world GDP) as the ‘premier’ forum as to future international economic cooperation. This new governance model is rooted in a short and medium-term ‘Action Plan’ and within a broader and longer-term ‘Global Framework for Strong, Sustainable and Balanced Growth’ (a new global growth model under the G-20 Leaders’ direction).This article considers retrospectively the roots of this new economic governance paradigm and prospectively whether and in what ways this framework/process might signal a new international collaborative approach to global economic governance for securing ‘financial stability’ as a ‘global public good’ (that is, a ‘new international financial architecture’) and otherwise for better rationalizing the policy management of the global economy and the underlying globalization processes. Will this G-20 (Leaders) process prove to be able to function constructively and on a consensus basis as the G-7/8 tried to do previously; and, will it provide the global platform and umbrella framework within which a ‘new Global Deal’, and ‘Grand Bargain’ – a new ‘Bretton Woods II’ economic, monetary and financial World Order – might evolve so as meaningfully to direct and coordinate global monetary, financial, development, investment, trade and other related global policy considerations (for example, labour, energy, and environmental issues)? Or will this process prove to be merely an ad hoc enhancement of existing global instruments, institutions and arrangements that were put into place in the mid-to-late 1990s by the G-7/8 in addressing the various financial crises of the 1990s – the so-called ‘New International Financial Architecture’ (NIFA-I)? Also, in this article, the makeup and nature of the range of informal global financial ‘network’ arrangements, institutions and instruments generated in advance, otherwise related to NIFA-I, or being generated under the new governance framework will be considered, along with the newly envisioned roles of the IMF, Financial Stability Board, World Bank and OECD. Also, a brief discussion will be undertaken as to whether the G-7/8 forum will continue, and if so, in what context and in what relationship to the new G-20 Leaders framework.

The Conduct of Global Monetary Policy and Domestic Stability

The purpose of this paper is to examine how important an improvement in global monetary policy might be for the macroeconomic performance of a small open economy such as the United Kingdom. Our paper contributes to the literature by proposing a new methodology to treat indeterminate solutions (the most-robust solution), and by analysing a policy improvement within a three-country framework. Both contributions yield a rich set of theoretical and policy implications. We find that the performance of the domestic macroeconomy depends crucially on domestic monetary policy, but there remains significant potential for monetary policy abroad to improve the stability of inflation and output in a small open economy. Importantly, how much of this potential spillover from policy abroad crystallises is still endogenous to the conduct of domestic policy. We also show that an improvement in policy abroad may not reduce domestic volatility when domestic policy is the only poor policy globally. In such a case domestic volatility can even become worse. Our paper also yields interesting results related to the impact of a policy improvement abroad on inflation persistence in the domestic economy and her exposure to foreign shocks.

Global imbalances and monetary policy

In the article I discuss some possible explanations for two features of financial globalization over recent years; first, the fact that expected returns have fallen significantly in advanced countries, even though economic growth has accelerated; and second, the fact that capital is flowing from poor to rich countries rather than the other way round, a phenomenon known in the literature as the “Lucas Paradox”. The “incomplete” nature of globalization, notably the persistent differences in institutional quality between North and South, might explain both puzzles as well as the emergence of global imbalances. Alternative explanations based on a fall in risk premia and accommodative monetary policy conditions fit the facts less well. I then discuss the implications for monetary policy.

Global Monetary Policy Shocks in the G5: A Svar Approach

The paper constructs a global monetary aggregate, namely the sum of the key monetary aggregates of the G5 economies (US, Euro area, Japan, UK, and Canada), and analyses its indicator properties for global output and inflation. Using a structural VAR approach we find that after a monetary policy shock output declines temporarily, with the downward effect reaching a peak within the second year, and the global monetary aggregate drops significantly. In addition, the price level rises permanently in response to a positive shock to the global liquidity aggregate. The similarity of our results with those found in country studies might supports the use of a global monetary aggregate as a summary measure of worldwide monetary trends.