Search Results
Working Paper
Large Capital Inflows, Sectoral Allocation, and Economic Performance
This paper describes the stylized facts characterizing periods of exceptionally large capital inflows in a sample of 70 middle- and high-income countries over the last 35 years. We identify 155 episodes of large capital inflows and find that these events are typically accompanied by an economic boom and followed by a slump. Moreover, during episodes of large capital inflows capital and labor shift out of the manufacturing sector, especially if the inflows begin during a period of low international interest rates. However, accumulating reserves during the period in which capital inflows are ...
Discussion Paper
Global Supply Chain Pressure Index: May 2022 Update
Supply chain disruptions continue to be a major challenge as the world economy recovers from the COVID-19 pandemic. Furthermore, recent developments related to geopolitics and the pandemic (particularly in China) could put further strains on global supply chains. In a January post, we first presented the Global Supply Chain Pressure Index (GSCPI), a parsimonious global measure designed to capture supply chain disruptions using a range of indicators. We revisited our index in March, and today we are launching the GSCPI as a standalone product, with new readings to be published each month. In ...
Working Paper
Capital controls or exchange rate policy? a pecuniary externality perspective
In the aftermath of the global nancial crisis, a new policy paradigm has emerged> in which old-fashioned policies such as capital controls and other government distor-> tions have become part of the standard policy toolkit (the so-called macro-prudential> policies). On the wave of this seemingly unanimous policy consensus, a new strand> of theoretical literature contends that capital controls are welfare enhancing and can> be justi ed rigorously because of second-best considerations. Within the same the-> oretical framework adopted in this fast-growing literature, we show that a credible> ...
Working Paper
Optimal policy for macro-financial stability
In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We study this question in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of an occasionally binding borrowing constraint as in Mendoza (2010). First, we show that the same set of taxes that replicates the constrained social planner allocation could be used optimally by a Ramsey planner to achieve the first best unconstrained equilibrium: in both cases without any ...
Report
Managing Monetary Policy Normalization
We propose a new framework for monetary policy analysis to study monetary policy normalization when exiting a liquidity trap. The optimal combination of reserves and interest rate policy requires an increase in liquidity (reserves) a few quarters after the policy rate is set at the effective lower bound. Removal of accommodation requires that quantitative tightening starts before the liftoff of the policy rate. Moreover, the withdrawal of liquidity takes place at a very slow pace relative to the normalization of the policy rate.
Discussion Paper
Modeling the Global Effects of the COVID-19 Sudden Stop in Capital Flows
The COVID-19 outbreak has triggered unusually fast outflows of dollar funding from emerging market economies (EMEs). These outflows are known as “sudden stop” episodes, and they are typically followed by economic contractions. In this post, we assess the macroeconomic effects of the COVID-induced sudden stop of capital flows to EMEs, using our open-economy DSGE model. Unlike existing frameworks, such as the Federal Reserve Board’s SIGMA model, our model features both domestic and international financial constraints, making it well-suited to capture the effects of an outflow of ...
Discussion Paper
Global Supply Chain Pressure Index: The China Factor
In a January 2022 post, we first presented the Global Supply Chain Pressure Index (GSCPI), a parsimonious global measure designed to capture supply chain disruptions using a range of indicators. In this post, we review GSCPI readings through December 2022, and then briefly discuss the drivers of recent moves in the index. While supply chain disruptions have significantly diminished over the course of 2022, the reversion of the index toward a normal historical range has paused over the past three months. Our analysis attributes the recent pause largely to the pandemic in China amid an easing ...
Report
The Bitcoin–Macro Disconnect
This paper investigates the link between Bitcoin and macroeconomic fundamentals by estimating the impact of macroeconomic news on Bitcoin using an event study with intraday data. The key result is that, unlike other U.S. asset classes, Bitcoin is orthogonal to monetary and macroeconomic news. This disconnect is puzzling as unexpected changes in discount rates should, in principle, affect the price of Bitcoin even when interpreting Bitcoin as a purely speculative asset.
Discussion Paper
Should Emerging Economies Embrace Quantitative Easing during the Pandemic?
Emerging economies are fighting COVID-19 and the economic sudden stop imposed by lockdown policies. Even before COVID-19 took root in emerging economies, however, investors had already started to flee these markets–to a much greater extent than they had at the onset of the 2008 global financial crisis (IMF, 2020; World Bank, 2020). Such sudden stops in capital flows can cause significant drops in economic activity, with recoveries that can take several years to complete (Benigno et al., 2020). Unfortunately, austerity and currency depreciations as enacted during the global financial crisis ...
Journal Article
Sudden Stops and COVID-19: Lessons from Mexico’s History
The COVID-19 pandemic produced a sharp contraction in capital flows in emerging markets during the spring of 2020. Such contractions are known as “sudden stops” and historically have been associated with significant downturns in a country’s economic activity. Evidence from Mexico’s financial crisis history suggests that sudden stops tend to exhibit a common pattern: the crisis lasts one to two years before a rapid but partial recovery, followed by years of protracted stagnation.