Andrew J. Filardo

Monetary Policy and Asset Price Bubbles: Calibrating the Monetary Policy Trade-Offs

The issue of monetary policy and asset prices has been receiving much attention not only because it is an interesting topic for macroeconomists but also because central banks have faced daunting challenges from large swings in various types of asset prices. To some extent, the achievement of a low, stable inflation environment has not simultaneously brought about a more stable asset price environment. The record over the past decade, in fact, has raised the prospect of asset price booms and busts as a permanent feature of the monetary policy landscape. This paper lays out a general framework to explore some of the key monetary policy trade-offs presented by asset prices, with particular emphasis on the role of asset price bubbles.

Should Monetary Policy Respond to Asset Price Bubbles? Some Experimental Results

Should central banks respond to asset price bubbles? This paper explores this monetary policy question in a hypothetical economy subject to asset price bubbles. Despite the highly stylized structure of the model, the results reveal several practical monetary policy lessons. First, a monetary authority should generally respond to asset prices as long as asset prices contain reliable information about inflation and output. Second, this finding holds even if a monetary authority cannot distinguish between fundamental and bubble asset price behavior. Third, a monetary authority’s desire to respond to asset prices falls dramatically as its preference to smooth interest rates rises. Finally, a monetary authority should not respond to asset prices if there is considerable uncertainty about the macroeconomic role of asset prices.

Targeting inflation in Asia and the Pacific: Lessons from the recent past

Central banks in Asia and the Pacific have overwhelmingly chosen inflation as the principal objective of monetary policy. Some central banks have declared themselves to be inflation targeters, while others pursue their objective without referring to this particular label. Moreover, whether or not they refer to their strategy as inflation targeting, central banks in the region have chosen diverse approaches to achieving their inflation targets: for example with respect to how explicit the target is, the choice of inflation indicator, and the choice of instrument. All this suggests that the region is a good sample with which to examine the lessons from the experiences of central banks that have adopted formal inflation targeting and those with more eclectic approaches to targeting inflation.

The 2001 US recession: what did recession prediction models tell us?

How predictable was the recent US recession? This paper evaluates the accuracy of several recession prediction models. In particular, traditional rule-of-thumb models using the composite index of leading indicators (CLI), Neftcis sequential probability model, a probit model, and Stock and Watsons experimental recession indexes are compared. Despite the relatively mild depth of the recession, the models using the CLI performed particularly well. The results are robust across different types of models and with respect to the use of real-time data. The strong real-time performance stands at odds with earlier sceptical claims about the marginal usefulness of the CLI in predicting cyclical turning points, and complements the results in the earlier research of Filardo (1999). At a more conceptual level, the paper provides general support to the classical business cycle view that turning points of business cycles from expansion to recession are complex, possibly endogenous and nonlinear, phenomena. The results also suggest that the impressive insights of Geoffrey Moore into the theory and construction of the CLI will continue to shape our understanding of business cycles well into the future.

The Globalisation of Inflation: The Growing Importance of Global Value Chains

Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that the conventional trade-based measures of openness used in previous studies are poor proxies for this transmission channel. The results support the hypothesis that as GVCs expand, direct and indirect competition among economies increases, making domestic inflation more sensitive to the global output gap. This can affect the trade-offs that central banks face when managing inflation.

Prolonged Reserves Accumulation, Credit Booms, Asset Prices and Monetary Policy in Asia

This article examines past evidence of prolonged periods of foreign exchange reserves accumulation in the Asia-Pacific region. Several proxies for this unobserved variable are considered, including a newly proposed one based on a factor model. We focus on identifying periods of prolonged interventions and identify its key macro-financial determinants. Two broad conclusions emerge from the stylized facts and the econometric evidence. First, the best protection against costly reserves accumulation is a more flexible exchange rate. Second, the necessity to accumulate reserves as a bulwark against goods price inflation is misplaced. Instead, there is a strong link between asset price movements and the likelihood of accumulating foreign exchange reserves that are costly. Policy implications are also drawn.