Ippei Fujiwara

ASIAN FINANCIAL LINKAGE: MACRO-FINANCE DISSONANCE

How are Asian financial markets interlinked and how are they linked to markets in developed countries? What is the main driver of fluctuations in Asian financial markets as well as real economic activities? In order to answer these questions, we estimate the spillover index proposed by Diebold and Yilmaz (2009) and gauge the degree of interactions in both financial markets and real economic activities among Asian economies. We first show that the degree of the international spillover in stock markets is like cookie-cutter products, namely, uniform, irrespective of the groups of countries, such as G3, NIEs and ASEAN4. This suggests the importance of the globally common shock in stock markets. We, then, discuss the macro-finance dissonance. In stock and bond markets, the US has been the main driver of fluctuations. Regarding real economic activities, China has emerged as an important source of fluctuations.

A NOTE ON GROWTH EXPECTATION

Recently, several researchers have succeeded in producing expectation–driven cycles by balancing the tension between the wealth effect and the substitution effect stemming from the higher expected future productivity. Especially, seminal research by Christiano et al. (“Monetary Policy and Stock Market Boom–Bust Cycles,†mimeo, Northwestern University, 2007), explains “stock market boom–bust cycles,†characterized by increases in consumption, labor inputs, investment, and stock prices relating to high expected future technology levels. We, however, show that such expectation–driven cycles are difficult to generate based on “growth expectation,†which reflects expectations of higher productivity growth rates.

Financial Stability in Open Economies

Do financial frictions call for policy cooperation? This paper investigates the implications of financial frictions for monetary policy in the open economy. Welfare analysis shows that there are long-run gains which result from cooperation, but, dynamically, financial frictions per se do not require policy cooperation to improve global welfare over business cycles. In addition, inward-looking financial stability, namely eliminating inefficient fluctuations of loan premiums in the home country, is the optimal monetary policy in the open economy, irrespective of the existence of policy coordination.

The Optimal Degree of Monetary-Discretion in a New Keynesian Model with Private Information

This paper considers the optimal degree of monetary-discretion when the central bank conducts policy based on its private information about the state of the economy and is unable to commit. Society seeks to maximize social welfare by imposing restrictions on the central bank’s actions over time, and the central bank takes these restrictions and the New Keynesian Phillips curve as constraints. By solving a dynamic mechanism design problem we find that it is optimal to grant “constrained discretion�? to the central bank by imposing both upper and lower bounds on permissible inflation, and that these bounds should be set in a historydependent way. The optimal degree of discretion varies over time with the severity of the timeinconsistency problem, and, although no discretion is optimal when the time-inconsistency problem is very severe, it is a transient phenomenon and some discretion is granted eventually.

Sustainable International Monetary Policy Cooperation

No abstract available.

Pegging the Exchange Rate to Gain Monetary Policy Credibility

Central banks that lack credibility often tie their exchange rate to that of a more credible partner in order to “import” credibility. We show in a small open economy model that a central bank that displays “limited credibility” can deliver significant improvements to a social welfare function that contains no role for exchange rate stabilization by maximizing an objective function that places weight on exchange rate stabilization, and thus the central bank with limited credibility will peg their currency to that of a more credible partner. As the central bank’s credibility improves it will place less weight on exchange rate stabilization in its objective function and thus loosen the peg. When the central bank is perfectly credible its objective function and the social welfare function are identical; it places no weight on exchange rate stabilization and allows the currency to freely float. Empirical results using a panel of both developed and developing countries show that as central banks become more independent they tend to allow more currency flexibility.

Dealing with Time-Inconsistency: Inflation Targeting vs. Exchange Rate Targeting

Abandoning an objective function with multiple targets and adopting single mandate can be an effective way for a central bank to overcome the classic time-inconsistency problem. We show that the choice of a particular single mandate depends on an economy’s level of trade openness and the credibility of the central bank. We begin with reduced form empirical results which show that as central banks become less credible they are more likely to adopt a pegged exchange rate, and crucially, the tendency to peg depends on trade openness. Then in a model where the central bank displays “loose commitment�? we show that as central bank credibility falls, they are more likely to adopt either an inflation target or a pegged exchange rate. A relatively closed economy would adopt an inflation target to overcome the time-inconsistency problem, but a highly open economy would prefer an exchange rate peg.

Fiscal Forward Guidance: A Case for Selective Transparency

Should the fiscal authority use forward guidance to reduce future policy uncertainty perceived by private agents? Using dynamic stochastic general equilibrium models, we examine the welfare effects of announcing future fiscal policy shocks. Analytical as well as numerical experiments show that selective transparency is desirable—announcing future fiscal policy shocks that are distortionary can be detrimental to ex ante social welfare, whereas announcing nondistortionary shocks generally improves welfare. Sizable welfare gains are found with constructive ambiguity regarding the timing of a consumption tax increase in the fiscal consolidation scenario in Japan recommended by Hansen and Imrohoroglu (2016). However, being secretive about distortionary tax shocks is time inconsistent, and welfare loss from communication may be unavoidable without commitment.

Optimal Monetary Policy in Open Economies Revisited

This paper revisits optimal monetary policy in open economies, in particular, focusing on the noncooperative policy game under local currency pricing in a two-country dynamic stochastic general equilibrium model. We first derive the quadratic loss functions which noncooperative policy makers aim to minimize. Then, we show that noncooperative policy makers face extra trade-offs regarding stabilizing the real marginal costs induced by deviations from the law of one price under local currency pricing. As a result of the increased number of stabilizing objectives, welfare gains from cooperation emerge even when two countries face only technology shocks, which usually leads to equivalence between cooperation and noncooperation. Still, gains from cooperation are not large, implying that frictions other than nominal rigidities are necessary to strongly recommend cooperation as an important policy framework to increase global welfare.

Policy Regime Change Against Chronic Deflation? Policy Option Under a Long-term Liquidity Trap

This paper evaluates the role of the first arrow of Abenomics in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, a policy regime change must be perceived by economic agents. Analysis using the QUICK survey system (QSS) monthly survey data shows that the reaction of monetary policy to inflation has been declining since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained by the zero lower bound. Estimated changes in perceptions are not abrupt enough to satisfy Sargents (1982) criteria for a regime change. This poses a serious challenge to central banks: what is an effective policy option left under the long-term liquidity trap?