Jon Frost

Does unconventional monetary policy affect inequality? Evidence from Japan

Inequality has been largely ignored in the literature and practice of monetary policy, but is gaining more attention recently. We look at how a decade of unconventional monetary policy (UMP) in Japan affected inequality among households using survey data. Our vector auto regression (VAR) results show that UMP widened income inequality, especially after 2008 when quantitative easing became more aggressive. This is largely due to the portfolio channel. To the best of our knowledge, this is the first study to empirically analyze the distributional impact of UMP. Japans extensive experience with UMP may hold important policy implications for other countries.

Comparing Different Early Warning Systems: Results from a Horse Race Competition Among Members of the Macro-Prudential Research Network

Over the recent decades researchers in academia and central banks have developed early warning systems (EWS) designed to warn policy makers of potential future economic and financial crises. These EWS are based on diverse approaches and empirical models. In this paper we compare the performance of nine distinct models for predicting banking crises resulting from the work of the Macroprudential Research Network (MaRs) initiated by the European System of Central Banks. In order to ensure comparability, all models use the same database of crises created by MaRs and comparable sets of potential early warning indicators. We evaluate the models’ relative usefulness by comparing the ratios of false alarms and missed crises and discuss implications for pratical use and future research. We find that multivariate models, in their many appearances, have great potential added value over simple signalling models. One of the main policy recommendations coming from this exercise is that policy makers can benefit from taking a broad methodological approach when they develop models to set macro-prudential instruments.

Early Warning for Currency Crises: What is the Role of Financial Openness?

The paper explores whether financial openness—capital account openness and gross capital inflows—makes countries vulnerable to currency crises. A quarterly dataset on 46 advanced and emerging market economies (AEs and EMEs) during 1975Q1–2011Q4 is used, with the period after Q2 2007 used for out-of-sample testing. The key findings are: (1) capital account openness is associated with lower probability of currency crises, but less so for EMEs; (2) surges in gross capital flows are associated with increased risk of currency crises; and (3) the model performs well out-of-sample, confirming that early warning models are helpful in judging relative vulnerability.

Hazardous Tango: Sovereign-Bank Interdependencies Across Countries and Time

Sovereign-bank feedback loops have been at the heart of the euro area crisis and many previous debt crises. We regress a market measure of interdependency - the correlation between sovereign and bank credit default swaps (CDS) - against various fundamental indicators of interlinkages and risk for 65 banks from 23 countries from Q1 2006 to Q4 2015. We find evidence that direct sovereign debt holdings of banks, implicit contingent liabilities of the government to banks and market volatility are significantly linked to higher correlations. While such CDS correlations are generally higher for banks in countries bank-based financial systems, we do not find these channels to be stronger in these countries than market-based systems. Finally, we find that bank CDS levels perform better in explaining sovereign CDS levels in periods of high volatility. Overall, these results support the notion of non-linear effects and spillovers in CDS markets.

Effective Macroprudential Policy: Cross-Sector Substitution from Price and Quantity Measures

Macroprudential policy is increasingly being implemented worldwide. Its effectiveness in influencing bank credit and its substitution effects beyond banking have been a key subject of discussion. Our empirical analysis confirms the expected effects of macroprudential policies on bank credit, both for advanced economies and emerging market economies. Yet we also find evidence of substitution effects towards nonbank credit, especially in advanced economies, reducing the policies’ effect on total credit. Quantity restrictions are particularly potent in constraining bank credit but also cause the strongest substitution effects. Policy implications indicate a need to extend macroprudential policy beyond banking, especially in advanced economies.

Dealing with large and volatile capital flows and the role of the IMF

The last decade has been characterised by the pronounced volatility of capital flows. While cross-border capital flows can have many benefits for both advanced and emerging market economies, they may also carry risks, which require appropriate policy responses. Disentangling the push from the pull factors driving capital flows is key to designing appropriate policies to deal with them. Strong institutions, sound fundamentals and a large domestic investor base tend to shield economies from adverse global conditions and attract less volatile types of capital. However, when the policy space for using traditional macroeconomic policies is limited, countries may also turn to macroprudential and capital flow management policies in a pragmatic manner. The IMF can play an important role in helping countries to deal with capital flows, through its surveillance and lending policy and through international cooperation. JEL Classification: F3, F32, F38, F42, F65, G28