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Mr. Kei Kawakami and Rafael Romeu
A stochastic debt forecasting framework is presented where projected debt distributions reflect both the joint realization of the fiscal policy reaction to contemporaneous stochastic macroeconomic projections, and also the second-round effects of fiscal policy on macroeconomic projections. The forecasting framework thus reflects the impact of the primary balance on the forecast of macro aggregates. Previously-developed forecasting algorithms that do not incorporate these second-round effects are shown to have systematic forecast errors. Evidence suggests that the second-round effects have statistically and economically significant impacts on the direction and dispersion of the debt-to-GDP forecasts. For example, a positive structural primary balance shock lowers the domestic real interest rate, in turn raising GDP and lowering the median debt-to-GDP projection by an additional 10 percent of GDP in the medium term relative to prior forecasting algorithms. In addition, the framework employs a new long-term (five decade) data base and accounts for parameter uncertainty, and for potentially non-normally distributed shocks.
Carlos Caceres, Mr. Yan Carriere-Swallow, and Bertrand Gruss
Is the Mundell-Fleming trilemma alive and well? International co-movement of asset prices takes place alongside synchronized business cycles, complicating the identification of financial spillovers and assessments of monetary policy autonomy. A benchmark for interest rate comovement is to impose the null hypothesis that central banks respond only to the outlook for domestic inflation and output. We show that common approaches used to estimate interest rate spillovers tend to understate the degree of monetary autonomy enjoyed by small open economies with flexible exchange rates. We propose an empirical strategy that partials out those spillovers that are associated with impaired monetary autonomy. Using this approach, we revisit the predictions of the trilemma and find more compelling evidence that flexible exchange rates deliver monetary autonomy than prior work has suggested.
Carlos Caceres, Mr. Yan Carriere-Swallow, Ishak Demir, and Bertrand Gruss
As the Federal Reserve continues to normalize its monetary policy, this paper studies the impact of U.S. interest rates on rates in other countries. We find a modest but nontrivial pass-through from U.S. to domestic short-term interest rates on average. We show that, to a large extent, this comovement reflects synchronized business cycles. However, there is important heterogeneity across countries, and we find evidence of limited monetary autonomy in some cases. The co-movement of longer term interest rates is larger and more pervasive. We distinguish between U.S. interest rate movements that surprise markets versus those that are anticipated, and find that most countries receive greater spillovers from the former. We also distinguish between movements in the U.S. term premium and the expected path of risk-free rates, concluding that countries respond differently to these shocks. Finally, we explore the determinants of monetary autonomy and find strong evidence for the role of exchange rate flexibility, capital account openness, but also for other factors, such as dollarization of financial system liabilities, and the credibility of fiscal and monetary policy.
Mr. Maurice Obstfeld, Mr. Jonathan David Ostry, and Miss Mahvash S Qureshi
This paper examines the claim that exchange rate regimes are of little salience in the transmission of global financial conditions to domestic financial and macroeconomic conditions by focusing on a sample of about 40 emerging market countries over 1986–2013. Our findings show that exchange rate regimes do matter. Countries with fixed exchange rate regimes are more likely to experience financial vulnerabilities—faster domestic credit and house price growth, and increases in bank leverage—than those with relatively flexible regimes. The transmission of global financial shocks is likewise magnified under fixed exchange rate regimes relative to more flexible (though not necessarily fully flexible) regimes. We attribute this to both reduced monetary policy autonomy and a greater sensitivity of capital flows to changes in global conditions under fixed rate regimes.
International Monetary Fund
Domestic demand is expected to remain the engine of growth in France, with net exports playing a minor role in the near term. Risks to the outlook are tilted to the downside. Boosting potential growth requires a comprehensive strategy. The consolidation targets set out in France’s Stability Program and the multiyear budget framework strike the right balance between speed and sustainability. Financial stability risks seem contained but vigilance is required. The medium-term prospects for the economy depend on improved competitiveness.
Mr. Kei Kawakami and Rafael Romeu

. II. I dentifying P olicy T ransmission : A C omparison to P rior W ork This section shows the fiscal policy transmission identification used to forecast debt in this study and relates it to similar prior monetary and fiscal policy studies. The proposed framework is compared to the SVAR of Blanchard and Perotti (2002) and others used to identify fiscal transmission mechanisms as well as two representative approaches to stochastic debt forecasting, Hajdenberg and Romeu (2010) and Garcia and Rigobón (2005) . Fiscal policy feedback into macroeconomic

Carlos Caceres, Mr. Yan Carriere-Swallow, and Bertrand Gruss

,” Mundell – Fleming Lecture at the 16 th Jacques Polak Annual Research Conference , International Monetary Fund , Washington, D.C . Bernanke , B.S. and A.S. Blinder , 1992 . “ The Federal Funds Rate and the Channels of Monetary Transmission ,” American Economic Review 82 ( 4 ): 901 − 21 . Bluedorn , J.C. and C. Bowdler , 2010 . “ The Empirics of International Monetary Transmission: Identification and the Impossible Trinity ,” Journal of Money, Credit and Banking 42 ( 4 ): 679 − 713 . Borio , C. , 2014 . “ The Financial Cycle

International Monetary Fund

trade and financial channels of transmission. Identification is obtained via weighting different plausible orderings, and results are summarized by the average impulse response. Results for “normal times” are based on regressions that include a crisis dummy for 2008Q4–2009Q1, while the framework without the crisis dummy also reflects the relationship across growth rates in crisis times. The estimate of the role of third-country effects in the transmission of U.S. shocks for France and other European countries is based on a counterfactual analysis. See Poirson, H. and

Carlos Caceres, Mr. Yan Carriere-Swallow, Ishak Demir, and Bertrand Gruss

Trilemma Configuration. ” Journal of International Money and Finance 29 ( 4 ): 615 – 41 . Bluedorn , J. , and C. Bowdler , 2010 . “ The Empirics of International Monetary Transmission: Identification and the Impossible Trinity. ” Journal of Money, Credit and Banking 42 ( 4 ): 679 – 713 . Bowman , D. , J.M. Londono , and H. Sapriza , 2015 . “ U.S. Unconventional Monetary Policy and Transmission to Emerging Market Economies. ” Journal of International Money and Finance 55 : 27 – 59 . Caceres , C. , Y. Carrière-Swallow , and

Mr. Maurice Obstfeld, Mr. Jonathan David Ostry, and Miss Mahvash S Qureshi

Journal of Finance , 69 ( 6 ): 2597 – 2649 . Bekaert , G. , and A. Mehl , 2017 , “ On the Global Financial Market Integration ‘Swoosh’ and the Trilemma, ” NBER Working Paper 23124 ( Cambridge, MA : NBER ). Bluedorn , J. , and C. Bowdler , 2010 , “ The Empirics of International Monetary Transmission: Identification and the Impossible Trinity, ” Journal of Money, Credit and Banking , 42 ( 4 ): 679 – 713 . Borensztein , E. , J. Zettelmeyer , and T. Philippon , 2001 , “ Monetary Independence in Emerging Markets: Does the