Bertrand Gruss, Mrs. Sandra V Lizarazo Ruiz, and Mr. Francesco Grigoli
Anchoring of inflation expectations is of paramount importance for central banks’ ability to deliver stable inflation and minimize price dispersion. Relying on daily interest rates and inflation forecasts from major financial institutions in the United States, we calculate monetary policy surprises of individual analysts as the unexpected changes in the federal funds rate before the meetings of the Federal Reserve Board. We then assess the effect of monetary policy surprises on the dispersion of inflation expectations, a proxy for the extent of anchoring, which is based on the same analysts’ inflation projections submit-ted after the Fed meetings. With an identification strategy that hinges on a tight window around the Fed meetings, we find that monetary policy surprises lead to an increase in the dispersion of inflation expectations up to nine months after the policy meeting. We rationalize these results with a partial equilibrium model that features rational expectations and sticky information. When we allow the degree of information rigidity to depend on the realization of firm-specific shocks, the theoretical results are qualitatively consistent and quantitatively close to the empirical evidence.
The yen is an important barometer for the Japanese economy. Depreciations are typically associated with favorable economic developments such as increased corporate profits, rising equity prices, and upward pressure on domestic consumer prices. On the other hand, large and sharp appreciations run the risk of lowering actual and expected inflation, squeezing corporate profits, generating a negative wealth effect through depressed equity prices, and reducing confidence in the Bank of Japan’s efforts to reflate the domestic economy and achieve the inflation target. This paper takes a closer look at underlying drivers of rapid yen appreciations, highlighting the key role of carry-trade and the zero lower bound as important amplifiers.
International Monetary Fund. Western Hemisphere Dept.
This paper assesses the importance of financial market developments for the business cycle in Brazil. The results underscore the importance of macro-financial linkages and highlight risks to the recovery going forward. Although some of the rise in credit growth in Brazil can be attributed to financial deepening and rising income levels, it may have implications for economic activity going forward. Cross-country evidence suggests that periods of easy financial conditions can amplify economic fluctuations and possibly lead to adverse economic outcomes. To explore the nexus between the financial cycle and business cycle, cycles are estimated using a variety of commonly-used statistical methods and with a small, semi-structural model of the Brazilian economy. An advantage of using the model-based approach is that financial and business cycles can be jointly estimated, allowing information from all key economic relationships to be used in a consistent way. Financial sector developments are found to be an important source of macroeconomic fluctuations. Financial accelerator models highlight the role of credit and asset prices in shaping the business cycle.
In November 2014, OPEC announced a new strategy geared towards improving its market share. Oil-market analysts interpreted this as an attempt to squeeze higher-cost producers including US shale oil out of the market. Over the next year, crude oil prices crashed, with large repercussions for the global economy. We present a simple equilibrium model that explains the fundamental market factors that can rationalize such a "regime switch" by OPEC. These include: (i) the growth of US shale oil production; (ii) the slowdown of global oil demand; (iii) reduced cohesiveness of the OPEC cartel; (iv) production ramp-ups in other non-OPEC countries. We show that these qualitative predictions are broadly consistent with oil market developments during 2014-15. The model is calibrated to oil market data; it predicts accommodation up to 2014 and a market-share strategy thereafter, and explains large oil-price swings as well as realistically high levels of OPEC output.
We carry out an ex post assessment of popular models used to forecast oil prices and propose a host of alternative VAR models based on traditional global macroeconomic and oil market aggregates. While the exact specification of VAR models for nominal oil price prediction is still open to debate, the bias and underprediction in futures and random walk forecasts are larger across all horizons in relation to a large set of VAR specifications. The VAR forecasts generally have the smallest average forecast errors and the highest accuracy, with most specifications outperforming futures and random walk forecasts for horizons up to two years. This calls for caution in reliance on futures or the random walk for forecasting, particularly for near term predictions. Despite the overall strength of VAR models, we highlight some performance instability, with small alterations in specifications, subsamples or lag lengths providing widely different forecasts at times. Combining futures, random walk and VAR models for forecasting have merit for medium term horizons.
Mr. Christopher W. Crowe and Mr. S. Mahdi Barakchian
Conventional VAR and non-VAR methods of identifying the effects of monetary policy shocks on the economy have found a negative output response to monetary tightening using U.S. data over the 1960s-1990s. However, we show that these methods fail to find this contractionary effect when the sample is restricted to the period since the 1980s, apparently due to changes in the policymaking environment that reduce their effectiveness. Identifying policy shocks using Fed Funds futures data, we recover the contractionary effect of monetary tightening on output and find that almost half of output variation over the period appears due to policy shocks.
This Selected Issues and Statistical Appendix paper on Gabon reviews management of oil revenues, competitiveness, and growth. The nature of Gabon’s problems has not changed during the past 15 years. The need to diversify the economy and the export base; control fiscal expenditure and the wage bill; carefully assess capital expenditure; and reform public sector enterprises are the challenges that the Gabonese need to be prepared to implement adequately. Gabon faces huge medium-term fiscal constraints imposed by the expected steady decline in oil production and its depletion.
This paper examines the behavior of crude oil prices since 1980, and in particular the volatility of these prices. The empirical analysis covers “spot” prices for one of the key internationally traded crudes, namely Dated Brent Blend. A GARCH (generalized autoregressive conditional heteroscedastic) model, which allows the conditional variance to be time-variant, is estimated for the period which includes the oil price slump of 1986 and the surge in prices in 1990 as a result of the Iraqi invasion of Kuwait. The paper also discusses the growth of futures and derivative markets and the dynamic links between spot and futures markets.
This paper discusses the behavior of futures prices for foreign exchange in Brazil during a period of high inflation and successive stabilization attempts (1989-92). After testing for futures prices unbiasedness and predicability by applying the Generalized Method of Moments, the paper argues that the finding of excess returns may be viewed as a rational response to the frequent and unpredictable changes in the exchange rate policy during that period. This response could reflect (i) an informational problem where the exchange rate policy is assumed to be unknown; or, (ii) a “peso” problem of rational (under) overprediction where the futures bias is the market response to the known policy of infrequent large nominal devaluations. The second line of explanation is suggested by conditioning the probability distribution of the excess return of futures contracts on the event of a major devaluation.
Mr. Joaquim Vieira Ferreira Levy and Mr. Jonathan David Ostry
The household saving ratio in France has undergone very sharp changes over the past two decades, falling dramatically in the first part of the 1980s before rising in more recent years. This paper emphasizes two factors in the evolution of private saving in France. The first relates to perceptions of household income growth and uncertainty, which are likely to have been affected by deteriorating labor market conditions, and which may therefore help to account for the recent increase in saving. The second factor relates to financial deregulation which may have lowered saving and increased its sensitivity to interest rate changes. It is argued that both factors have played some role in the evolution of French household saving.