Overview of some recent activities in
the NBER program in International Finance
and Macroeconomics
Jeffrey Frankel,
IFM Director, NBER, and Professor, Harvard University
NBER Board of Directors, September 28, 2015
Overview of IFM program
• 76 Members (primary affiliation IFM)
• Taking a spell in government service -– Kathryn Dominguez:
nominated, Fed Governor
– Kristin Forbes: External member, Monetary
Policy Committee, Bank of England
– Olivier Blanchard: Chief Economist, IMF
– Maury Obstfeld: Member, Council of Economic
Advisers; now succeeding O.B. at IMF
– Jay Shambaugh: now
succeeding M.O. at CEA
– Linda Tesar: also at CEA
– Raghu Rajan:
RBI Governor
– Shang-Jin Wei:
Chief Economist,
ADB.
NBER Working Papers
• Over 100 per year in IFM.
• Some of the most active topics:
– The Global Financial Crisis
• Financial market imperfections
• Monetary policy at the zero lower bound.
– Emerging markets
– Exchange rate arrangements
Andy Rose
• Including currency unions
– Goods pricing across national borders
– Fiscal policy
• Counter-cyclicality
• Sovereign Debt
• Many of the papers from the last 6 years
are surveyed in the current NBER Reporter
– under the rubric of International Macro-Prudential Policy.
Gita Gopinath
IFM Program Meetings, 3 per year
• March
• October
• July, 1st week of NBER Summer Institute:
– Monday-Friday a.m.
– IFM side-meetings:
• International Trade
& Macroeconomics
• New IFM Data
Sources project
• This year:
Special panel on
the Greek crisis.
Some IFM-related conferences
• International Seminar on Macroeconomics
– Meets every June in Europe
– Papers now published in Journal
of International Economics.
– My ISoM co-director: Hélène Rey.
More IFM-related conferences
• 1) Project on the Global Financial Crisis
– Conference held at Bretton Woods, June 2011.
– Co-organizers:
Charles Engel
& Kristin Forbes.
– Also in JIE.
More IFM-related conferences, continued
• 2) Sovereign Debt & Financial Crisis
– October 2013
– Organizers: Sebnem Kalemli-Ozcan,
Carmen Reinhart
& Kenneth Rogoff.
• 3) Monetary Policy
& Financial Stability
in Emerging Markets
– June 2014, in Istanbul
– Organizer:
Sebnem Kalemli-Ozcan.
International macro-prudential policy
• Macro-prudential thinking observes that
the whole of the financial system is more than
the sum of the parts.
– Micro-prudential regulation might, e.g.,
limit the loan-to-value ratio for individual mortgages
or set capital minimums for individual lenders,
at levels that are figured by taking the probability
of housing price fluctuations as exogenous.
– A macro-prudential approach recognizes that housing
prices are endogenous: during a credit-fueled housing
boom, the probability of a crash is greater and so
regulations may need to be set more stringently.
– International macro-pru policy would include also,
e.g., restrictions on mortgages in foreign currency.
My recent survey of recent NBER research on
international macro-prudential policies includes:
(1) cross-country analysis of national prudential
macro-policies;
(2) macro-prudential regulation that focuses on
the composition of debt, treating foreign debt
as carrying extra risk beyond that of domestic debt;
(3) a broader precautionary approach to
the national balance sheet with regard,
e.g., to foreign exchange reserves.
(4) Targets and instruments:
Why isn’t the interest rate instrument enough?
Two themes
• Think about the complete cycle.
– An understanding of the danger of moral hazard does
not necessarily imply declarations of “no bail-out”
policies during the boom phase.
– If some sort of bailout is inevitable during the bust
phase, then some corresponding regulation is needed
during the boom phase.
• Advanced countries may have something to learn
from the experiences of emerging market countries.
– Financial market imperfections (e.g., GFC);
– Crisis management (e.g., Greek crisis);
– Counter-cyclical macro-prudential tools
(e.g., use of reserve requirements in Asian countries).
Theory
• What is the source of the market failure?
– The need for collateral to assure creditworthiness.
– Can explain pro-cyclical capital flows.
• Over-borrowing
– “Pecuniary externalities”
– “Fire sales”
• Theory papers
– Javier Bianchi
& Enrique Mendoza
– Emmanuel Farhi
& Ivan Werning
– Anton Korinek
& Olivier Jeanne
Specific examples of macro-prudential policies
• Banks: reserve requirements
– E.g., higher on fx liabilities than domestic.
• Stock market: Margin requirements
• Housing market:
• Maximum Loan/value ratio
• Maximum Debt service/income ratio
• Prohibition on foreign-currency mortgages.
• A surprising proposition –
Emerging Market countries perhaps successfully apply
these tools in a counter-cyclical manner more than do
the US and other advanced countries.
Even more surprising:
China’s stock market regulator raised margin
requirements during the recent bubble,
in January & April and on June 12.
Federico, Végh & Vuletin (2014) find that developing
countries use reserve requirements countercyclically
far more than advanced countries do.
Pablo Federico, Carlos Végh, and Guillermo Vuletin, "Reserve Requirement Policy over the Business Cycle," NBER Working Paper No. 20612,
October 2014, and "Effects and Role of Macroprudential Policy: Evidence from Reserve Requirements Based on a Narrative Approach,"
presented at 2014 Central Bank of the Republic of Turkey-NBER Conference on Monetary Policy and Financial Stability in Emerging Economies
Mortgage lending has over time increasingly
come to dominate other bank lending.
“Betting the House,” Òscar Jordà, Moritz Schularick & Alan Taylor, ISoM, JIE, 2015
“Loose monetary conditions lead to booms in real estate lending and
house prices bubbles; these, in turn, materially heighten the risk of
financial crises. Both effects have become stronger in the postwar era.”
Credit-fed housing bubbles lead to worse recessions
than do other bubbles.
Òscar Jordà, Moritz Schularick, & Alan Taylor, 2015,
“Leveraged Bubbles,” NBER WP No. 21486, August,
a study of housing and equity markets in 17
countries over the past 140 years.
Credit-fed equity bubbles lead to worse recessions too,
than other bubbles.
Jordà, Schularick, Taylor, 2015, “Leveraged Bubbles,”
NBER WP No. 21486, August, a study of housing and
equity markets in 17 countries over the past 140 years.
"Definition [of bubble:] real asset prices diverge significantly from their trend, becoming
elevated by more than one standard deviation from a country-specific Hodrick-Prescott
filtered trend …But, secondly, we also require for our definition that at some point during
an episode of elevation thus defined, a large price correction occurs (“the bubble bursts”),
with real asset prices falling by more than 15% over a 3-year window.”
Policy responses:
Use of macroprudential policies -- Kuttner & Shim (2015)
Kenneth Kuttner & Ilhyock Shim, “Can non-interest rate policies stabilize housing markets? Evidence from a panel of 57 economies,” NBER WP 19723, 2013.
Asian & other EM countries take macro-prudential actions
more often than advanced countries do -- Kuttner & Shim (2015)
Kenneth Kuttner & Ilhyock Shim, “Can non-interest rate policies stabilize housing markets? Evidence from a panel of 57 economies,” NBER WP 19723, 2013.
Kenneth Kuttner & Ilhyock Shim, “Can non-interest rate policies stabilize housing
markets? Evidence from a panel of 57 economies,” NBER WP 19723. Revised 2015.
Interest rate and credit policies in Korea
Interest'rate
Reserve'Req
Interest rate and credit policies in China
Interest'rate
5
LTV
20
<1
10
interest'rate,'%
1
15
DSTI
3
15
5
6
95
4
2
5
0
0
1986 1989 1992 1995 1998 2001 2004 2007 2010
2002
2004
2006
2008
2010
Kuttner & Shim (2015): Ceilings on ratio of Debt Service
to Income significantly affect housing credit.
cumula/ ve'/ ghtening
25
LTV
cumula/ ve'/ ghtening
interest'rate,'%
DSTI
25
Reserve'Req
Targets and instruments
• Countries may need macro-prudential policy as an
additional instrument
– because monetary policy is constrained.
• In large advanced countries: by the zero lower bound.
• In small countries: by international constraints.
• Does a floating exchange rate give monetary
independence from international constraints?
– Hélène Rey (2014, 2015): No. Regardless of floating, EMs are
hit by external financial shocks (e.g., Fed tightening or “risk-off”).
– Michael Klein & Jay Shambaugh (2013): Yes. Even if passive EMs
are hit by external shocks, floating gives them the option to
adjust their monetary policies in response.
Rey challenges the traditional “impossible trinity,”
which claims that exchange rate flexibility is sufficient
to allow an independent monetary policy.
“Dilemma, not Trilemma” -- She says only capital controls can give independence.
One can also define macro-prudential
more broadly
• to include, e.g., EM accumulation of foreign
exchange reserves during the boom phase
– as insurance against the bust phase of the cycle.
• Some studies find that countries with higher fx
reserves have done better in recent crises:
– Aizenman et al (2011, 2012, 2014),
– Frankel & Saravelos (2012),
– Dominguez, Hashimoto & Ito (2012).
Kathryn Dominguez, et al (2012):
Countries able to draw on foreign exchange reserves
did better in the Global Financial Crisis of 2008-09.
Program in International Finance
and Macroeconomics