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Arnoldshain Seminar XII

A Model about the Interaction of the Monetary Policy in an Advanced and an Emerging Economy. Arnoldshain Seminar XII. Neder , Ángel Enrique Brinatti , Agostina María Almuzara , Martín Ezequiel FCE-UNC Argentina Valencia September 2014.

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Arnoldshain Seminar XII

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  1. A Model about the Interaction of the Monetary Policy in an Advanced and anEmergingEconomy ArnoldshainSeminar XII Neder, Ángel Enrique Brinatti, Agostina María Almuzara, Martín Ezequiel FCE-UNC Argentina Valencia September 2014 FCE-UNC 1/21 Neder-Brinatti-Almuzara (2014)

  2. Prices and activitystabilization are notenoughforpreservingthefinancialsystemfromfragility. • Willtherebemodifications in thepractice of monetarypolicyin developed and emergingeconomies, takingintoaccounttheinternationalfinancial crisis? • Therehavebeenseveralworksdealingwiththebehavior of CB in advancedeconomies, butmost cases werealwaysaimed at determiningtheactions of monetarypolicyonly in thoseeconomies. • A modelforbothtypes of economiesisproposedtryingtoshed light ontheimportant role of theirinteractions, and consideringthatintermediationissubjecttoimperfectcompetition and financialfrictions, creatinganadditionaltransmissionchannelformonetarypolicy. Motivation FCE-UNC 2/21 Neder-Brinatti-Almuzara (2014)

  3. DSGE • Two open economies (advanced and emerging) • Sectors in eacheconomy: • Households • Firms • Banks • Government (fiscal and monetaryauthority) • Assumptions: • Demandsfordomesticcurrency, deposits in domesticcurrency (in botheconomies), and foreigncurrency (in the case of theemergingeconomy)  MIU framework. • Calvo pricingprotocol  Phillips Curve fordomesticinflation • Financialintermediationissubjecttoimperfectcompetition and financialfrictions. • CB sets domesticinterestratesaccordingtoan “expanded” Taylor Rule. TheModel FCE-UNC 3/21 Neder-Brinatti-Almuzara (2014)

  4. Goods, services and assets: • Consumption and investmentgoods • Productiveservices of capital and labor. • Deposits (issuedbybanks) and bonds (issuedbygovernment at theadvancedeconomy)  means of saving. • Loans and otherforms of credit (interbanklending and discountwindowfacilities) • Currency (including as foreigncurrencythatissuedbytheadvancedeconomy and demandedbytheemergingoneconform a rudiment of a foreignexchangemarket in theemergingeconomy) • Distinctionbetweeneconomies: • Location of financialfrictions • In theadvancedeconomy imperfections in thedomesticcreditmarket • In theemergingeconomy  frictions in theforeignexchangemarket TheModel(end) FCE-UNC 4/21 Neder-Brinatti-Almuzara (2014)

  5. Identical at thetwoeconomies, exceptforthe EE hoardsforeigncurrency. • Full integration of goodsmarketisassumed. Householdsconsumptionismodelled as a Dixit-Stiglitzcomposite. • Householdsoptimizetheirconsumptionsubjectto a budgetconstraint. • Goodsmarket open tointernationaltradewithoutbarriers law of oneprice  nominal exchangerate. Households FCE-UNC 5/21 Neder-Brinatti-Almuzara (2014)

  6. Optimizationprocess in the EE Households(end) FCE-UNC 6/21 Neder-Brinatti-Almuzara (2014)

  7. Specification of firms are essentiallythesameforboththeemerging and theadvancedeconomy, exceptforfirms at theadvancedeconomy are exposedtocreditrisk. • Threetype of Firms: • Capital goodproducers: who combine depreciated capital (bought to entrepreneurs) and investment goods (bought to retailers) to produce new capital and sell them to entrepreneurs. • Entrepreneursare wholesalers who take bank credit to finance the purchase of capital goods and also demand labor services to produce goods which are demanded by retailers. • Retailers: who sell consumption goods to households and investment goods • to capital good producers. They costless differentiate goods and set prices according to a Calvo protocol. • Every market but investment and consumption good markets are perfectly competitive. That is to say that retailers are the only ones who sell goods under monopolistic competition forces. Firms FCE-UNC 7/21 Neder-Brinatti-Almuzara (2014)

  8. Forprices, a similar schemetothatusedforconsumptiongoodsisused. • Firmsoptimizetheirinvestmentsubjectto a givenlevel of expenditure in capital goods, determining a capital priceindex, whichtakesintoaccounttheexpenditure in domestic and imported capital goods. • Capital goodmarkets open tointernationaltradewithoutbarriers law of oneprice  nominal exchangerate. Firms FCE-UNC 8/21 Neder-Brinatti-Almuzara (2014)

  9. Entrepreneurs in the AE faceanidiosycratic shock . • A variable isdefined as a cutoffvalue: entrepreneurswhoreceiveanyvaluelowerthanthecutoff are unabletorepaytheir loan in full. • Thecutoffisdefined as thevalue of thatsatisfies • Theaggregatevalue of thedefaultedloans in nominal termsis Firms: Riskyness of Borrowers FCE-UNC 9/21 Neder-Brinatti-Almuzara (2014)

  10. Monopolisticallycompetitivebanking sector. • Banks getfundsfromHouseholds’ deposits and alsotakecredit in a perfectlycompetitiveinterbankmarket and/or DWF. • Allfinancialcontracts are of oneperiodlengthwith no risk. • Optimizationprocess • Tomaximizetheirexpectedprofits, banks set nominal interestratesondeposits and loans, thequantity of interbankborrowing and DWF. • The net profitfunctiontobemaximizedis: Banks: AdvancedEconomy FCE-UNC 10/21 Neder-Brinatti-Almuzara (2014)

  11. Subjectto: Banks: AdvancedEconomy FCE-UNC 11/21 Neder-Brinatti-Almuzara (2014)

  12. EulerConditions: Banks: AdvancedEconomy(end) FCE-UNC 12/21 Neder-Brinatti-Almuzara (2014)

  13. Behaviour similar to Banks in anAdvancedEconomywiththedifferencethatthemarketfordepositsisperfectlycompetitive. Additionally, theymayaccumulategovernmentbondsissuedbothbytheAdvanced and byEmergingEconomies. • Optimizationprocess • Subjectto Banks: EmergingEconomy FCE-UNC 13/21 Neder-Brinatti-Almuzara (2014)

  14. EulerConditions Banks: EmergingEconomy(end) FCE-UNC 14/21 Neder-Brinatti-Almuzara (2014)

  15. The CB sets thereferenceinterestrateaccordingtoan extended Taylor Rule. • Sincetheeconomymayface a liquiditytrap, it´sableto use DWF as analternativepolicyinstrument. So, balance sheetis: • DWF rate: Benefitstransferred: MonetaryPolicy: AdvancedEconomy FCE-UNC 15/21 Neder-Brinatti-Almuzara (2014)

  16. Taylor Rule fordepositsinterestrate. Doesn´trespondtochanges in theinterestrate spread: • CB mayincur in sterilizedinterventionsintotheforeignexchangemarketbyvaryingits stock of foreignbonds in ordertocompensatefluctuations in theexchangerate. So, balance sheetis: • Eventhoughspaceforexchangeratepolicyisextremelynarrow, a specified rule forint´l reserves constitutes a temptation: • Quasifiscalresult MonetaryPolicy: EmergingEconomy FCE-UNC 16/21 Neder-Brinatti-Almuzara (2014)

  17. In eacheconomy, theyplay a passive role  Expenditures and Bonds supply are determinedbyanautorregressiveprocess, and thebudgetconstraint determines lump-sumtaxes (or transferes) thatshouldbecollectedfrom (orgivento) thehousehold sector. • FortheAdvancedEconomy. • Similar considerationsapplyto EE. Governments FCE-UNC 17/21 Neder-Brinatti-Almuzara (2014)

  18. Real Side • Producedgoods: • Level of expenditure: • FinancialSide • Financialmarket: • Exchange ratemarket: • Bonds market: • B of Payments: EquilibriumConditions FCE-UNC 18/21 Neder-Brinatti-Almuzara (2014)

  19. Webuilt a theoreticalmodelwhichis a contribution in differentiatingan AE and an EE and theirinteraction in monetarypolicy. • Mainfeatures of EE: • Existence of a hoardingdemandforforeigncurrency. • CB intervenes in theexchangeratemarketwiththeaim of moderatingtheexchangeratevolatility. • Mainfeature of AE: • CB providesliquidityaidtoanyfundamentallysoundbank. • Existence of riskyfirms. Conclusions and avenuesforfutureresearch FCE-UNC 19/21 Neder-Brinatti-Almuzara (2014)

  20. More worktobe done: • Theincorporation of unconventionalmonetarypolicy in the AE whichgeneratesspilloverseffectsonthe EE thatforcesits CB totakedecisionsthatwouldnotbetaken in theabsence of thoseeffects. • Enrichingthemonetarypolicyinstrumentsthat CB are ableto use. • Forinstance, “microprudentialtools”. • Consideringtheexistence of monetarypolicycooperation. • Keepcalm and carryon. Conclusions and avenuesforfutureresearch FCE-UNC 20/21 Neder-Brinatti-Almuzara (2014)

  21. A Model about the Interaction of the Monetary Policy in an Advanced and anEmergingEconomy ArnoldshainSeminar XII THANK YOU VERY MUCH! Neder, Ángel Enrique Brinatti, Agostina María Almuzara, Martín Ezequiel FCE-UNC Argentina FCE-UNC 21/21 Neder-Brinatti-Almuzara (2014)

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