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on International Finance |
| By: | Armand Fouejieu Azangue (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans) |
| Abstract: | The 2008/2009 financial crisis raised issues related to the monetary policy doctrine of the last two decades. Inflation targeting has been criticized as its main objective of inflation stabilisation might have diverted central banks from other concerns such as financial stability. As a first attempt in the literature on emerging countries, this study aims at investigating (i) whether inflation targeting is associated to higher financial instability, and (ii) whether inflation targeting central banks are less responsive to financial imbalances relative to non-targeters. To this end, we build a composite index in order to get a more complete and comprehensive view of the financial conditions in emerging countries. The paper concludes that, in spite of a stronger central banks' response to financial imbalances, inflation targeters are facing more financial instability than others. These findings suggest that, even if inflation targeting might be associated to higher financial fragility, this can hardly be attributed to the central banks 'carelessness' about developments in the financial sector. For emerging market economies, especially those implementing inflation targeting, this highlights the need for a broader and more integrated framework such as macro-prudential policies to tackle the issue of financial stability. |
| Keywords: | Inflation targeting ; financial stabiity ; central banks' reaction function |
| Date: | 2014–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01012077&r=ifn |
| By: | Beatrice Pataracchia; Robert Kollmann; Marco Ratto; Werner Roeger; Jan in’t Veld |
| Abstract: | We study the joint dynamics of foreign capital flows and real activity during the recent boom-bust cycle of the Spanish economy, using a three-country New Keynesian model with credit-constrained households and firms, a construction sector and a government. We estimate the model using 1995Q1-2013Q2 data for Spain, the rest of the Euro Area (REA) and the rest of the world. We show that falling risk premia on Spanish housing and non-residential capital, a loosening of collateral constraints for Spanish households and firms, as well as the fall in the interest rate spread between Spain and the REA fuelled the Spanish output boom and the persistent rise in foreign capital flows to Spain, before the global financial crisis. During and after the global financial crisis, falling house prices, and a tightening of collateral constraints for Spanish borrowers contributed to a sharp reduction in capital inflows, and to the persistent slump in Spanish real activity. The credit crunch was especially pronounced for Spanish households. |
| JEL: | C11 E21 E32 E62 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0519&r=ifn |