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This paper studies a policy often used to defend a currency peg: raising short-term interest rates. The rationale for this policy is to stem demand for foreign reserves. Yet, this mechanism is absent from most monetary models. This paper develops a general equilibrium model with asset market frictions where this policy can be effective. The friction I emphasize is the same as in Lucas (1990): money is required for asset transactions. When the government raises domestic interest rates, agents want to increase their holdings of domestic currency in order to acquire more domestic-currency-denominated assets. Thus, agents do not run on the reserves of the central bank, and the peg survives. A key implication of the model is that an interest rate defense can always be successful, but at great costs for domestic agents. Hence the reluctance of governments to sustain this policy for long periods of time.
Banks and Banking --- Investments: Bonds --- Macroeconomics --- Money and Monetary Policy --- Interest Rates: Determination, Term Structure, and Effects --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Price Level --- Inflation --- Deflation --- General Financial Markets: General (includes Measurement and Data) --- Monetary economics --- Banking --- Investment & securities --- Currencies --- Interest rate policy --- Central bank policy rate --- Asset prices --- Bonds --- Interest rates --- Money --- Prices --- Brazil
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This paper presents an empirical measure of disinflation credibility and discusses its evolution in Turkey since the 2001 crisis. The results indicate that credibility has improved markedly over this period, boding well for the future of disinflation in Turkey.
Bayesian statistical decision theory. --- Deflation (Finance) --- Disinflation --- Finance --- Bayes' solution --- Bayesian analysis --- Statistical decision --- Econometric models. --- Inflation --- Macroeconomics --- Money and Monetary Policy --- Bayesian Analysis: General --- Central Banks and Their Policies --- International Finance Forecasting and Simulation --- Price Level --- Deflation --- Monetary Policy --- Monetary economics --- Inflation targeting --- Consumer price indexes --- Asset prices --- Prices --- Monetary policy --- Price indexes --- Turkey
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This Selected Issues paper studies Luxembourg’s economic growth performance of the past two decades with a view to shedding light on the growth prospects and fiscal implications. The paper investigates whether the recent weakness in activity is largely transitory or whether it heralds a new era of lower potential output growth. The paper also explains one option for reforming the pay-as-you-go pension pillar, which is to link pension benefits to the contributions base through a “solidarity factor.”.
Labor --- Macroeconomics --- Public Finance --- Industries: Financial Services --- Production and Operations Management --- Macroeconomics: Production --- Price Level --- Inflation --- Deflation --- Social Security and Public Pensions --- Nonwage Labor Costs and Benefits --- Private Pensions --- Financial Institutions and Services: General --- Pensions --- Population & demography --- Labour --- income economics --- Asset prices --- Production growth --- Pension spending --- Financial sector --- Prices --- Expenditure --- Production --- Economic sectors --- Economic theory --- Financial services industry --- Industrial productivity --- Luxembourg --- Income economics
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This paper tests uncovered interest parity (UIP) using interest rates on longer maturity bonds for the Group of Seven countries. These long-horizon regressions yield much more support for UIP—all of the coefficients on interest differentials are of the correct sign, and almost all are closer to the UIP value of unity than to zero. The paper also analyzes the decision by a government facing electoral uncertainty to implement structural reforms in the presence of fiscal restraints similar to the Stability and Growth Pact.
Banks and Banking --- Foreign Exchange --- Inflation --- Labor --- Macroeconomics --- Price Level --- Deflation --- Labor-Management Relations, Trade Unions, and Collective Bargaining: General --- Interest Rates: Determination, Term Structure, and Effects --- Trade Policy --- International Trade Organizations --- Currency --- Foreign exchange --- Trade unions --- Finance --- International economics --- Labour --- income economics --- Labor unions --- Real exchange rates --- Exchange rates --- Asset prices --- Prices --- Interest rates --- Manufacturing industries --- United States --- Income economics
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The World Economic Outlook, published twice a year in English, French, Spanish, and Arabic, presents IMF staff economists' analyses of global economic developments during the near and medium term. Chapters give an overview of the world economy; consider issues affecting industrial countries, and economics in transition to market; and address topics of pressing current interest. Annexes, boxes, charts, and an extensive statistical appendix augment the text.
Inflation --- Investments: Stocks --- Labor --- Macroeconomics --- Real Estate --- Price Level --- Deflation --- Housing Supply and Markets --- Unemployment: Models, Duration, Incidence, and Job Search --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Demand and Supply of Labor: General --- Labour --- income economics --- Property & real estate --- Investment & securities --- Banking --- Housing prices --- Unemployment --- Stocks --- Labor markets --- Asset prices --- Prices --- Housing --- Labor market --- United States --- Income economics
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Option prices provide valuable information on market expectations. This paper attempts to extract market expectations, as conveyed by an implied risk-neutral probability distribution, from option prices for the dollar-euro exchange rate. Returns' volatilities are inferred from observed and interpolated option prices. To address robustness, two distributions, one from actual data and the other from interpolated data, were computed. The main conclusion of the paper is that traders have wide-ranging expectations, and large movements in either direction would not occur as a surprise. The main implication for monetary policy is that should markets become too volatile, then intervention may be required.
Foreign exchange rates --- Stock options. --- Euro. --- Money --- Options, Stock --- Options (Finance) --- Foreign Exchange --- Investments: General --- Investments: Options --- Macroeconomics --- Money and Monetary Policy --- Price Level --- Inflation --- Deflation --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Monetary Policy --- Investment --- Capital --- Intangible Capital --- Capacity --- Finance --- Currency --- Foreign exchange --- Monetary economics --- Asset prices --- Options --- Exchange rates --- Reserve requirements --- Depreciation --- Prices --- Derivative securities --- Monetary policy --- Saving and investment
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Boom and bust phases in asset prices have become a pervasive feature of macroeconomic developments in many advanced economies. This paper studies fiscal policy during boom-bust phases in asset prices and draws several conclusions. First, expansions and contractions in economic activity during such boom-bust phases tend to be highly persistent, cyclical turning points are harder to forecast, and the margins of error for output gap estimates can be large. Second, conventional estimates of revenue elasticities seem not to allow an accurate assessment of the fiscal stance and of the strength of underlying fiscal positions during boom-bust phases. And third, boom-bust phases tend to exacerbate already existing procyclical policy biases, as well as political-economy biases, toward higher spending and public debt ratios.
Assets (Accounting) --- Fiscal policy. --- Tax policy --- Taxation --- Economic policy --- Finance, Public --- Asset requirements --- Prices --- Econometric models. --- Government policy --- Macroeconomics --- Public Finance --- Production and Operations Management --- Business Fluctuations --- Cycles --- Fiscal Policy --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Stabilization --- Treasury Policy --- Price Level --- Inflation --- Deflation --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Macroeconomics: Production --- Economic growth --- Asset prices --- Fiscal stance --- Business cycles --- Fiscal policy --- Output gap --- Production --- Economic theory --- United Kingdom
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One plausible mechanism through which financial market shocks may propagate across countries is through the effect of past gains and losses on investors' risk aversion. We first present a simple model on how heterogeneous changes in investors' risk aversion affect portfolio decisions and stock prices. Second, we empirically show that, when funds' returns are below average, they adjust their holdings toward the average (or benchmark) portfolio. In other words, they tend to sell the assets of countries in which they were "overweight," increasing their exposure to countries in which they were "underweight." Based on this insight, we construct a matrix of financial interdependence reflecting the extent to which countries share overexposed funds. This index can improve predictions about which countries are likely to be affected by contagion from crisis centers.
International finance --- Portfolio management --- Investment management --- Investment analysis --- Investments --- Securities --- International monetary system --- International money --- Finance --- International economic relations --- Econometric models. --- Finance: General --- Macroeconomics --- Industries: Financial Services --- General Financial Markets: General (includes Measurement and Data) --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Price Level --- Inflation --- Deflation --- Mutual funds --- Emerging and frontier financial markets --- Competition --- Stock markets --- Asset prices --- Financial services industry --- Stock exchanges --- Prices --- Brazil
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This Selected Issues paper reviews the status and potential impacts of HIV/AIDS in South Africa. It draws on demographic projections and economic studies, and summarizes the official policy response and actions taken by the nongovernmental and business communities. It presents some stylized facts on property price developments in South Africa, and reviews briefly the link between asset price developments and economic activity. It also looks at the ability of policymakers to identify asset price booms.
Exports and Imports --- Foreign Exchange --- Macroeconomics --- Real Estate --- Diseases: AIDS and HIV --- Price Level --- Inflation --- Deflation --- International Investment --- Long-term Capital Movements --- Health Behavior --- Housing Supply and Markets --- Health: General --- HIV/AIDS --- Finance --- International economics --- Currency --- Foreign exchange --- Property & real estate --- Asset prices --- HIV and AIDS --- Foreign direct investment --- Capital flows --- Housing prices --- Prices --- Health --- Balance of payments --- HIV --- Viruses --- Investments, Foreign --- Capital movements --- Housing --- South Africa --- Hiv and AIDS --- Hiv --- Hiv/AIDS
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This paper develops a simple methodology to test for asset integration, and applies it within and between American stock markets. Our technique relies on estimating and comparing expected risk-free rates across assets. Expected risk-free rates are allowed to vary freely over time, constrained only by the fact that they must be equal across (risk-adjusted) assets in well integrated markets. Assets are allowed to have standard risk characteristics, and are constrained by a factor model of covariances over short time periods. We find that implied expected risk-free rates vary dramatically over time, unlike short interest rates. Further, internal integration in the S&P 500 market is never rejected and is generally not rejected in the NASDAQ. Integration between the NASDAQ and the S&P, however, is always rejected dramatically.
Stocks -- Prices -- Econometric models. --- Stocks -- Rate of return -- Econometric models. --- Econometrics --- Finance: General --- Investments: Stocks --- Macroeconomics --- Information and Market Efficiency --- Event Studies --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- General Financial Markets: General (includes Measurement and Data) --- Classification Methods --- Cluster Analysis --- Principal Components --- Factor Models --- Price Level --- Inflation --- Deflation --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- State Space Models --- Econometrics & economic statistics --- Investment & securities --- Finance --- Stocks --- Stock markets --- Factor models --- Asset prices --- Time series analysis --- Financial institutions --- Financial markets --- Econometric analysis --- Prices --- Stock exchanges --- Econometric models --- United States --- Rate of return --- Econometric models.
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