• (IMES DPS) Exchange Rate Misalignment and External Imbalances: What is the Optimal Monetary Policy Response? by Giancarlo Corsetti, Luca Dedola, and Sylvain Leduc Link
    Bank of Japan Wed 25 Mar 2020 12:04

    How should monetary policy respond to capital inflows that appreciate the currency, widen the current account deficit and cause domestic overheating? Using the workhorse open-macro monetary model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, solve for the optimal targeting rules under cooperation and characterize the constrained-optimal allocation. The answer is sharp: the optimal monetary stance is contractionary if the exchange rate pass-through (ERPT) on import prices is incomplete, expansionary if ERPT is complete -- implying that misalignment and exchange rate volatility are higher in economies where incomplete pass through contains the effects of exchange rates on price competitiveness.

    Keywords: Currency misalignments; trade imbalances; asset markets and risk sharing; optimal targeting rules; international policy cooperation; exchange rate pass-through

  • Summary of Opinions at the Monetary Policy Meeting on March 16, 2020 Link
    Bank of Japan Tue 24 Mar 2020 23:54
  • Average Interest Rates by Type of Deposit Link
    Bank of Japan Tue 24 Mar 2020 23:54
  • (IMES DPS) Welfare Implications of Bank Capital Requirements under Dynamic Default Decisions by Toshiaki Ogawa Link
    Bank of Japan Tue 24 Mar 2020 12:03

    This paper studies capital requirements and their welfare implications in a dynamic general equilibrium model of banking. I embed two, less commonly considered but important, mechanisms. Firstly, banks choose entry and exit, which lets the number of banks change endogenously. Strengthening capital requirements reduces banks' franchise value and damages their liquidity providing function through the extensive margin. Secondly, since equity issuance is costly for banks, they precautionarily hold capital buffers against future liquidity shocks. This behavior makes present capital requirements only occasionally binding. My model shows that the optimal capital requirement would be lower than that in the literature because of the expanded negative effects of capital requirements. To maintain financial stability without damaging banks' liquidity provision, strengthening capital requirements needs to be accompanied by reducing the cost of equity issuance for banks.

    Keywords:...

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    Bank of Japan Mon 23 Mar 2020 12:02
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    Bank of Japan Mon 23 Mar 2020 02:02
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    Bank of Japan Tue 25 Feb 2020 08:03
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    Bank of Japan Tue 25 Feb 2020 07:08
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    Bank of Japan Tue 25 Feb 2020 05:03
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    Bank of Japan Mon 24 Feb 2020 23:58
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