The Mundell-Fleming IS-LM approach has guided generations of economists over the past 60 years. But countries have experienced new problems, the international finance literature has advanced, and the composition of the global economy has changed, so the scene is set for an updated approach. We propose an Integrated Policy Framework (IPF) diagram to analyze the use of multiple policy tools as a function of shocks and country characteristics. The underlying model features dominant currency pricing, shallow foreign exchange (FX) markets, and occasionally-binding external and domestic borrowing constraints. Our diagram includes the use of monetary policy, FX intervention, capital controls, and domestic macroprudential measures. It has four panels to explore four key trade-offs related to import consumption, home goods consumption, the housing market, and monetary policy. Our extended diagram adds fiscal policy into the mix.
Archive for February 29th, 2024
An Integrated Policy Framework (IPF) Diagram for International Economics
February 29, 2024Settlement of money and securities in central bank money reduces risk
February 29, 2024Lena Wiberg of Riksbank writes a useful primer on central bank money:
The traditional payments and securities markets are undergoing a structural transformation, driven by, among other things, increased competition through new technologies and new actors, as well as new legislation. As part of the structural transformation, current actors in the financial sector see an opportunity to improve efficiency and optimise costs. They are therefore reviewing their services offerings and exploring new innovative solutions to streamline transaction flows, especially across borders.
In times of change, it is important that the actors in the financial sector work to provide safe systems for the settlement of money and securities. One way to reduce settlement risk is to settle in central bank money. As a central bank cannot go bankrupt, this removes the credit risk for participants in a settlement system provided by a central bank.
However, it is not always possible to settle in central bank money, and in these cases so-called commercial bank money is instead used for settlement. Settlement in commercial bank money takes place in a commercial institution, such as a bank, which means that participants in the system may have a credit risk with regard to that institution.
Macro-financial policy analysis in bank-dependent economies: an operational manual
February 29, 2024Pierre-Richard Agénor and Luiz Awazu Pereira da Silva of BIS have written a nice detailed manual/book on macro-finance in bank dependent economies:
Since the global financial crisis of 2007-08, much academic and policy-oriented research has focused on the design, or redesign, of macroeconomic and financial policy frameworks. This literature has brought to the fore the role of banks and financial frictions in macroeconomic fluctuations. It has also explored how macroeconomic and regulatory policies should be combined to respond to domestic and external shocks, and how the institutional mandates of central banks and regulators should be formulated, or amended, when both price stability and financial stability matter for society.
In that context, interactions between monetary policy and macroprudential regulation – with its focus on systemic risk, and the stability of the financial system as a whole – have received particular scrutiny. In middle-income countries, where vulnerability to external shocks has been a perennial problem, much attention has also been devoted to the role of foreign exchange intervention and short-term capital controls in promoting stability.
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