Monetary and Financial Market Intervention Around the World

Paper Session

Friday, Jan. 6, 2017 10:15 AM – 12:15 PM

Hyatt Regency Chicago, Regency A
Hosted By: American Economic Association
  • Chair: Ralph Koijen, London Business School

China’s Model of Managing the Financial System

Markus K. Brunnermeier
,
Princeton University
Michael Sockin
,
University of Texas-Austin
Wei Xiong
,
Princeton University

Abstract

Active government intervention in financial markets through the relaxing/tightening of market regulations and even direct asset trading with the objective to smooth out market fluctuations is part of China's economic model. Our theoretical framework shows that the government’s "managing" of financial markets impacts asset prices not only by tempering short-term imbalances but also indirectly through market participant’s expectations about future government interventions. Inefficient speculative equilibria may arise in which market participants, instead of acquiring information about fundamentals, focus on information about future government interventions. The resulting speculative behavior can lead to financial instability.

Capital Flows and Currency Wars

Ricardo Caballero
,
Massachusetts Institute of Technology
Emmanuel Farhi
,
Harvard University
Pierre-Olivier Gourinchas
,
University of California-Berkeley

Abstract

This paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. In this context, we establish five main results: (i) Economies experiencing liquidity traps pull others into a similar situation by running current account surpluses; (ii) Reserve currencies have a tendency to bear a disproportionate share of the global liquidity trap—a phenomenon we dub the “reserve currency paradox”; (iii) While more price and wage flexibility exacerbates the risk of a deflationary global liquidity trap, it is the more rigid economies that bear the brunt of the recession; (iv) Beggar-thy-neighbor exchange rate devaluations provide stimulus to the undertaking country at the expense of other countries (zero-sum); and (v) Safe public debt issuances, helicopter drops of money, and increases in government spending in any country are expansionary for all countries (positive-sum). We use these results to shed light on the evolution of global imbalances, interest rates, and exchange rates since the beginning of the global financial crisis.

Quantitative Easing in the Euro Area: The Dynamics of Risk Exposures and the Impact on Asset Prices

Ralph Koijen
,
London Business School
Francois Koulischer
,
Bank of France
Benoit Nguyen
,
Bank of France
Motohiro Yogo
,
Princeton University

Abstract

We use new data on security-level portfolio holdings of institutional investors and households in the euro area to understand the impact of the ongoing asset purchase programme of the European Central Bank (ECB) on the dynamics of risk exposures and on asset prices. We develop a tractable measurement framework to quantify the dynamics of euro-area duration, sovereign and corporate credit, and equity risk exposures as the programme evolves. We propose an instrumental-variables estimator to identify the impact of central bank purchases on sovereign bonds on sovereign bond yields. Our results suggest that the foreign sector sells most in response to the programme, followed by banks and mutual funds, while the purchases of insurance companies and pension funds are positively related to purchases by the ECB.
Discussant(s)
Darrell Duffie
,
Stanford University
Guido Lorenzoni
,
Northwestern University
Arvind Krishnamurthy
,
Stanford University
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • F3 - International Finance