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28 October 2010
Discussion on“The Financial Accelerator under Learning
and the Role of Monetary Policy”by Caputo, Medina and Soto
CEPR/ESI 14th Annual Conference
Harun ALP Central Bank of Turkey
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The Paper
• Financial accelerator on the demand side of credit market is modelled by using BGG (1999) framework.
• Borrow at a premium over the risk free rate, which is a function of the leverage of the borrower.
• Departure from Rational Expectation assumption.
• Adaptive Learning: Agents in economy act like econometricians.
• Past data is discounted when agents update their expectations.
• Combination of the two elements generates a sizable drop in output and asset prices in response to a negative shock.
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• Consider negative productivity shock under alternative monetary policy rules responding asset prices.
• The expectations formation mechanism endogenously generates a significant deviation of asset prices from their fundamental values.
• Responding aggressively only to inflationary pressures is still efficient in this environment.
The Paper
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Calibration
• Learning itself introduces a lot of inertia.
• Milani (2005, 2007): In a New Keynesian model with learning, the estimated degrees of habits and indexations are close to zero.
• Parameter values for indexations may be too high.
• Estimate the model to see whether financial accelerator and learning are accepted by data.
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Instrument Rules
• React to the level of asset prices or change in the asset prices.
• Some fluctuations in asset prices are efficient in the presence of technology shocks.
• React to the deviations of asset price from its fundamental value (flexible price with no financial frictions)
• Technology shocks lead to changes in natural rate of interest.
• React to the natural rate of interest.
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Instrument Rules
• Optimized simple instrument rules under an ad-hoc loss function
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• More formal welfare analysis
• Consider optimal policy as a benchmark and look at whether simple instrument rules close to optimal.
• The central bank tries to stabilize two distortions with one instrument (sticky price and wage vs. financial friction ).
Optimal Policy
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• Paper considers only technology shocks.
• Under a different shock
• How learning affects asset price behavior?
• Are deviations from RE still large?
• How different instrument rules perform?
• The size of the shock affect the propagation in a nonlinear way due to the learning.
• Consider the policy exercise under different values of shocks.
• May affect the coefficients of the instrument rules.
Shocks
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Discussion on“The Financial Shocks and Monetary
Reactions in a New Keynesian Model”by de Walque and Pierrard
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The Paper
• Extend a standard New Keynesian model to incorporate a banking sector including interbank market.
• Modelling the supply side of credit market.
• No borrowing friction in firm-bank relationship
• Key features of the model:
• Maturity mismatch.
• Risk of default on interbank borrowing.
• Collateralized borrowing from central bank.
• Consider both conventional and unconventional monetary policy.
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Borrowing from the Central Bank
• At equilibrium, no borrowing from central bank.
• It is difficult to consider collateral requirements in a market which the borrowing does not exist at equilibrium.
• Role for money may be needed.
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Interbank Market
• Interbank loans are increasing following a negative security quality shock.
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Maturity Mismatch
• 1-period borrowing from interbank and central bank vs. long-term lending to firms.
• How the maturity mismatch affects the propagation of shocks?
•The fire sale of the long-term assets.
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• Looser requirements for the quality of the collateral.
• No cost of reducing the quality of collateral.
• Why central banks do not use the unconventional policy in normal times?
• Some cost needed.
Unconventional Monetary Policy
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• Reacting to a banking variable is beneficial.
• Consider aggressive reaction to inflation in policy rule.
• Consider rigorous welfare analysis.
• In this model, central bank has two instrument.
• Look at the optimal policy to see
• How unconventional policy behave optimally?
• How two instruments interact?
• Benefits of using two instrument.
Conventional Monetary Policy
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To sum up
• Both papers are very interesting and helpful in understanding the current financial crisis.
• Both papers introduce a second friction for monetary policy to concern.
• Depending on the model structure and the nature of the shock, the trade-off between two frictions may be significant.
• Using additional instrument is beneficial.