1: Financial frictions and integrated nancial markets matter by spread- ing and amplifying country specic shocks. We develop a two country DSGE world with incomplete markets to address these issues. The main reference for the model's framework is a work by Gertler and Kiyotaki 1. In the basic version of the model countries trade in goods but nancial markets are closed. Then, we enrich the model by allow- ing for integrated nancial markets but portfolio shares remain exoge- nously set. We end up with the complete model that also allows for portfolio choice by implementing a method developed by Devereux and Sutherland2.We nd home bias in international portfolios, that under incomplete markets allows for less volatility than under full portfo- lio diversication. The model provides a simple two country world framework that may also be used for monetary policy issues. 2: During the last nancial crises, the main Central Banks in the world implemented dierent examples of unconventional monetary policies in order to soften the tightening in the credit market con- ditions. In the United States the Federal Reserve (Fed) applied the \quantitative easing" approach in a very massive way, allowing the country to avoid a deep recession from the sub-prime crisis to this day. Similar attempts (even if dierently named) were followed during the same period by the Bank of England and the Bank of Switzerland. Even in the Euro Area, despite the more severe stance implied by the in uence of the Bundesbank's heritage, during the current Euro- zone crisis the European Central Bank (ECB) was involved in massive shopping of Treasury bonds of the countries under speculative attack in order to restore the transmission mechanism of its monetary policy. Moreover, in the attempt to avoid a credit crunch for the real economy and to mitigate the urgent liquidity needs by the European banking system, the ECB also launched last December its unlimited three-years liquidity-renancing operations at the 1 percent in order to provide longer-term lending facilities to the nancial institutions. Unconven- tional monetary policies seem therefore to get an increased importance during the last few years as alternative instrument of monetary pol- icy when the traditional target rates are close to zero and when the credit market conditions worsen with serious risk for the real economy, justifying a growing interest on this issue. We would like to analyze how dierent unconventional interventions by the Central Banks might mitigate a country-specic crisis in a two country DSGE model with credit frictions. To this task we use a baseline model we previously developed, whose framework is mainly based on a work by Gertler and Kiyotaki (2010). We specically focus on the eects of coordinated versus uncoordinated policies.

1. Banking Frictions and Integrated Financial Markets in a Two Country DSGE Model. 2. Unconventional Monetary Policy Coordination in a Two Country World with Banking Frictions / Carniti, Elena A. M.. - (2012 Mar 16).

1. Banking Frictions and Integrated Financial Markets in a Two Country DSGE Model. 2. Unconventional Monetary Policy Coordination in a Two Country World with Banking Frictions

2012-03-16

Abstract

1: Financial frictions and integrated nancial markets matter by spread- ing and amplifying country specic shocks. We develop a two country DSGE world with incomplete markets to address these issues. The main reference for the model's framework is a work by Gertler and Kiyotaki 1. In the basic version of the model countries trade in goods but nancial markets are closed. Then, we enrich the model by allow- ing for integrated nancial markets but portfolio shares remain exoge- nously set. We end up with the complete model that also allows for portfolio choice by implementing a method developed by Devereux and Sutherland2.We nd home bias in international portfolios, that under incomplete markets allows for less volatility than under full portfo- lio diversication. The model provides a simple two country world framework that may also be used for monetary policy issues. 2: During the last nancial crises, the main Central Banks in the world implemented dierent examples of unconventional monetary policies in order to soften the tightening in the credit market con- ditions. In the United States the Federal Reserve (Fed) applied the \quantitative easing" approach in a very massive way, allowing the country to avoid a deep recession from the sub-prime crisis to this day. Similar attempts (even if dierently named) were followed during the same period by the Bank of England and the Bank of Switzerland. Even in the Euro Area, despite the more severe stance implied by the in uence of the Bundesbank's heritage, during the current Euro- zone crisis the European Central Bank (ECB) was involved in massive shopping of Treasury bonds of the countries under speculative attack in order to restore the transmission mechanism of its monetary policy. Moreover, in the attempt to avoid a credit crunch for the real economy and to mitigate the urgent liquidity needs by the European banking system, the ECB also launched last December its unlimited three-years liquidity-renancing operations at the 1 percent in order to provide longer-term lending facilities to the nancial institutions. Unconven- tional monetary policies seem therefore to get an increased importance during the last few years as alternative instrument of monetary pol- icy when the traditional target rates are close to zero and when the credit market conditions worsen with serious risk for the real economy, justifying a growing interest on this issue. We would like to analyze how dierent unconventional interventions by the Central Banks might mitigate a country-specic crisis in a two country DSGE model with credit frictions. To this task we use a baseline model we previously developed, whose framework is mainly based on a work by Gertler and Kiyotaki (2010). We specically focus on the eects of coordinated versus uncoordinated policies.
Two country DSGE model. Incomplete markets. En-dogenous portfolio choice. Unconventional monetary policy.
1. Banking Frictions and Integrated Financial Markets in a Two Country DSGE Model. 2. Unconventional Monetary Policy Coordination in a Two Country World with Banking Frictions / Carniti, Elena A. M.. - (2012 Mar 16).
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/200911
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