Monetary and macroprudential policies in an oil-exporting economy
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1 Monetary and macroprudential policies in an oil-exporting economy Franz Hamann 1 1 Department of Macroeconomic Modeling Banco de la República CBRT-BIS-IMF Conference on Macroprudential Policy: Effectiveness and Implementation Challenges Istanbul, 2015 Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
2 Outline Motivation Some facts Oil, monetary and macro-pru model, Hamann et al. (2015) Key elements of MP/MP framework Unexpected permanent oil price shifts Findings and remarks Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
3 Motivation 1. Small, open and commodity exporting economies are subject to large, sudden and (very!) persistent commodity price swings Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
4 Motivation 1. Small, open and commodity exporting economies are subject to large, sudden and (very!) persistent commodity price swings 2. Booms: credit expands, demand for both tradable (T) and nontradable (NT) goods, RER appreciates, shifts resources from the T sector to the NT Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
5 Motivation 1. Small, open and commodity exporting economies are subject to large, sudden and (very!) persistent commodity price swings 2. Booms: credit expands, demand for both tradable (T) and nontradable (NT) goods, RER appreciates, shifts resources from the T sector to the NT 3. This adjustment is efficient. With sectoral financial frictions it is not, because T and NT credit is missallocated Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
6 Motivation 1. Small, open and commodity exporting economies are subject to large, sudden and (very!) persistent commodity price swings 2. Booms: credit expands, demand for both tradable (T) and nontradable (NT) goods, RER appreciates, shifts resources from the T sector to the NT 3. This adjustment is efficient. With sectoral financial frictions it is not, because T and NT credit is missallocated 4. Monetary policy relaxes (pro-cyclical, ER pass-through reduces inflation) and MP policies aiming to restrain total credit dynamics may weaken T-sector misallocating further credit Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
7 Motivation 1. Small, open and commodity exporting economies are subject to large, sudden and (very!) persistent commodity price swings 2. Booms: credit expands, demand for both tradable (T) and nontradable (NT) goods, RER appreciates, shifts resources from the T sector to the NT 3. This adjustment is efficient. With sectoral financial frictions it is not, because T and NT credit is missallocated 4. Monetary policy relaxes (pro-cyclical, ER pass-through reduces inflation) and MP policies aiming to restrain total credit dynamics may weaken T-sector misallocating further credit 5. How does a CB in an oil-exporting economy cope with a sudden and long-lasting reversal of international oil prices? Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
8 Quarters Quarters Quarters Colombia around oil price shocks, González et al. (2013) Real GDP Private Consumption Trade Balance Real Exchange Rate EMBI index Trade Balance (excl. mining) Manufacturing Credit Construction Credit Total Credit Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
9 Outline Motivation Some facts Oil, monetary and macro-pru model, Hamann et al. (2015) Key elements of MP/MP framework Unexpected permanent oil price shifts Findings and remarks Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
10 The question and the problem I How does monetary policy in an oil-exporting economy cope with a sudden and long-lasting reversal of international oil prices? Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
11 The question and the problem I How does monetary policy in an oil-exporting economy cope with a sudden and long-lasting reversal of international oil prices? I We conduct a quantitative assessment of the impact of an unexpected permanent change in oil prices in an oil-exporting economy and derive its monetary policy implications Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
12 The question and the problem I How does monetary policy in an oil-exporting economy cope with a sudden and long-lasting reversal of international oil prices? I We conduct a quantitative assessment of the impact of an unexpected permanent change in oil prices in an oil-exporting economy and derive its monetary policy implications I Our framework: first, understand the consequences on the economy s NFA (assumed exogenous by many models which rely on approximation solution methods); then, couple it with conventional monetary policy models Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
13 Key elements of the framework I Small open economy DSGE with three sectors: T, NT and oil exporting sector Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
14 Key elements of the framework I Small open economy DSGE with three sectors: T, NT and oil exporting sector I Long-run block (Small-scale Bewley model): Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
15 Key elements of the framework I Small open economy DSGE with three sectors: T, NT and oil exporting sector I Long-run block (Small-scale Bewley model): I Incomplete financial markets + oil sector: optimal resource extraction by large private international oil firms and government taxes oil profits Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
16 Key elements of the framework I Small open economy DSGE with three sectors: T, NT and oil exporting sector I Long-run block (Small-scale Bewley model): I Incomplete financial markets + oil sector: optimal resource extraction by large private international oil firms and government taxes oil profits I Short-run block (Large-scale MP model): Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
17 Key elements of the framework I Small open economy DSGE with three sectors: T, NT and oil exporting sector I Long-run block (Small-scale Bewley model): I Incomplete financial markets + oil sector: optimal resource extraction by large private international oil firms and government taxes oil profits I Short-run block (Large-scale MP model): I Sticky nominal prices in NT sector, flexible prices in T and oil sector Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
18 Key elements of the framework I Small open economy DSGE with three sectors: T, NT and oil exporting sector I Long-run block (Small-scale Bewley model): I Incomplete financial markets + oil sector: optimal resource extraction by large private international oil firms and government taxes oil profits I Short-run block (Large-scale MP model): I I Sticky nominal prices in NT sector, flexible prices in T and oil sector Capital is specific to both T and NT sectors, labor can move freely between sectors Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
19 Key elements of the framework I Small open economy DSGE with three sectors: T, NT and oil exporting sector I Long-run block (Small-scale Bewley model): I Incomplete financial markets + oil sector: optimal resource extraction by large private international oil firms and government taxes oil profits I Short-run block (Large-scale MP model): I I I Sticky nominal prices in NT sector, flexible prices in T and oil sector Capital is specific to both T and NT sectors, labor can move freely between sectors Financial accelerator (BGG) in both T and NT sectors where net worth is influenced by valuation effects Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
20 Key 1: Optimal oil extraction and country risk I Optimal resource extraction problem v (o)=max{px c (o,x)+bv (o x + d)} x where o is the stock of oil reserves, x is oil extraction and d are random discoveries, positively correlated with random oil prices, p Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
21 Key 1: Optimal oil extraction and country risk I Optimal resource extraction problem v (o)=max{px c (o,x)+bv (o x + d)} x where o is the stock of oil reserves, x is oil extraction and d are random discoveries, positively correlated with random oil prices, p I Given optimal oil extraction policies x (o), HHchoosenextperiods NFA in an incomplete financial markets environment. Oil-tax revenues transferred to HH. Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
22 Key 1: Optimal oil extraction and country risk I Optimal resource extraction problem v (o)=max{px c (o,x)+bv (o x + d)} x where o is the stock of oil reserves, x is oil extraction and d are random discoveries, positively correlated with random oil prices, p I Given optimal oil extraction policies x (o), HHchoosenextperiods NFA in an incomplete financial markets environment. Oil-tax revenues transferred to HH. I In addition, oil affects the country risk premium: (1 + i )=(1 + r )(1 + p exp n b b b ) exp(n oil (p o p o)) Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
23 Key 2: Sectoral financial accelerator: tradable and nontradable (j = N,T ) I Perfectly competitive banks make commercial loans to entrepreneurs, b j, by taking deposits from households, d, andborrowingfrom international financial markets, b?. Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
24 Key 2: Sectoral financial accelerator: tradable and nontradable (j = N,T ) I Perfectly competitive banks make commercial loans to entrepreneurs, b j, by taking deposits from households, d, andborrowingfrom international financial markets, b?. I Financial intermediation subject to frictions (CSV problem) on the side of the asset side of the banks. Thus, spreads depend on firms net worth, n j and the value of capital, p kj k j h i n j E r kj = p kj k j n j t (1 + r)(rp) where rp is a regulation premium : any policy that increases intermediation costs Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
25 Key 3: Conventional and unconventional tools I Monetary policy rule: reacts to deviations of total (weighted average of T and NT) inflation relative to the target p i = j p (p p) Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
26 Key 3: Conventional and unconventional tools I Monetary policy rule: reacts to deviations of total (weighted average of T and NT) inflation relative to the target p i = j p (p p) I Regulation premium rule: reacts to credit, l, deviations from its long-run value, l rp = µ rp l l Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
27 Outline Motivation Some facts Oil, monetary and macro-pru model, Hamann et al. (2015) Key elements of MP/MP framework Unexpected permanent oil price shifts Findings and remarks Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
28 MP/MP response to permanent 30% oil price increase 6.5 Reserves (years) 100 Reserves 104 GDP 4 Headline Inflation Consumption External Debt p T / P N 1 6 Non Tradable Inflation Tradable output 104 Non Tradable Output 7 External Interest Rate 4 Tradable Inflation Policy Rate 100 Total Credit 102 Non Tradable Credit 4 Regulation Premium Macro Pru W/o Macro Pru Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
29 MP/MP response to permanent 30% oil price fall 8 Reserves (years) 110 Reserves 100 GDP 5 Headline Inflation Consumption External Debt p T / P N 2 4 Non Tradable Inflation Tradable output 100 Non Tradable Output 7.5 External Interest Rate 8 Tradable Inflation Policy Rate 102 Total Credit 101 Non Tradable Credit 0 Regulation Premium Macro Pru W/o Macro Pru Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
30 Findings and remarks Findings and Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent fall in oil prices Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
31 Findings and remarks Findings and Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent fall in oil prices I Key: RER adjustment + endogenous oil extraction coupled with country risk Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
32 Findings and remarks Findings and Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent fall in oil prices I Key: RER adjustment + endogenous oil extraction coupled with country risk I With sectoral financial frictions the RER adjustment is inefficient, misallocating T and NT credit Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
33 Findings and remarks Findings and Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent fall in oil prices I Key: RER adjustment + endogenous oil extraction coupled with country risk I With sectoral financial frictions the RER adjustment is inefficient, misallocating T and NT credit I AMacroprupolicywhichtargetstotalcreditmayamplifythese inefficiencies Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
34 Findings and remarks Findings and Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent fall in oil prices I Key: RER adjustment + endogenous oil extraction coupled with country risk I With sectoral financial frictions the RER adjustment is inefficient, misallocating T and NT credit I AMacroprupolicywhichtargetstotalcreditmayamplifythese inefficiencies I Our model, calibrated to the colombian economy, shows that the effects appear to be small Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
35 Findings and remarks Findings and Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent fall in oil prices I Key: RER adjustment + endogenous oil extraction coupled with country risk I With sectoral financial frictions the RER adjustment is inefficient, misallocating T and NT credit I AMacroprupolicywhichtargetstotalcreditmayamplifythese inefficiencies I Our model, calibrated to the colombian economy, shows that the effects appear to be small I It also implies a monetary policy dilemma: inflation jumps (ER pass-through) while activity tanks Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
36 Findings and remarks Findings and Remarks I Atwo-stageapproachtostudymacroconsequencesofunexpected permanent fall in oil prices I Key: RER adjustment + endogenous oil extraction coupled with country risk I With sectoral financial frictions the RER adjustment is inefficient, misallocating T and NT credit I AMacroprupolicywhichtargetstotalcreditmayamplifythese inefficiencies I Our model, calibrated to the colombian economy, shows that the effects appear to be small I It also implies a monetary policy dilemma: inflation jumps (ER pass-through) while activity tanks I However, the policy dilemma dissapears if monetary authority targets the NT inflation. Hamann (Colombia) Monetary & Macro-pru policies CBRT-BIS-IMF / 14
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