Central Bank Balance Sheet Policies and Spillovers to Emerging Markets

July 25, 2017

Preview Citation

Format: Chicago

Manmohan Singh, and Haobin Wang. Central Bank Balance Sheet Policies and Spillovers to Emerging Markets, (USA: International Monetary Fund, 2017) accessed September 20, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We develop a theoretical model that shows that in the near future, the monetary policies of some key central banks in advanced economies (AEs) will have two dimensions—changes in short-term policy rates and balance sheet adjustments. This will affect emerging market economies (EMs), especially those with a pegged exchange rate, as these EMs primarily use a single monetary policy tool, i.e., the short-term policy rate. We show that changes in policy rates and balance sheet adjustments in AEs may differ in their respective financial spillovers to pegged EMs. Thus, it will be difficult for EMs to mitigate different types of spillovers with a single monetary policy tool. In that context, we use the model to show how EMs might use additional tools—capital controls and/or macro-prudential policy—to complement their monetary policy and financial stability toolkit. We also discuss how balance sheet adjustments that affect long-term interest rates may percolate to influence short-term interest rates via financial plumbing.

Subject: Balance of payments, Capital controls, Central bank policy rate, Collateral, Financial institutions, Financial services, Financial statements, Monetary policy, Public financial management (PFM), Unconventional monetary policies

Keywords: AE agent, AE central bank, Asset purchase, Balance sheet, Capital control, Capital controls, Central bank, Central bank policy rate, Collateral, Excess reserves, Fed funds rate, Financial spillovers, Financial statements, General Collateral Finance (GCF rate), Global, Macro-prudential, Monetary policy, Policy rate, Quantitative easing, RRP (reverse repo program), Unconventional monetary policies, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/172
Stock No:

WPIEA2017172
ISBN:

9781484311417
ISSN:

1018-5941

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