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Internal Economics Training

Macro-Prudential Policy Modeling for Open Economies (Self-Financed)

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Session No.: IT 20.01

Location: Washington, D.C., United States

Date: February 19-21, 2020 (3 days)

Primary Language: English

    Target Audience

    Officials, primarily in ministries of finance, economy, and planning, or in central banks.

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    Qualifications

    It is required that candidates have an advanced degree in economics, strong analytical skills, and a very good knowledge of English. Courses will be conducted in English with no interpretation.

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    Course Description

    Professor Enrique Mendoza (University of Pennsylvania)

    This course studies quantitative macroeconomic models for the analysis of macroprudential policy in open economies using a DSGE framework of financial crises in which asset markets are incomplete and collateral constraints distort credit allocations. From a methodological standpoint, the course covers global, nonlinear solution methods used to solve models in which asset-market incompleteness and financial frictions are “essential,” in the sense that they affect macroeconomic dynamics as well as long-run distributions of wealth and asset holdings. Through lectures and hands-on exercises, Professor Mendoza blends elements of real business cycle theory, international macroeconomics and asset pricing theory using tools from recursive macroeconomic theory.

    The course first reviews the theory of credit and precautionary savings under incomplete markets in an open economy, which is the foundation of the framework studied in the course. A canonical perfect-foresight, small-open-economy model is presented first, followed by an extension to a stochastic setup in which the small open economy faces non-insurable income shocks. The course then explores global methods for solving open-economy incomplete-markets models using this simple model as an example. The course discusses how this framework is modified and enriched by adding occasionally binding collateral constraints to study financial crises and sudden reversals of capital inflows, focusing on two particular cases. First, a “debt-to-income” setup, in which debt is denominated in units of world tradable goods but the income generated in the nontradables sector is used as collateral. Second, a “loan-to-value” setup, in which domestic physical assets (e.g., housing, capital) are used as collateral. The course then moves on to examine how to use these two setups for the design and quantitative evaluation of macroprudential policy, including discussion of an easy-to-use Matlab algorithm to solve both debt-to-income and loan-to-value models. Finally, the course extends the analysis of macroprudential policy to compare optimal policy with and without commitment (i.e., the role of time inconsistency), consider environments with unconventional shocks (e.g noisy news and regime changes) or where learning about new financial regimes leads to deviations from rational expectations, and explore the interactions between monetary and financial policies.

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    Important Note for Internal Economics Training Courses

    Internal Economics Training (IT) courses are self-financed. The IMF will not charge officials for attending courses. However, all travel, insurance, hotel, and living costs will need to be covered by the agency sponsoring the participants.

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