English

Macroprudential Policy Modeling for Open Economies (INS-CRS)

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Deadline for the application has passed.
Course No.: IT 18.01
Location: Washington, D.C., United States
Date: January 31, 2018-February 2, 2018 (3 Days)
Language: English

Target Audience:

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

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.

Course Description:

Professor Enrique Mendoza (University of Pennsylvania)

This course studies quantitative macroeconomic models for the analysis of macroproduential policy in open economies using a DSGE framework of financial crises in which asset markets are incomplete and credit markets suffer from market failure because of collateral constraints. From a methodological standpoint, the course covers global, nonlinear solution methods that are 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, and relies on 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 “liability dollarization” 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 “collateral assets” setup, in which domestic assets (e.g., housing) 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 a Matlab solution algorithm to solve the liability dollarization setup with an application calibrated to Argentina. Finally, the course extends the analysis of macroprudential policy to compare optimal policy with and without commitment (i.e., the role of time inconsistency), and to environments with unconventional shocks (such as noisy fundamentals news and regime changes in capital markets), or where learning about the stability of a new financial regime leads to deviations from the standard rational expectations paradigm.

Important Note for Online Courses:

For Online Learning (OL) courses, which are delivered through the edX platform, you will need an additional piece of information to register: you will be prompted for your edX.org username. If you do not already have a username, please go to https://courses.edx.org/register and sign up for a free account. Once you have created an account, you may complete the IMF Institute application. If you already have an edX account, your username can be found on the top right of the screen after logging in.

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.