Showing papers by "Carl E. Walsh published in 1996"

The lender of last resort function under a currency board : the case of Argentina

Abstract: Within the current rules of the game, Argentina's central bank (BCRA) is charged with being the lender of last resort as well as providing full convertibility between pesos and U.S. dollars - two objectives with one instrument, namely, reserves. Within those rules, it may be well that the balance of responsibilities needs to shift. Complete dollarization can significantly reduce risks but not entirely eliminate them. If the BCRA can concentrate more on building up reserves and helping to ward off crises of confidence in the currency, perhaps the banking system can protect itself better from liquidity shocks. But this will require, among other things, consolidation of the sector (which could give it greater access to outside liquidity) and prudential strengthening of the system. Triage of weaker banks should continue and not await another crisis. More experience with the new liquidity policy is needed and so is reform of the settlement system, as it affects the functioning of the interbank market, which is essential for containing crises. Essentially, however, no grand solution seems to exist for the problems that seem inevitable in a system where the central bank is also the currency board. Argentina's strategy must therefore turn on actively strengthening its banking systems to reduce the risks of insolvency.

The Lender of Last Resort Function Under a Currency Board: The Case of Argentina

Abstract: No grand solution appears to exist for the problems that seem inevitable in the Argentine system, in which the Central Bank is both lender of last resort and currency board, providing full convertibility between pesos and U.S. dollars. Argentina's strategy therefore must turn on actively strengthening its banking systems to reduce solvency risks and on building its reserves. Within the current rules of the game, Argentina's central bank (BCRA) is charged with being the lender of last resort as well as providing full convertibility between pesos and U.S. dollars - two objectives with one instrument, namely, reserves. Within those rules, it may well be that the balance of responsibilities needs to shift. Complete dollarization can significantly reduce risks but not entirely eliminate them. If the BCRA can concentrate more on building up reserves and helping to ward off crises of confidence in the currency, perhaps the banking system can protect itself better from liquidity shocks. But this will require, among other things, consolidation of the sector (which could give it greater access to outside liquidity) and prudential strengthening of the system. Triage of weaker banks should continue and not await another crisis. More experience with the new liquidity policy is needed and so is reform of the settlement system, as it affects the functioning of the interbank market, which is essential for containing crises. Essentially, however, no grand solution seems to exist for the problems that seem inevitable in a system where the central bank is also the currency board. Argentina's strategy must therefore turn on actively strengthening its banking systems to reduce the risks of insolvency. This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to advise member countries on financial sector policy.

Central Bank Institutional Design and the Output Cost of Disinflation: Did the 1989 New Zealand Reserve Bank Act Affect the Inflation-Output Tradeoff?

Abstract: The 1989 Reserve Bank of New Zealand Act provides a natural experiment in which the effects of institutional change on economic relationships can be studied. The Act set price stability as the single objective of monetary policy and gave the Bank great independence in achieving that goal. We explore the mechanisms through which central bank institutional reforms such as the 1989 Act may affect economic structure, focusing on the output cost of disinflation (short-run inflation-output tradeoff). Three basic channels are identified based on: (i) the inflation environment and menu costs (New Keynsian theory); (ii) misperceptions of shocks, and (iii) wage contracting behavior which is the outcome of time-consistent equilibrium behavior involving strategic interaction between the central bank, firms and unions. Our empirical work investigates changes in the short-run inflation-output tradeoff, allowing environments where "learning" about the new regime is assumed to be rapid as well as slow. We find that a major shift in the New Zealand tradeoff has occurred since the 1989 Act and that enhanced central bank credibility, in the sense that public expectations of inflation measured by survey data are closer on average to the central bank public projections, lower the output cost of disinflation. Lower average inflation, by contrast, tends to raise the output cost of disinflation.