Inflation Targeting Pillars: Transparency and Accountability, Issues 2009-2262
International Monetary Fund, Dec 1, 2009 - Business & Economics - 19 pages
Credit Default Swap spreads have been used as a leading indicator of distress. Default probabilities can be extracted from CDS spreads, but during distress it is important to take account of the stochastic nature of recovery value. The recent episodes of Landbanski, WAMU and Lehman illustrate that using the industry-standard fixed recovery rate assumption gives default probabilities that are low relative to those extracted from stochastic recovery value as proxied by the cheapest-to-deliver bonds. Financial institutions using fixed rate recovery assumptions could have a false sense of security, and could be faced with outsized losses with potential knock-on effects for other institutions. To ensure effective oversight of financial institutions, and to monitor the stability of the global financial system especially during distress, the stochastic nature of recovery rates needs to be incorporated.
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Bank of Canada Bank of England Blinder Central Bank Communication central bank's views communications strategy Country Experiences currently IMF Czech National Bank discussion endogenous interest rate exchange rate financial markets forecast interest rate forthcoming IMF framework Freedman and Laxton Full-Fledged Inflation-Targeting Regimes global and domestic governor greater transparency IMF Working Paper Implementing Full-Fledged Inflation-Targeting increased transparency inflation expectations Inflation Report Ingves interest rate decision interest rate path interest rate scenario International Monetary Fund issue loss function low and stable low inflation major chapter Monetary Policy Report Norges Bank outcome output and inflation Paper Washington path for interest policy actions policy horizon policy interest rate policy rate policymakers projected interest rate publish the interest rate of inflation repo rate Report or Inflation Reserve Bank Riksbank risks surrounding simple reaction function stable inflation supply shocks target band Taylor rule transmission mechanism understanding unpublished manuscript variables Zealand