Pricing behavior and the role of trade openness in the transmission of monetary shocks

Pricing Behaviour and the Role of Trade Openness in the Transmission of Monetary Shocks

We investigate whether the transmission of monetary shocks in Poland depends on the level of economic slack. To this end, we estimate smooth transition panel local projections using Poland’s regional data and analyze how monetary shocks affect unemployment and prices in regimes of high and low unemployment. Our key finding aligns with economic intuition: the response of unemployment to monetary policy shocks is stronger when economic slack is high, compared to when it is low. Conversely, the adjustment of prices to monetary innovations is more pronounced when idle resources in the economy are scarce, compared to when they are abundant. Our main conclusion is further supported by evidence showing that the difference in the strength of the employment response to monetary shocks, depending on the unemployment level, is more pronounced in sectors producing non-tradable goods than in those manufacturing tradable goods. Moreover, comparing our model with its linear counterpart confirms that monetary transmission in Poland indeed exhibits state-dependence, while the analysis of monetary shock distributions under low and high unemployment shows that our results are not driven by the presence of a regime-dependent pattern in monetary disturbances.

The international transmission of monetary shocks between the US and Canada is explored. Focusing on real variables such as consumption, investment, employment, and the bilateral trade balance, along with measures of US and Canadian money, the empirical analysis examines the impact of a monetary shock in one country on real activity in both countries. The long-run analysis provides evidence of cointegration among the variables and suggests that money plays an important role in the equilibrium relationships between the two countries. Variance decompositions and impulse response functions reveal interesting avenues of real transmission in the short run. The short-run analysis provides strong evidence that US monetary shocks affect real activity in both the USA and Canada. The analysis also indicates that Canadian monetary disturbances affect Canadian and US real activity, and that many of these effects are similar in magnitude to the effects of US monetary shocks. The importance of the nominal exchange-rate regime is also discussed.

The Transmission of Monetary Policy Shocks from the US to the Euro Area

We study heterogeneity in the transmission of monetary shocks across euro-area (EA) countries using a dynamic factor model and high-frequency identification. Deploying a novel methodology to asses the degree of heterogeneity, we find it to be low in financial variables and output but significant in consumption, consumer prices, and variables related to local housing and labour markets. We show that a large proportion of the variation in the responses to monetary shocks can be accounted for by differences in some characteristics of these markets across EA member countries: the share of adjustable mortgage contracts, homeownership rates, shares of hand-to-mouth and wealthy hand-to-mouth consumers, as well as wage rigidity.

This study examines whether the positive and negative unanticipated monetary shocks have asymmetric causal impact on real output growth and inflation rate. In particular, we examine whether the asymmetry observed in the impact of these shocks on output is consistent with that of inflation as predicted by menu cost models. The empirical results indicate that the positive monetary shocks tend to cause an increase in price whereas the negative monetary shocks have no impact. On the other hand, the negative monetary shocks cause a fall in real output; however, the positive monetary shocks seem to have no impact. The crucial implication of these findings is that the positive monetary shocks tend to be inflationary with less or no impact on real output whereas the negative monetary shocks cause reductions in real output with no or less impact on inflation.

Exchange Rate Pass-Through into Import Prices In Major Southeast Asian Countries

In present paper has tried to examine and investigate quality of effectiveness of monetary Shocks on the growth of agricultural Sector by using Time series dataes of Iran Economy during 1960-2006 , filter Hodric-Prescott method and liner Regressive models. The resultes Show that qualily of effectiveness monetary shocks on growth of Agricultural Sector is Asymmetric and length of effectiveness Monetary Shocks is symmetric . in other words negetive monetary shocks affect growth of agricultural Sector more than positive monetary shocks on the and reflection of value added of agricultural to positive monetary shocks is small than negetive monetary shochs.however, monetary policies aren,t suitable for influence on production of agricultural sector. However, it is Necessery policemakes use suitable policies for influence production of sector agricultural. Keywords: Agricultural sector, Hodric- Prescott

The paper undertakes a comparative empirical analysis of the effects of shocks on domestic prices in four Asian countries before and after the financial crisis of 1997 in South-East Asia. We apply two different estimation methodologies, namely structural VAR and a single equation approach. The results of the two methods are consistent, although the magnitude of the elasticities of the exchange rate pass-through are different due to the inclusion of different variables, lag terms and different assumptions made in both methods. The results show that the degrees of exchange rate pass-through in these countries are different across countries and over time. In most cases, the pass-through rates are incomplete. The degree of exchange rate pass-through is highest on import prices, moderate on PPI and lowest on CPI. In some cases, the pass-through rates on CPI are even negative. The effect of the import price shock is stronger compared to that of the exchange rate shock in determining the movement of domestic prices in these countries. Trade openness has a weak correlation with the degree of exchange rate pass-through.

This article investigates the transmission of monetary policy shocks in the euro area after 1999. To examine this we use empirical structural vector error correction models, built on the data for the period from 1999 to mid-2005. We identify a monetary shock by restricting it to have only temporary effects on output and inflation. We obtain negative responses of inflation and output to a restrictive monetary shock in the period under investigation. These results are obtained with the HICP based as well as the core inflation measure included in the model.

In this study, we use a Dynamic Stochastic General Equilibrium (DSGE) model to investigate the household portfolio channel of monetary and credit shocks transmission in Iran. In this regard, we developed a canonical New Keynesian DSGE model with financial and banking sectors. The model is estimated by Bayesian method for the period 1990-2012. The result showed that the current and expected prices of financial and physical assets affected their optimal proportions in household portfolio. Second, banking sector had a significant impact on the household portfolio composition and also on the real sector variables. More specifically, a positive deposit rate shock reduced the proportions of financial and physical assets in household portfolio and increased marginal cost and inflation. This shock decreased investment and output. Third, a positive shock on stock price had negative effects on demand for other assets in household portfolio but these effects were discharged rapidly. Moreover, the housing price shock had similar effects on demand for mentioned assets but the effects were discharged slowly. The results emphasized the role of credit, banking and assets markets sectors in financial fluctuation, business cycles and monetary transmission in Iran.

Haberler versus Nurkse: The Case for Floating Exchange Rates as an Alternative to Bretton Woods?

This thesis uses quantitative macroeconomic models to understand the relationships between inequality, monetary policy, and climate change. Chapter 1: From Income to Wealth Inequality in the U.S. The past 40 years have been characterized by a decrease in the rate of return on safe assets, an increase in the equity premium, an increase in the price of financial assets, and an increase in labor income and wealth inequality. Using a heterogeneous-agent model featuring permanent labor income inequality, a two-asset structure, and non-homothetic preferences, this chapter investigates the impact of an increase in permanent labor income inequality on wealth inequality. As rich households save a higher share of their permanent income than poorer ones, a more skewed permanent labor income distribution increases aggregate savings, everything else equal. However, in general equilibrium, with a realistic market structure, an increase in aggregate savings increases mostly the price of capital, not its quantity. This has little impact on the marginal productivity of capital and labor but creates capital gains that push up the top 1% wealth share. Chapter 2: Income Inequality and Monetary Policy This chapter studies the interplay between permanent labor income inequality and monetary policy within the framework of Heterogeneous-Agent New Keynesian (HANK) models. This chapter studies the impact of an increase in permanent labor income inequality on the transmission of monetary shocks on the real economy. In a Heterogeneous-Agent New-Keynesian model with standard preferences, we show that the distribution of permanent labor income is neutral with respect to monetary policy shocks. However, this model cannot account for the observed relationship between permanent income and consumption-saving behavior. Including a non-homothetic taste for wealth allows us to match this relationship, and breaks the neutrality result. The direct substitution effect from a monetary policy shock is weakened while indirect effects are stronger. The rise in permanent labor income inequality makes households hold wealth more for a present motive rather than for an intertemporal-substitution motive. As a result, the aggregate elasticity of intertemporal substitution is weakened while the aggregate static MPC is strengthened. In a realistic two-asset HANK model, we quantify the change in the composition of a monetary shock. We observe a rise in the magnitude of a monetary policy shocks as the increase in indirect effects more than outweighs the fall in the direct effect. Chapter 3: Why is there still investment in polluting capital? Despite governments’ commitments to limit global warming to 1.5 degrees Celcius, there is still investment in carbon-intensive capital. This chapter uses a growth model featuring irreversible investment, capacity utilization, and clean and polluting capital to study this apparent paradox. It shows that current investment in polluting capital and CO2 emissions are coherent with expectations of a future carbon tax if investors also expect a bailout of polluting capital. This result implies that governments’ credibility can play an important role in reducing the cost of implementing an optimal carbon tax by committing not to bail out. However, there exists a temptation for a short-sighted government to boost output and consumption in the short run by announcing a future bailout.

We propose a model of banks’ exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks’ optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity-mismatched balance sheet and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks’ maturity mismatch. (JEL E43, E44, E51, E52, G21, G32)

We propose a model of banks’ exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks' optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity-mismatched balance sheet, and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks’ maturity mismatch.