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

Pricing behavior 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

This paper constructs a sticky price Dynamic Stochastic General Equilibrium model with multi-regions. Producers from different regions would range in price rigidity, production function, the regional structures of intermediate inputs. That is, firms from each area, can get intermediates and investments from all the regions in the country following the empirical Multi-region Input-Output table in China. Different from the previous symmetry model, the model in this paper allows idiosyncratic regional dynamics to the national monetary shocks. This model is calculated by the Bayesian estimation method using the regional and aggregate China empirical data.

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.

In this paper we present an extensive analysis of the consequences for global equilibrium determinacy of implementing active interest rate rules (i.e. monetary rules where the nominal interest rate responds more than proportionally to changes in inflation) in flexible-price open economies. We show that conditions under which these rules generate aggregate instability by inducing cyclical and chaotic equilibrium dynamics depend on particular characteristics of open economies such as the degree of (trade) openness and the degree of exchange rate pass-through implied by the presence of non-traded distribution costs. For instance, we find that a forward-looking rule is more prone to induce endogenous cyclical and chaotic dynamics the more open the economy and the higher the degree of exchange rate pass-through. The existence of these dynamics and their dependence on the degree of openness are in general robust to different timings of the rule (forward-looking versus contemporaneous rules), to the use of alternative measures of inflation in the rule (CPI versus Core inflation), as well as to changes in the timing of real money balances in liquidity services ("cash-when-I-am-done" timing versus "cash-in-advance" timing).

Long-Run Drivers of Current Account Imbalances in the EU: The Role of Trade Openness

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.

This paper evaluates the welfare effects of a monetary union (MU), compared to a e oating exchange rate regime, using a quantitative business cycle model of a two-country world with sticky prices. It is assumed that, under a e oat, there are shocks to the uncovered interest rate parity (UIP) condition. These shocks are shown to have a negative effect on welfare— the detrimental effect is stronger, the higher the degree of trade openness. A MU eliminates UIP shocks, and it may thus raise welfare. The welfare gain from MU is positively linked to openness. (JEL: E4, F3, F4)

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.

The financial sector plays a crucial role in the economy, not only being a simple intermediary between creditors and borrowers, but also having a significant impact on the economy’s development and its various characteristics. For this reason, accounting for financial sector peculiarities is critical when developing policy-oriented general equilibrium models for practical use. This drives the interest of many researchers in development of approaches to describing the financial sector and financial frictions in DSGE models. In financial frictions models one can describe the production side of the economy in a simplistic way. However, it could be important to model the production sector in more detail. For instance, separating tradable and non-tradable sectors of the economy could be of great significance, especially for developing economies which depend on foreign trade a lot. In this paper we analyze the role of the financial sector and how important it is for transmission of monetary and fiscal shocks under different assumptions about the production sector. Namely, we compare two-sector economy with tradable and non-tradable sectors with a simplistic model which assumes that the economy produces only tradable goods. According to the results, financial frictions impact tradable and nontradable sectors asymmetrically. In the two-sector model the effect of financial frictions is quantitatively smaller than in the one-sector economy. Therefore, using the latter simplifying assumption could lead to overestimating the role of financial frictions in the transmission of monetary and fiscal shocks. In addition, the paper provides estimates of how changes in monetary and fiscal policy instruments impact the Russian economy given the existence of financial frictions.

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

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