Aggressive Monetary Policy Research Articles

The Effects of Structural Shocks on Macroeconomic Fundamentals under Aggressive Monetary Policy: The Case of Turkey

Purpose: This study aims to investigate the impact of aggressive monetary policy in terms of inflation on the effects of structural shocks over macroeconomic fundamentals in Turkey. For this purpose, we estimate the basic new Keynesian model by using the Bayesian method for the period of 2000Q1 to 2019Q1. Design/methodology/approach: We use the most recent quarterly dataset of the real gross domestic product index, consumer price index and short term interest rate for Turkey. The prior distribution of structural parameters and shock processes are determined according to the literature. Then, we estimate two different version of the basic new Keynesian model with six distinct chains of Metropolis-Hasting algorithm with each of 100000 draws. Finally, we examine the long term impact of aggressive monetary policy on the effects of structural shocks with the help of the unconditional variance decomposition. Besides, the short term and over time analysis are conducted via the conditional forecast error variance decompositions. Findings: The results of Bayesian impulse responses are consistent with theoretical framework of the new Keynesian synthesis. Besides, the historical shock decompositions of endogenous variables give valuable insight for the last twenty years of Turkish economy. The empirical results show that aggressive monetary policy increases the effects of monetary policy shock on inflation while its impact on output gap and interest rate decreases at every quarter. Moreover, the aggressive monetary policy boosts the effects of supply shock on the variability of output gap over time. Research limitations/implications: If the Central Bank of Turkey intends to implement aggressive monetary policy to sustain price stability, the monetary authority should bear in mind that their effects on both the real sector and the short term interest rate will diminish. Originality/value: This study deals with the popular discussion about the aggressiveness of monetary authority in emerging countries with its own distinctive design.

Abenomics: from the “Great Stagnation” to the “Three-Arrows Strategy”

Abstract This article addresses Japan’s economy, its new economic policy package, which is known as Abenomics. The centerpiece of Abenomics has been the three “economic arrows” targeted at aggressive monetary policy, flexible fiscal policy, and growth strategy. This article focuses on Abenomics and shows the measures undertaken by the administration. The research question is: to what extent the policy package contributes to stimulating the economy? This question relates to the main problem of the effectiveness of Abenomics. The main purpose of this article is an attempt to evaluate Abenomics from the perspective of 5 years since the time of its announcement.

Why Did the World Economic Crisis of 2008-2009 End in the Great Recession? A Critical Comparison of the Great Depression and the Great Recession

In this article, I will discuss the reasons why the US economic crisis of 2008-2009 ended in the Great Recession from a Marxist perspective. First, I will discuss a Marxist financial crisis theory. My conclusion is the formation of fictitious capital plays a crucial role in accelerating the economic growth process, creates economic over-sensitiveness and eventually leads to a crisis. Second, I will present a historical process of the Great Depression in the United States from a perspective of financial crisis. In those days, the gold reserves of Federal Reserve Banks should not be less than 40% against note liabilities. However, the government set up the Reconstruction Finance Corporation in 1932 and took an aggressive monetary policy under the gold standard. Therefore the United States was finally compelled to abandon the gold standard in 1933. Third, I will discuss the financial crisis of 2008-2009 and show its difference from the Great Depression in the 1930s. And finally, I will try to critically compare the Great Depression with the Great Recession from a Marxist financial crisis theory.

Interest Rates and Foreign Spillovers

We show that medium-term interest rates in the euro area, Japan, UK and US are affected by domestic and foreign shocks. We find that US rates are the main source of spillovers globally and are less exposed to foreign shocks. Foreign spillovers to European rates were negligible only during the sovereign debt crisis and the introduction of more aggressive monetary policies by the ECB. We identify causal relations among asset prices through structural vector autoregressions (SVAR) and magnitude restrictions. We use preliminary regressions on event days to estimate key parameters employed to constrain the structural parameter space of the SVAR. JEL Classification: C3, G2

Monetary policy, de-anchoring of inflation expectations, and the “new normal”

Persistently low inflation rates, followed by declining inflation expectations, in advanced economies after the Great Recession have raised the question whether central banks are still able to credibly anchor inflation to their medium-term targets. The purpose of this paper is twofold. First, we investigate why agents’ expectations that over the business cycle inflation will remain in line with the target begin to falter. Our hypothesis is that agents form expectations in terms of their probabilistic belief that the economy may switch from a normal to a depression state (permanently low output and inflation), which is updated upon observing the actual state of the economy. Second, we study how the de-anchoring of expectations interacts with monetary policy to determine whether the central bank is still able to achieve its target - and hence re-anchor inflation expectations - or whether the system drifts towards depressed states. We obtain two main findings. The first is that, facing unfavourable shocks, if inflation expectations ``fall faster" than the policy rate, and the zero lower bound is reached without correcting the shock, the system converges to a new steady state - the "new normal" - with permanent negative gaps. The second is that a more aggressive monetary policy is ineffective both at the zero lower bound and above it, when the shock is large and/or when the reactivity of inflation expectations is sufficiently high. This latter finding seems to support the necessity, in those conditions, to abandon conventional monetary policy and to switch to an aggressive reflationary policy package that prevents the entrenchment of deflationary expectations.

Evaluating South African Fiscal and Monetary Policy Trade‐offs Using a Wavelet‐Based Model

AbstractThe balance between South African fiscal and monetary policy in an open economy context poses some interesting questions for policymakers: questions such as whether more aggressive monetary or fiscal policy will likely deliver better growth prospects in the short and medium run, and what will the consequences be for the real exchange rate and for inflation? This research applies wavelet analysis to post‐apartheid South African quarterly macroeconomic data, and uses the decomposition to simulate a large state‐space linear‐quadratic tracking model. We find that restricted fiscal policy is the best option to realise growth, leading to lower interest rates, lower inflation, real exchange depreciation and improved trade balances compared to restricted monetary policy.

THE MACROECONOMIC IMPACT OF MONETARY-FISCAL POLICY IN A “FISCAL DOMINANCE” WORLD

This paper focuses on the question of what monetary and fiscal policy can do and should do in a “fiscal dominance” world. I first highlight that both “amplification” and “fiscal cushion” effects are always at work jointly in determining the evolution of inflation. I find the threshold of maturity of government bonds beyond which more aggressive monetary policy dampens inflation volatility is three quarters. In addition, I conduct welfare analysis to quantitatively evaluate the costs and benefits brought by long-term debt. My results show that the threshold of government debt maturity above which an aggressive monetary policy improves welfare is eight quarters. More importantly, I characterize optimal monetary and fiscal policy using simple and implementable rules. My results indicate an optimal monetary and fiscal combination calls for an aggressive response in both rules. Finally, I find that optimized simple monetary-fiscal rule is significantly welfare inferior to the Ramsey optimal policy.

Macroeconomic stabilization of primary commodities price cycles in developing economies

This paper proposes a strategy for stabilizing macroeconomic policy to address jointly the effects of changes in the prices of food, minerals and energy (oil). Our approach differs from the general literature, which analyzes the effects of a commodity boom or bust and therefore the solutions in terms of economic policy separately, that is, by type of commodity. The stabilization strategy that we propose considers a key fact affecting many open economies, namely, that they not only are affected by increases or decreases in commodity prices, but also benefit from them. Consequently, we use a structural model for an open economy with restricted households to show that welfare could be improved with a fiscal rule incorporating transfers to stabilize household consumption. This strategy noticeably dominates an aggressive monetary policy focused only on stabilizing inflation and a fiscal policy that has an excessive bias toward saving income from exports.

Learning, robust monetary policy and the merit of precaution

Abstract We study in a New Keynesian framework the consequences of adaptive learning for the design of robust monetary policy. Compared to rational expectations, the fact that private sector follows adaptive learning gives the central bank an additional intertemporal trade-off between optimal behavior in the present and in later periods thanks to its ability to manipulate future inflation expectations. We show that adaptive learning imposes a more restrictive constraint on monetary policy robustness to ensure the dynamic stability of the equilibrium than under rational expectations but strengthens the argument in favor of a more aggressive monetary policy when the central bank fears for model misspecifications.

Monetary Policy, De-Anchoring of Inflation Expectations, and the 'New Normal'

Low inflation rates in the Euro Area raise the question of whether inflation is still credibly anchored to the Euro-system’s medium term target of below, but close to 2%. The purpose of this paper is twofold. On the one hand, we investigate why agents’ inflation expectations that inflation will remain in line with the target begin to falter. On the other hand, we want to study how the de-anchoring of expectations interacts with monetary policy determining whether the central bank is still able to achieve its target - and hence re-anchor inflation expectations - or whether the system drifts away towards the liquidity trap. Two are our main findings. The first is that large unfavourable shocks might lead agents to question their trust in resilience of the system, and to revise their expectations. If inflation expectations fall faster than the policy rate, and the zero lower bound is reached without correcting the interest-rate gap, the system converges to a new steady state - the “new normal” - with permanent negative gaps. The second is that a more aggressive monetary policy is ineffective both at the ZLB and above the ZLB, when the shock is large shocks and/or when the reactivity of inflation expectations is high enough. This last finding seems to support the necessity, in those conditions, to abandon conventional monetary policy and to switch to an aggressive reflationary policy that prevents the entrenchment of deflationary expectations.

Co-movement and the transmission of the Japanese REIT market in different property sectors: a comparative analysis of different monetary policy regimes

Three REIT markets in different property sectors do not co-move before the introduction of aggressive monetary policies in Japan. REIT market was sluggish after the impacts of the Lehman shock and the Great East Japan Earthquake. They move almost independently with just a few mutual transmissions. At the same time, monetary policies were not as powerful as in the period of Abenomics. On the other hand, with the introduction of strong monetary policies, REIT market became bullish. Aggressive monetary policies, as a common factor, play important roles in the co-movement and mutual transmission of three REIT markets in different property sectors. In other words, three REIT markets in different property sectors are formed through mutual dependence and influence. The results of this paper imply that large scale easing policies contribute to mitigating asset deflation by increasing the prices of Japanese REIT market.

Co-movement and the transmission of the Japanese REIT market in different property sectors: a comparative analysis of different monetary policy regimes

Three REIT markets in different property sectors do not co-move before the introduction of aggressive monetary policies in Japan. REIT market was sluggish after the impacts of the Lehman shock and the Great East Japan Earthquake. They move almost independently with just a few mutual transmissions. At the same time, monetary policies were not as powerful as in the period of Abenomics. On the other hand, with the introduction of strong monetary policies, REIT market became bullish. Aggressive monetary policies, as a common factor, play important roles in the co-movement and mutual transmission of three REIT markets in different property sectors. In other words, three REIT markets in different property sectors are formed through mutual dependence and influence. The results of this paper imply that large scale easing policies contribute to mitigating asset deflation by increasing the prices of Japanese REIT market.

High Trend Inflation and Passive Monetary Detours

According to the long-run Taylor principle (Davig and Leeper, 2007), a central bank can deviate to a passive monetary policy and still obtain equilibrium uniqueness if a sufficiently aggressive monetary policy is expected for the future. Does this principle hold true when both monetary and fiscal policies can switch between active and passive and there is positive trend inflation? We find that passive monetary detours are no longer possible when trend inflation is high, whatever fiscal policy is in place. This has important policy implications in terms of flexibility and monetary-fiscal authorities coordination.

Four reasons why 2018 will be the best post‐crisis year

▀ We head into 2018 in a fairly optimistic mood. The current upswing is more broadly based than any other since the global financial crisis, and – unusually by recent standards – we have entered the new year without any major crisis looming. We see world GDP growth accelerating from 3.0% last year to 3.2% in 2018, which would be the best year for the global economy since the post‐global financial crisis rebound. ▀ There are four key reasons why 2018 is going to be a good one globally: (i) strong trade growth; (ii) muted inflation keeping monetary policy accommodative; (iii) emerging markets staying robust; (iv) resilience to political uncertainty. ▀ The near‐term risk of an abrupt slowdown in China looks limited, while the Eurozone economy continues to stage robust growth which is underpinned by strong fundamentals. A potential fiscal loosening, a weaker dollar and business investment revival bode well for the US. The outlook is bright for economies that are heavily integrated into global manufacturing supply chains or reliant on commodity exports. ▀ Granted, soaring debt is a cause for concern, particularly in some emerging markets, along with high asset price valuations. They warrant close monitoring and are plausible triggers for the next global slowdown. Nonetheless, while such risks could linger or indeed escalate further before correcting, we don't see them as 2018 issues. ▀ The most obvious trigger for any such correction would be a widespread and more aggressive monetary policy normalisation. However, in our view, inflation pressures look set to build only slowly. Add the fact that high debt will make the economy more sensitive to interest rate moves, we expect central banks to normalise with caution and see policymakers doing less tightening that the consensus expectation.

World Economic Prospects Monthly

Economic OutlookVolume 41, Issue S12 p. 1-29 Article World Economic Prospects Monthly First published: 19 December 2017 https://doi.org/10.1111/1468-0319.12317AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract Overview: all set for an even better year in 2018 ▀ The global economy shows no sign of losing any momentum in Q4 this year and is heading into next year in a healthy state. We have nudged up our 2018 GDP growth forecast from 3.1% to 3.2% – after 2.9% in 2017 – which would be the strongest performance since the post-global financial crisis rebound. ▀ November's global composite PMI was broadly unchanged at a very high level for the fourth month running. A small drop in the services sub-index was offset by a rise in the manufacturing index to a new cyclical peak, which bodes well for global trade prospects around the turn of the year. ▀ The Eurozone continues to perform well and, despite this year's euro strength, the manufacturing PMI rose to its second-highest reading on record in November. This manufacturing strength appears to be filtering through to stronger investment. We now see GDP growth in the Eurozone at an above-consensus 2.2% next year, only a touch slower than our forecast of 2.4% for 2017. Meanwhile, in response to an expected larger fiscal boost, we have raised our US GDP growth forecast to 2.7% in 2018, 0.4pp higher than this year. And given the more hawkish changes at the Fed, as well as stronger growth and inflation, we now see three rate hikes in 2018, one more than assumed a month ago. ▀ Given our positive outlook for the advanced economies and a fairly favourable outlook for commodity prices, we expect both manufacturers and commodity producers in emerging markets to fare well next year. Despite GDP growth in China slowing to 6.4%, we expect growth in emerging markets as a whole to rise from 4.4% this year to 4.7% in 2018, with growth in India seen accelerating sharply to 7.4%. ▀ High asset price valuations and high levels of debt, particularly in some emerging markets, are concerns and warrant monitoring. And these risks could linger or indeed escalate further before correcting. A trigger for a correction could be more aggressive monetary policy normalisation. But we expect central banks to normalise with caution and see policymakers doing less tightening than the consensus expectation. Volume41, IssueS12December 2017Pages 1-29 RelatedInformation

This Time Should Have Been Different: The Causes and Consequences of Macroeconomic Policy Failure in the Great Recession

The great tragedy of the last decade is that so much of the economic and political turmoil on both sides of the Atlantic has been unnecessary. Needless and excessive fiscal austerity, asymmetric inflation targeting, and the failure to address persistent sovereign and household debt overhangs have turned serious but manageable financial crises into long-term threats to the liberal international order. The real economic consequences have been massive: a “lost decade” for the Eurozone, a Great Depression in Greece, and below-trend income growth in the US and UK since 2008. Macroeconomic policies that might have resolved the crises quickly and accelerated the economic recovery – in particular, large-scale fiscal stimulus, with an emphasis on infrastructure investment generating substantial employment and taking advantage of historically-low (negative) real interest rates – were never even attempted. The political consequences of these fiscal and monetary “own goals” have been equally massive: a marked rightward political shift in many industrialized countries and a surge in populist nationalism, as illustrated most clearly in the cases of Brexit and the election of Donald Trump. This essay explores the reasons why policymakers failed so spectacularly, as well as the ramifications of this failure for the future of the global economy. It emphasizes two key factors: the persistence and pervasiveness of “bad” economic ideas, and the long-term, negative consequences of central bank independence. In a sort of Gresham’s Law of political economy, macroeconomic policy debates have been dominated by false narratives and discredited ideas, such as the household analogy, the morality of debt, and expansionary austerity. The prevalence of these narratives precluded any serious discussion of meaningful stimulus or debt relief on both sides of the Atlantic. This was especially tragic, given that we knew from history exactly what not to do in the wake of financial crises – and yet, we did it anyway. At the same time, central bank independence – while a successful institutional innovation to the inflationary problems of the 1970s and 1980s – proved to be a roadblock to effective monetary responses to the current crises. In particular, the widespread adoption of 2% inflation “ceilings,” along with the dominance of central bank governing boards by hawkish former bankers and economists, prevented serious discussion of more aggressive monetary policies that might have accelerated the recovery. This failure of macroeconomic policy and the ensuing era of stagnation has triggered a rising backlash against globalization. At the same time, we may now be seeing a counter-backlash, as those most dependent on cross-border supply chains and globalized financial markets increasingly speak out against Brexit, repealing NAFTA and other trade agreements, and increasing immigration restrictions. Despite fears of a rollback of globalization and the collapse of the liberal international order, the most likely medium-term outcome now seems to be increasing isolation of the US and UK, with the rest of the world’s major economies moving forward with continued trade and financial integration. The greater risk is that we will still not have fully recovered from the past decade's crises when the next major crisis hits – and that we will once again fail to learn from our past macroeconomic policy errors when it does.

Threshold effects of financial stress on monetary policy rules: A panel data analysis

This study tests for the state-dependent response of monetary policy to increases in overall financial stress and financial sector-specific stress across a panel of advanced and emerging economy countries. We use a factor-augmented dynamic panel threshold regression model with (estimated) common error components to deal with cross-sectional dependence. We find strong evidence of advanced economy countries' aggressive monetary policy loosening in response to stock market and banking stress but only in times of high financial market volatility. By comparison, evidence of threshold effects of financial stress is generally weak for emerging market countries’ interest rate decisions.

Regime-switching monetary and fiscal policy rules and their interaction: an Indian case study

The recession following the sub-prime crisis has rekindled international interest in the field of monetary and fiscal policy interaction. However, very little has been done to appropriately estimate these dynamic policies. This paper estimates regime- switching monetary and fiscal policy rules and lays strong emphasis on mis-specification testing. We apply a Markov regime-switching model to estimate monetary and fiscal policy rules for India to highlight the evolving stance of Indian macro-policy for the period 1951–2008 and investigate the behaviour of select macroeconomic variables under the estimated policy regimes. Our results suggest that, in India, fiscal policy was largely active for the entire period except for a few periods of restraint. Monetary policy, despite achieving greater autonomy post-1990s, has largely been accommodating fiscal policy. Whenever monetary policy became active, fiscal policy undermined monetary policy’s effectiveness by not accommodating accordingly. We argue for an aggressive monetary policy and a constrained fiscal policy in India.

The Size and Evolution of the Government Spending Multiplier in France

Focusing on government spending on private goods and services from 1980 to 2010, we nd that the scal multiplier in France is signi cant and close to 1 on impact, and becomes statistically insigni cant after about 3 years. Moreover, using a time-varying SVAR model, we conclude (1) that this multiplier does not evolve signifi cantly over any time horizon from the beginning of the 1980s onwards and (2) that the variance of shocks hitting the economy evolves more than the model autoregressive parameters. Even in alternative speci cations where Bayesian priors are pushed towards time variation, the main evolution that we uncover is a (nonsignifi cant) decrease in the medium-term spending multiplier, partly linked to the implementation of a more aggressive monetary policy since the 1990s. We fi nd no evidence of an increase in the multiplier during recessions in France. At the very least, business cycle conditions do not seem to be the main driver of the evolution of the government spending multiplier from 1980 to 2010.

Fiscal Foundations of Inflation: Imperfect Knowledge

This paper proposes a theory of the fiscal foundations of inflation based on imperfect knowledge and learning. Because imperfect knowledge breaks Ricardian equivalence the scale and composition of the public debt matter for inflation. High moderate-duration debt generates wealth effects on consumption demand that impairs the intertemporal substitution channel of monetary policy: aggressive monetary policy is required to anchor inflation expectations. Counterfactual experiments, in an estimated medium-scale DSGE model, reveal the US economy would have been substantially more volatile over the Great Inflation and Great Moderation periods, had average debt been consistent with levels currently observed in Italy or Japan.