Changes In Monetary Regimes Research Articles

Determinante deviznih rezervi i optimalni nivo deviznih rezervi u Bosni i Hercegovini

The research answered the question of what affects BH foreign exchange reserves and what is the lower limit of the optimal level of foreign exchange reserves of the Central Bank of Bosnia and Herzegovina (CBBH). We defined excess foreign exchange reserves as the difference between the balance of foreign exchange reserves and the lower limit of the optimal level of foreign exchange reserves. In most of the analyzed period, foreign exchange reserves are significantly above the lower limit of the optimal foreign exchange reserves. In 2022, the banking sector had the largest excess of foreign exchange reserves in the scenario of a floating exchange rate, without considering the degree of euroization. The excess is the lowest in the fixed exchange rate regime, in which, through the money supply, we allowed a high impact of euroization on optimal foreign exchange reserves. Even under this most conservative scenario, the excess foreign exchange reserves amount to 1.9 billion KM or about 4% of nominal GDP in 2022. Changes in BH monetary regime, enabling the CBBH to lend to residents and a possible transition to a floating exchange rate, are possible while maintaining a satisfactory level of foreign currency liquidity of the CBBH.

A basic macroeconomic agent-based model for analyzing monetary regime shifts.

In macroeconomics, an emerging discussion of alternative monetary systems addresses the dimensions of systemic risk in advanced financial systems. Monetary regime changes with the aim of achieving a more sustainable financial system have already been discussed in several European parliaments and were the subject of a referendum in Switzerland. However, their effectiveness and efficacy concerning macro-financial stability are not well-known. This paper defines the economic requirements for modeling the current monetary system and introduces the corresponding macroeconomic agent-based model (MABM) in a continuous-time stochastic agent-based simulation environment with a provenance model. This MABM aims to present a starting point for exploring and analyzing monetary reforms. In this context, the monetary system affects the lending potential of banks and might impact the dynamics of financial crises. MABMs are predestined to replicate emergent financial crisis dynamics, analyze institutional changes within a financial system, and thus measure macro-financial stability. The used simulation environment makes the model more accessible and facilitates exploring the impact of different hypotheses and mechanisms in a less complex way. Moreover, the model replicates a wide range of stylized economic facts, which validates it as an analysis tool to implement and compare monetary regime shifts.

Outline of the Evolution of the Hungarian Monetary Policy from the Restoration of the Two-level Banking System to the Present Day

This study outlines the development of Hungary’s monetary policy, and the course and changes in its objectives and instruments since the beginning of the market economy transition in the late 1980s. The author’s basic thesis is that the period since the two-level banking system was reinstated after four decades of a planned economy system, in 1987, can be basically divided into three development phases with significantly different characteristics. The first phase was an ‘attempt to introduce’ an imported monetary mechanism, or perhaps an urge to comply with it, while the second phase was an approach of a monetary regime change launched in 2013 and supporting economic growth and financial stability strongly and directly, which lasted until the appearance of the traumatic elements of the Covid-19 pandemic crisis. The third phase is evolving today, under the circumstances of adapting to the conditions of the real essence of the twenty-first century, i.e. a new type of international competitiveness, which is pursued by the Central Bank of Hungary as stipulated by the Fundamental Law and the cardinal Central Bank Act of Hungary.

Thinking Ahead of the Next Big Crash: Clues From Athens in Classical Times

Credible analyses and evidence submitted by experts from universities, international organizations and independent think tanks show that the trends which led to the 2008 worldwide financial crisis remain intact. As a result, central for responsible leaderships should be the concern how to forestall the next big one which might prove uncontrollable. Given the world dominance of the U.S. dollar, in a 2015 paper I discussed two paths of possible reforms: One bold but gradual, which would entail altering the present institutional setup of the U.S. Federal Open Market Committee (“the Fed”), provided that it maintains control over the Federal Funds Rate (FFR); and, if not, a radical one, which would entail replacing the Fed with a monetary regime based on free banking. In this paper I go a step further in the latter direction by drawing on the model of free banking that emerged in Athens in classical times and enabled the Athenian “empire” to turn the Attic drachma into the dollar of today, throughout the eastern Mediterranean and beyond, without causing major financial crises for over two centuries. More specifically, I argue that, even if the said model had not proved its potential as a highly successful historical precedent, as banker of the world, the U.S. ought to consider it as a benchmark for reference and adaptation, before an unexpected international financial crisis and/or the revolutionary technological developments in the front of gold-like digital currencies, precipitate a monetary regime change.

Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada

Using narrative evidence with a novel database of real-time data and forecasts from the Bank of Canada’s staff projections (1974–2015), we construct a new measure of monetary policy shocks and estimate the effects of monetary policy in Canada. We show it is crucial to account for the break in the conduct of monetary policy caused by the announcement of inflation targeting in 1991. A 100-basis-point increase in our new shock series leads to a 1.0 percent peak decrease in real GDP and a 0.5 percent fall in the price level, while not accounting for the break leads to a persistent decrease in GDP and a price puzzle. Albeit the change in monetary regime, the effects of monetary policy have not changed much before and after IT.

Unobserved Components with Stochastic Volatility in U.S. Inflation: Estimation and Signal Extraction

We consider unobserved components time series models where the components are stochastically evolving over time and are subject to stochastic volatility. It enables the disentanglement of dynamic structures in both the mean and the variance of the observed time series. We develop a simulated maximum likelihood estimation method based on importance sampling and assess its performance in a Monte Carlo study. This modelling framework with trend, seasonal and irregular components is applied to quarterly and monthly US inflation in an empirical study. We find that the persistence of quarterly inflation has increased during the 2008 financial crisis while it has recently returned to its pre-crisis level. The extracted volatility pattern for the trend component can be associated with the energy shocks in the 1970s while that for the irregular component responds to the monetary regime changes from the 1980s. The scale of the changes in the seasonal component has been largest during the beginning of the 1990s. We finally present empirical evidence of relative improvements in the accuracies of point and density forecasts for monthly US inflation.

A DSGE Model of Slovakia with Frictional Labor Market and Monetary Regime Switch

AbstractThe aim of this paper is to examine the dynamical and structural characteristics of Slovakia using a dynamic stochastic general equilibrium model augmented with search and matching mechanisms and other forms of frictions. I implement a switching mechanism to account for the monetary regime change in Slovakia in 2009. My focus lies in the investigation of labor market rigidities that affect the macroeconomic variables. I also examine the long term impact of the recession in 2009 on the Slovak economy. My findings are as follows. Firstly, based on parameter estimates, I identify significant labor market frictions present in the Slovak Republic. Secondly, my results capturing the historical evolution of key macroeconomic variables support the view that the recession in the examined small open economy was mainly caused by shocks originating in the foreign sector. Thirdly, the monetary authority can influence the labor market variables through its transmission channels relatively effectively; and lastly, I discovered that the recession decreased the Slovak economy’s flexibility. While the results of estimations on two sub-samples are quite similar for most of the structural parameters, an increase in price and wage stickiness is observable.

Recovery from the Great Depression: The Farm Channel in Spring 1933

From March to July 1933, US industrial production rose 57 percent. We show that an important source of recovery was the effect of dollar devaluation on farm prices, incomes, and consumption. Devaluation immediately raised traded crop prices, and auto sales grew more rapidly in states and counties most exposed to these price increases. The response was amplified in counties with more severe farm debt burdens. For plausible assumptions about farmers’ relative MPC, the incidence of higher farm prices, and the aggregate multiplier, this redistribution to farmers accounted for a substantial portion of spring 1933 growth. This farm channel thus provides an example of how the distributional consequences of macroeconomic policies can have large aggregate effects. That recovery in 1933 benefited from redistribution to farmers suggests an important limitation to the use of 1933 as a guide to the effects of monetary regime changes in other circumstances. (JEL E32, E65, N12, N52, Q11, Q12)

Why so Low for so Long? A Long-Term View of Real Interest Rates

Prevailing explanations of the decline in real interest rates since the early 1980s are premised on the notion that real interest rates are driven by variations in desired saving and investment. But based on data stretching back to 1870 for 19 countries, our systematic analysis casts doubt on this view. The link between real interest rates and saving-investment determinants appears tenuous. While it is possible to find some relationships consistent with the theory in some periods, particularly over the last 30 years, they do not survive over the extended sample. This holds both at the national and global level. By contrast, we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes. Moreover, external influences on countries' real interest rates appear to reflect idiosyncratic variations in interest rates of countries that dominate global monetary and financial conditions rather than common movements in global saving and investment. All this points to an underrated role of monetary policy in determining real interest rates over long horizons.

Forecasting Inflation Using the Phillips Curve: Evidence from Swedish Data

This paper studies the forecasting ability of various Phillips curve specifications in a pseudo out-of-sample exercise for Swedish inflation over the period 1980–2014. Three measures of inflation are considered––headline inflation, underlying inflation, GDP deflator inflation, in addition to different activity variables, various econometric specifications and different sample periods. Although the results indicate heterogeneity in individual model performance and evidence of model instability, in general, the Phillips curve models improve inflation forecasts against the random walk benchmark for both headline inflation and underlying inflation, and fail to beat the random walk benchmark for GDP deflator inflation. Phillips curve forecasts beat the random walk benchmark especially for 2004–2013. The monetary regime change in 1993 from exchange rate targeting to inflation targeting is also taken into account. The results suggest that for all Phillips curve models and all three inflation measures, the performance of the Phillips curve depends on whether the data used for making the predictions was under the inflation targeting regime or not. Univariate forecasting models perform well for the fixed exchange rate regime period, but the Phillips curve models are useful under the inflation targeting regime.

Timing and duration of inflation targeting regimes

Central banks in G7 countries shifted to unconventional policy measures in the aftermath of the Financial Crisis, when faced with economic slack, financial instability and fiscal trouble. This shift ended a spell of rules-based time consistent monetary policy that started in the mid-1980s. I argue that substantial economic, political and financial risks put pressures on the continued support for a monetary regime. Central banks may be forced to adopt policies with no option to reset those options later on. I demonstrate with duration models – on a sample of industrialized and emerging economies from 1970 to 2012 – that the policy switch to inflation targeting happened after episodes with high inflation and public debt, reflecting broad support for stability-oriented monetary (and fiscal) policy. More generally, changes in monetary regimes occur after a crisis. High inflation makes central banks pursue active monetary policies, while they forsake those same policies in the wake of fiscal or financial crises.

It Takes a Regime Shift: Recent Developments in Japanese Monetary Policy through the Lens of the Great Depression

Last week, we witnessed one of the most exciting developments in monetary policymaking since the 1930s. The Japanese central bank staged an honest-to-goodness regime shift. The Bank of Japan went beyond vague promises and cheap talk. As I will describe in more detail later, it took dramatic actions and pledged convincingly to do whatever it takes to end deflation in Japan. The theoretical reasons why this regime shift may be important are well understood by economists. Persistent deflation and anemic growth suggest that Japan continues to suffer from a shortfall of demand. But their policy interest rate is already at the zero lower bound. Furthermore, riskier, long-term rates are also very low— suggesting that unconventional policies such as large-scale asset purchases are unlikely to do much to further reduce nominal rates. As discussed by Paul Krugman, Gauti Eggertsson and Michael Woodford, and others, if unconventional monetary policy can raise expected inflation, this can push down real interest rates even though nominal rates cannot fall. 1 This, in turn, can raise aggregate demand by stimulating interest

Abenomics: Preliminary Analysis and Outlook

In early 2013, Japan enacted a monetary regime change. The Bank of Japan set a 2 percent inflation target and specified concrete actions to achieve this goal by 2015. In 2013, Shinzo Abe’s government supported this change with fiscal policy and planned structural reforms. Together with the Bank of Japan’s aggressive monetary easing, this policy package is known as “Abenomics.” We show that Abenomics ended deflation in 2013 and raised long-run inflation expectations. Our estimates suggest that Abenomics also raised 2013 output growth by 0.9 to 1.8 percentage points. Monetary policy alone accounted for up to a percentage point of growth, largely through positive effects on consumption. In both the medium and the long run, Abenomics will likely continue to be stimulative. However, the size of this effect, while highly uncertain, thus far appears likely to fall short of Japan’s large output gap. In part this is because the Bank of Japan’s 2 percent inflation target is not yet fully credible. We conclude by outlining a way to interpret future data releases in light of our results.

Inflation stationarity during Latin American inflation: insights from unit root and structural break analysis

Inflation stationarity has important theoretical and policy implications, yet most of the literature has focused on low inflation countries. This article investigates inflation stationarity in Brazil, Argentina, Chile, Mexico and Bolivia during a hyperinflationary period from 1980 to 2004. We test for structural breaks in inflation, discuss the breaks in terms of changes in monetary regimes, and test if accounting for these structural breaks changes the nonstationarity results for those nations that ‘fail’ the traditional Augmented Dickey–Fuller (ADF) test for inflation. All five are found to have inflation rates that are I(0) once the structural breaks analysis is incorporated into our unit root tests.

Heterogeneous response of disaggregate inflation to monetary policy regime change: The role of price stickiness

This paper explores how a monetary regime change affects headline inflation via differential effects on various sectors in the economy. Using disaggregated CPI data for Canada, we find that the response to the adoption of inflation targeting (IT) was quite heterogeneous across sectors. While sticky-price sectors experienced a notable change in inflation dynamics following IT adoption, little structural change was observed in flexible price sectors. Our analysis based on a common factor model suggests that the structural changes in the sticky price sectors are driven by a decline in their responses to common aggregate shocks, including a monetary shock.

Monetary Regime Change and Business Cycles

This paper proposes a simple method to structurally estimate a model over a period of time containing a regime shift. It then evaluates to which degree it is relevant to explicitly acknowledge the break in the estimation procedure. We apply our method on Swedish data, and estimate a DSGE model explicitly taking into account the monetary regime change in 1993, from exchange rate targeting to inflation targeting. We show that ignoring the break in the estimation leads to spurious estimates of model parameters including parameters in both policy and non-policy economic relations. Accounting for the regime change suggests that monetary policy reacted strongly to exchange rate movements in the first regime, and mostly to inflation in the second. The sources of business cycle fluctations and their transmission mechanism are significantly affected by the exchange rate regime.

Trend Inflation in Advanced Economies

We derive estimates of trend inflation for fourteen advanced economies from a framework in which trend shocks exhibit stochastic volatility. The estimated specification allows for time-variation in the degree to which longer-term inflation expectations are well anchored in each economy. Our results bring out the effect of changes in monetary regime (such as the adoption of inflation targeting in several countries) on the behavior of trend inflation. Our estimates expand on the previous literature in several dimensions: For each country, we employ a multivariate approach that pools different inflation series in order to identify their common trend. In addition, our estimates of the inflation gap—defined as the difference between trend and observed inflation—are allowed to exhibit considerable persistence. Consequently, the fluctuations in estimates of trend inflation are much lower than those reported in studies that use stochastic volatility models in which inflation gaps are serially uncorrelated. This specification also makes our estimates less sensitive than trend estimates in the literature to the effect of distortions to inflation arising from non-market influences on prices, such as tax changes. A forecast evaluation based on pseudo-real-time estimates documents improvements in inflation forecasts, even though it remains hard to outperform simple random walk forecasts to a statistically significant degree.

Les mésalignements du taux de change et leur impact sur la croissance économique en Zone franc. Le cas du Cameroun

The growth evolution in Franc Zone has failed to eradicate poverty. The CFA franc exchange rate has often been incriminated, because of changes in monetary regime. In this paper, we focus on growth effects of misalignments in Cameroon over the period 1978-2009. We rely on the behavioral equilibrium exchange rate approach to determine them. The estimation of a single growth equation shows that misalignments act negatively.

Monetary regime change and business cycles

This paper proposes a method to structurally estimate a model with a regime shift and evaluates the importance of acknowledging the break in the estimation. We estimate a DSGE model on Swedish data taking into account the regime change in 1993, from exchange rate targeting to inflation targeting. Ignoring the break leads to spurious estimates. Accounting for the break suggests that monetary policy reacted strongly to exchange rate movements in the first regime, and mostly to inflation in the second. The sources of business cycles and their transmission mechanism are significantly affected by the exchange rate regime.

Post-Keynesian money endogeneity evidence in G-7 economies

Post-Keynesian theory of money endogeneity emphasizes the importance of bank loans causing money supply changes. Thus, the proponents of endogenous money supply assert banks create money by meeting money demands of economic agents. Money is said to originate as bank-created loans from deposits, which in turn create more loans under the endogenous money supply. The traditional money supply theory asserts that deposits create money, so money is exogenously created. This paper provides new evidence on endogenous money supply across G-7 economies over 26 years using quarterly data with controls for monetary regime change effects. Bank loans cause money supply, hence money is endogenous and the monetary regime effect appears to hold as crucial factors in money supply theory. Money supply behavior is exogenous during two short periods in the UK and the US when monetary targeting policies were in place.