Countercyclical Monetary Policy Research Articles

Alternative Exchange Rate Systems for Oil-Exporting Countries: Frankel’s Currency-Plus-Commodity Basket Proposal versus the Current System

Choosing an appropriate exchange rate regime is crucial for economic policy, particularly for developing countries seeking to establish robust macroeconomic frameworks to mitigate external shocks. However, such nations, including those reliant on oil and natural gas exports, often face challenges in selecting suitable regimes, exacerbated by a lack of traditional advice. The debate around this issue intensified in the aftermath of the 2014 oil price decline. In response, Jeffrey Frankel proposed the currency-plus-commodity basket (CCB) arrangement in 2017, blending the benefits of floating and pegging. This study applies the CCB system to Algeria, aiming to evaluate its impact compared to the current managed floating regime from 2001 to 2021, on indicators of internal (inflation rates) and external (change in foreign exchange reserves) balance using monthly data. Employing wavelet analysis and robustness tests, specifically quantile-on-quantile regression (QQR), the findings suggest that the CCB regime surpasses managed floating in maintaining monetary stability and achieving internal and external balance. Moreover, it provides greater flexibility and stimulates the domestic economy through its ability to stabilize terms of trade via active countercyclical monetary policy. Nonetheless, further discussion, adjustment, experimentation, and development of the proposed regime are warranted.

An extended wavelet approach of the money-output link in the United States.

The paper examines the link between money and output in the U.S. by using wavelet analysis. The time span covers the period from 1960Q1 to 2021Q1. The main results evidence that money positively leads real output from the late 1960s to 1982, at medium frequency, with the interest rate playing an important role. In contrast, we reveal that real output negatively leads money, at the same medium frequency, but from the late 1990s to 2021. The COVID-19 pandemic generates significant co-movements in the short and medium frequencies, over the period from 2020 to 2021, with output negatively leading money. We underline that Federal Reserve monetary policy operating procedures play an essential role in explaining these findings. The results support using the federal funds rate operating procedure as countercyclical monetary policy measures and implementing unconventional monetary policy tools in times of the effective lower bound. Finally, no relationship between money and output is observed in the long term, while the short term (i.e. high frequency) reveals rather chaotic co-movements. The results remain robust to alternative wavelet tools, higher-frequency datasets, and a Hodrick–Prescott filtered quarterly sample.Supplementary InformationThe online version contains supplementary material available at 10.1007/s00181-022-02294-6.

Does Counter-Cyclical Monetary Policy Promote Enterprise R&D Investment in a Recession? Empirical Evidence from China

Using the continuous difference-in-difference (DID) model, this paper analyzes the Chinese listed companies’ panel data from 2013 to 2019 by taking the rapid monetary policy easing in mid-2015 as the policy shocks to test the impact of loose monetary policy on enterprise R&D investment. The results show that loose monetary policy significantly weakened the negative impact of high leverage on enterprise R&D investment. After considering the heterogeneity and fixed effects of enterprise and industry characteristics, loose monetary policy still significantly improved highly leveraged enterprises’ R&D investment and showed a greater innovation-driving role in a competitive market environment. Based on this, this paper believes that The People’s Bank of China should continue to guide the decrease of medium- and long-term interest rates and promote benign competition among enterprises to improve the effectiveness of the monetary policy.

POLICY RATES PASS-THROUGH IN INDONESIA’S DUAL BANKING SYSTEM: DOES BUSINESS CYCLE MATTER?

This paper examines the pass-through of the policy rate to conventional and Islamic bank rates during the recessionary and expansionary episodes for the case of Indonesia. Applying an error-correction modelling to monthly data from June 2014 to April 2021, our findings confirm that the interest rate pass-through is sensitive to the business cycle for both conventional and Islamic banks. The policy rate pass-through to deposit rates is higher during the recession for both banking types. We also note that the lending rates of conventional banks fully adjust to the policy rate in the recessionary phase. The findings for Islamic financing rates are interesting. Namely, they tend to move inversely with the policy rates during the expansionary period. Meanwhile, depending on the rates, they are either over-responsive or less responsive during the recessionary phase. Finally, the degree of short-run adjustment in most banking rates is not influenced by the business cycle. These findings suggest that Islamic banking rates are less synchronized to the monetary policy rate, indicating that sharia-based banking barely supports counter-cyclical monetary policy.

Macroeconomic Performance, Exchange Rate Dynamics, and Short-Run Policies in Burundi

ABSTRACT This article analyzes the link between economic performance and macroeconomic policy in Burundi based on data up to 2016. The results show that short-run policies in Burundi tend to dent macroeconomic performance in two folds. First, the Burundi Franc has been overvalued for the most part of the recent decade with a damaging effect on long-run growth. Secondly, fiscal policy tends to be procyclical while the fear of free-falling of the currency changes the usually countercyclical monetary policy with negative effects of long-run growth as well as increasing output volatility. We recommend more flexibility for the currency to ameliorate the overvaluation of the Burundi franc combined with other institutional reforms to curtail fiscal dominance and create space for countercyclical fiscal and monetary policies.

A Dynamic Analysis of Oil Prices and Inflation Model and Method

The study examines the impact of oil prices on inflation by applying a threshold model for five (5) ASEAN members, namely Malaysia, Indonesia, Singapore, Thailand and the Philippines. Three (3) indicators for oil price shocks are extracted in conjunction with Mork [23], Lee et al. [22] and Hamilton [13] methods. Consequently, these values are used to delineate the effect of price shock differentials. The pass-through effect is integrated into the threshold equation model. Later, the model is calculated to have an impact on inflation of high and low oil prices. The result is that the oil price shock appears to have a major impact on inflation when prices are in the high regime. This extends to all shock measures. The effective exchange rate and industrial price index (IHP) are classified as the primary determinant of inflation in all sample countries. As such, counter-cyclical monetary policy considerations should remain driven by the emerging downside risks of oil price shocks. It requires a more accommodative monetary environment to offset inflationary pressures on the domestic economy.

Контрцикличная фискальная и монетарная политика государства в области макроэкономического регулирования

The problem of countercyclical fiscal and monetary regulation has become very ur- gent in the last two decades. This article is devoted to the analysis and assessment of countercyclical fiscal and monetary policy from the point of view of the fundamental basis, as well as its practical application. The subject of this research is countercycli- cal fiscal and monetary policy from the point of view of its effectiveness in the con- text of the economic crisis. The methodological basis of the study is an overview of theoretical and practical models of countercyclical fiscal and monetary policy known in the scientific literature. The key objective of the study was to attempt to identify and evaluate countercyclical fiscal and monetary policies from the point of view of theory and practice. The result of the study was the conclusion that in a crisis, coun- tercyclical fiscal and monetary policy leads to ambiguous results, but on the whole, it is the most optimal for leveling the consequences of the crisis.

Ratchet Effect in Import Prices – Inflation Rate Nexus

This study examined the existence of the ratchet effect in the import price-inflation rate nexus for advanced (high-income) and emerging (middle-income) countries. The study used monthly data from 1980M01 to 2019M07 and compared the potential of the dummy variable-based asymmetric model with that of the Nonlinear Autoregressive Distributed Lag (NARDL) model in modelling the ratchet effect. The result showed that the ratchet effect exists in the import price-inflation rate nexus for high-income and middle-income countries. This suggests that the issue of imported inflation and ratchet effect is country-specific. The significance of the ratchet effect in these countries implies that maintaining a (symmetric) rule-based counter-cyclical monetary policy when dealing with import price shocks would be inefficient, and can make monetary policy harm the economy in the medium to the long term. It is, therefore, recommended that each country should examine the existence or otherwise of ratchet in her import price - inflation rate nexus to determine whether it should adopt a symmetric or an asymmetric rule-based counter-cyclical monetary policy against import price shocks to avoid harming the economy through the implementation of an inefficient monetary policy.

A Pro-cyclical Stock Market under a Counter-cyclical Monetary Policy in a Model of Endogenous Business Cycles

During the last 25 years, the stock market in the US has been strongly pro-cyclical in the presence of a counter-cyclical monetary policy. In this paper, we use an endogenous business cycle model to explore the factors contributing to a pro-cyclical stock market. A dynamic expectation structure in the real sector gives rise to a strong non-linearity and is responsible for the emergence of endogenous business cycles in the model. In the context of this model, we find that a timid or ineffective monetary policy allows the stock market to be dominated by the fluctuations of profits in the real sector. We model the potential ineffectiveness of monetary policy in terms of an endogenous risk premium. The model is calibrated to fit key properties of the data. In particular, it can generate a pro-cyclical stock market in the presence of a counter-cyclical monetary policy.

Capital Flows to Latin America (2003–17): A Critical Survey from Prebisch’s Business Cycle Theory

ABSTRACT The economic literature on capital flows to developing countries has shared two important commonalities since the 1990s. Published works (whether they focus on the external situation or stress the domestic determinants of capital flows) tend to assume a beneficial effect of capital inflows, which leads to an improvement of peripheral institutions, whose deficiencies are ostensibly the main cause of economic turmoil and/or failure in attracting capital flows, in continuity with New Institutional Economics. In doing so, mainstream economists deliberately overlook the asymmetric characteristics of the international monetary system and the persisting hegemony of dollar. Raul Prebisch’s pioneering work on business cycles in Latin America provide an alternative view, one capable of amending the existing mainstream literature. On the one hand, Prebisch stressed the destabilizing role of capital inflows on Latin American economies, particularly short-term speculative capital. On the other hand, Prebisch designed a set of counter cyclical monetary policies in order to contrast capital volatility, particularly during downturns. An analysis of stylized facts shows that, when correctly updated, Prebisch’s theory has remarkable explanatory potential when applied to Latin America’s current economic and financial situation.

The third round of euro area enlargement: Are the candidates ready?

In this paper, we study the readiness of Bulgaria, Croatia and Romania to adopt the common monetary policy of the ECB in the context of the third round of euro area enlargement. Following the optimal currency area (OCA) theory literature, we focus on the coherence of economic shocks between candidate countries on the one hand and the euro area on the other and analyse the relevance of euro area shocks for key macroeconomic variables in these countries. Our results, based on a novel empirical approach, show that the overall importance of those shocks that are relevant for the ECB is fairly similar in candidate countries and the euro area. The cost of joining the euro area should, therefore, not be pronounced, at least from the aspect of the adoption of the common counter-cyclical monetary policy. This conclusion holds for all three candidates, despite important differences in their monetary and exchange rate regimes.

Modern Monetary Theory: An Austrian Interpretation of Recrudescent Keynesianism

Modern monetary theory (MMT) argues that governments can never go bankrupt because they have the power to print money to finance budget deficits. Consequently, debt monetization can achieve virtually any government objective desired. This paper uses Austrian economics to argue that MMT suffers from the flaws of all forms of Keynesian economics, particularly the original version of the 1930s and 1940s. MMT fails to understand capital-based macroeconomics and how government policy affects the temporal structure of production. MMT also neglects the importance of profit and loss accounting compared to government allocation of resources. The Austrian school argues that traditional New Keynesian countercyclical monetary policy results in a credit-induced boom and bust (Austrian business cycle theory) by injecting new money into private sector loans through the banking sector. However, Austrian analysis demonstrates that MMT’s monetary policy to monetize government deficits and increase the money supply through government spending will instead lead to secular economic stagnation and a stunted capital structure. Overall, the policy prescriptions of MMT are far more dangerous than traditional New Keynesian policies.

Inflation-Linked Bonds, Nominal Bonds, and Countercyclical Monetary Policies

Although inflation-linked bonds have many advantages, nominal bonds are the most important instrument to finance public debts throughout the world. One explanation that the literature has offered is that nominal bonds make countercyclical monetary policies more effective. This paper reconsiders this argument with a model that features an inflation risk premium in the nominal bonds interest rate. In this model, nominal bonds help to stabilize the economy, but also add to debt service costs. The paper finds that the debt service costs channel is very powerful: in the case of discretionary policymaking, inflation-linked bonds always outperform nominal bonds. The case of commitment qualifies this result. Still, also commitment cannot explain the occurrence of large stocks of nominal bonds alongside small stocks of inflation-linked bonds.

Rational Sentiments and Economic Cycles

We propose a rational model of endogenous cycles generated by the two-way interaction between credit market sentiments and real outcomes. Sentiments are high when most lenders optimally choose lax lending standards. This leads to low interest rates and high output growth, but also to the deterioration of future credit application quality. When the quality is sufficiently low, lenders endogenously switch to tight standards, i.e. sentiments become low. This implies high credit spreads and low output, but a gradual improvement in the quality of applications, which eventually triggers a shift back to lax lending standards and the cycle continues. The equilibrium cycle might feature a long boom, a lengthy recovery, or a double-dip recession. It is generically different from the optimal cycle as atomistic lenders ignore their effect on the composition of the pool of borrowers. Carefully chosen macro-prudential or countercyclical monetary policy often improves the decentralized equilibrium cycle.

The Ukrainian interest rate pass-through in the post-1999 era and the effectiveness of the countercyclical monetary policy

This study investigates the nature of the Ukraine interest rate pass-through from January 2000 to November 11, 2018-the post-1999 era. The empirical results reveal a relatively high short-run interest pass-through of 0.724100 and a marginally overshooting long-run interest rate pass-through of 1.054309. The bounds test results indicate a strong long-term relationship between countercyclical monetary policy and market rates. These empirical findings suggest that the National Bank of Ukraine has been very effective in formulating and implementing its countercyclical monetary policy, in spite of the pervasive corruption, formidable political and economic challenges faced by the Ukrainian Republic over this sample period, the results are quite surprising.

Monetary policy in the unique growth cycle of post Keynesian systems

This paper deals with the following two issues in a post Keynesian system: the existence and uniqueness of a growth cycle and the effectiveness of a counter-cyclical monetary policy for stabilization. It is found that the unique growth cycle, represented by the unique limit cycle, can be observed if the rate of interest is set to a constant level while that the long-run equilibrium can be globally asymptotically stable if an appropriate counter-cyclical monetary policy is conducted.

A Positive Theory of Monetary Policy in a Natural Rate Model

A Positive Theory of Monetary Policy in a Natural Rate Model

Countercyclical Monetary Policy Transmission Mechanism in the U.S. and Latin American Economies over the Post-2008 Period

ABSTRACTExcept for the Chilean case, competitive pricing behaviors by commercial banks in the U.S. and other Latin American economies in the post-U.S. subprime mortgage crisis were documented. The findings for the U.S. and Mexican economies make significant contributions to the literature. The investigation also found bidirectional Granger causality between the lending rate and the Central Bank’s policy related rate and the presence of the GARCH (r, s)-M effects on the intermediation premia and their variances in each of these economies. These findings suggest that monetary policymakers intervene more frequently and by making small policy adjustments to achieve their macroeconomic objectives.

An Empirical Analysis of the Risk Taking Channel of Monetary Policy in China—Base on Evidence from Chinese Listed Bank

After financial crisis in 2008, more and more researchers paid attention to not only the expansionary monetary policy but also the relationship between the risk-taking and monetary policy. Borio and Zhu firstly researched on risk-taking channel of monetary policy in 2008. This article firstly reviews some literature about the risk-taking channel of monetary policy, the transmission mechanism and the influencing factors, and then selects the data of 15 representative listed Banks in China from 2007-2016 to do empirical research and draw the following conclusions. First, this article finds evidence that the risk-taking channel of monetary policy is significant in China. Expansionary monetary policy has a positive impact on banks’ risk-taking. Second, macro-economic conditions and the micro characteristics of the bank can influence the transmission of risk-taking channel. Based on that, this article proposes the recommendation that monetary policy should be included in macro-prudential system to strengthen monitoring system of the bank’s risk management. Besides the relationship between counter-cyclical capital regulation and monetary policy control is important.

Understanding Macroeconomic Disagreement

We propose a new measure of macroeconomic disagreement, using dispersions of forecasts of a wide range of financial, activity and inflation variables from both household and professional surveys at various frequencies. With a mixed-frequency state-space model, we construct macroeconomic disagreement estimates of the one-year ahead expected state of the economy. Impulse responses show disagreement shocks lead to a contraction in economic activity, and monetary policy expansion reduces disagreement, implying that endogenous disagreement is an additional channel for countercyclical monetary policy.