Policy Credibility Research Articles

Policy Maker’s Credibility with Predetermined Instruments for Forward-Looking Targets

Cette article propose des critères de choix par une banque centrale entre différentes règles de politique monétaire réagissant à l’inflation. Une attention particulière est portée sur la nature non-prédéterminée ou prédéterminée des instruments de politique monétaire. En prenant l’exemple d’une courbe de Phillips des nouveaux Keynésiens, un instrument non-prédéterminé lorsque l’inflation est aussi non-prédéterminée implique un manque extrême de crédibilité et de robustesse de l’ancrage et de la stabilisation des prix, dès lors que la banque centrale ne connaît pas exactement les paramètres de l’économie. En revanche, un instrument prédéterminé est tel qu’une régle proportionnelle ancre l’inflation non-prédéterminée de manière robuste et crédible. Cette règle peut alors être une forme réduite d’une politique optimale à la Ramsey avec un minimum de crédibilité et de robustesse. Nous recommandons de modéliser des politique optimales avec un minimum de crédibilité de la banque centrale plutôt qu’avec des règles proportionnelles en supposant non-prédéterminés à la fois les instruments et les cibles de la politique monétaire.

Effects of Fed policy rate forecasts on real yields and inflation expectations at the zero lower bound

Surprises in policy rate forecasts from the Fed’s Summary of Economic Projections significantly affected real yields at the zero lower bound. By contrast, we find no significant impact on long-term inflation expectations and thereby monetary policy credibility.

The Monetary Policy Credibility Channel and the Amplification Effects in a Semi-structural Model

The paper extends a standard semi-structural model to account for nonlinear and asymmetric effects of monetary policy credibility. In our setting, central bank credibility is proportional to the deviation of inflation expectations from the announced inflation target, with positive deviations being more costly compared to negative ones. A loss in policy credibility as a result of shocks leads to a more persistent, backward-looking inflation process, and is associated with lower output. We find that the extended model with credibility effects matches well the key macroeconomic data over specific past episodes for Indonesia and Philippines and consider its adaptation to integrated policy frameworks as an area for further exploration.

Inflation and Financial Stability Trade‐off: Role of Monetary Policy Credibility and Fiscal Cyclicality

This paper examines the role of monetary credibility and fiscal cyclicality in generating the trade‐off between inflation rates and financial stability. We systematically develop simple theoretical models to shape the rationalisation framework, which demonstrates the role of fiscal cyclicality behaviour in arousing a trade‐off for the monetary policy to target low inflation rates and a stable financial system at the same time. By utilising the generalised method of moment (GMM), we find that a credible monetary policy generates a trade‐off between inflation and financial stability as long as the fiscal policy is procyclical.

Risks of Global Financial Markets and the Importance of Credibility: Implications for Hungarian Fiscal Policy

The central issue in the controversy about the adoption of the euro in Hungary is the difficulties associated with the fulfillment of the fiscal criterion and the possible growth sacrifice it requires. In this paper the author examines the question whether the strategy of delaying entry into the euro-zone implies that fiscal consolidation can be delayed as well. In approaching the problem the paper considers the origins and history of the present-day global financial markets and argues that given the high degree of systemic risks individual countries face responsible macroeconomic policies are crucial in minimizing vulnerability tocrises. Consequently in order to avoid excessive interest rates and speculative inflows (or currency crisis in the worst case scenario) fiscal deficits in Hungary would have to be cut and credibility of fiscal policy reestablished even without EMU accession. The overall conclusion from this overview is that delaying entry in order to delay fiscal adjustment is likely to increase the trade off between real and nominal convergence instead of mitigating it.
 JEL classification: F33, F41, H62

Do policy mix characteristics matter for electric vehicle adoption? A survey-based exploration

Policy mixes that combine multiple policy instruments together are proposed as methods to accelerate the adoption of electric vehicles (EVs). This paper examines the links among psychological factors, policy mix characteristics, and EV purchase intention based on an extended theory of planned behavior (TPB). The empirical results from a survey in China reveal that the consistency, coherence, and credibility of policy mixes matter greatly in increasing an individual’s EV purchase intention, whereas comprehensiveness has a non-significant effect. More importantly, the consistency negatively moderates the effects of consumer attitude, subjective norm, and personal norm on purchase intention, but positively moderates the relationship between perceived behavioral control and purchase intention. This paper makes theoretical contributions by extending the TPB from a policy mix perspective, which provides new knowledge for both policy research and EV adoption literature. The findings also have policy implications for the adoption of EVs.

Increasing the ambition of the EU Nationally Determined Contribution: lessons from a survey of experts and students

The Paris Agreement targets and an increasingly large public opinion movement world-wide require to progressively raise the ambition of the Nationally Determined Contributions (NDC). The European Union (EU) could play a crucial role in this process being one of the first Parties to submit its NDC and to call for the integration of the ratchet-up mechanism for ambition in the Paris Agreement. An enhanced EU NDC, therefore, would convey a powerful signal to the other UNFCCC Parties, reinforce the credibility of EU climate policy, and confirm the EU as a global “climate leader”. This paper examines whether and how the EU could enhance its NDC. For this purpose, it proposes some of the most likely and accredited options that could be pursued to achieve this goal. To dig deeper into this issue, the paper presents the results of a survey conducted among experts (scholars, practitioners, negotiators) and non-experts (students), using a mixed methods research design that combines qualitative and quantitative analyses to provide an ex-ante assessment of the selected policy options. The survey’s results show that increasing the EU NDC ambition is perceived as hard but feasible by both groups of interviewees. However, the non-experts’ group considers more options to be feasible showing in general a more optimistic attitude towards enhancing the EU NDC.

Effects of Fed Policy Rate Forecasts on Real Yields and Inflation Expectations at the Zero Lower Bound

We study the effects of quantitative policy rate forecasts by the Federal Reserve on real yields and inflation expectations at the zero lower bound (ZLB). We study the effects of surprises in policy rate forecasts from the Summary of Economic Projections (SEP) on real yields and breakeven inflation rates derived from government bonds for forward rates across the yield curve. We find that surprises in the SEP policy rate forecasts significantly affect real yields in the expected direction across the yield curve. By contrast, breakeven inflation rates are little affected across the yield curve. In particular, five-year breakeven inflation rates five years ahead, a common measure of monetary policy credibility, are not significantly affected by surprises in SEP policy rate forecasts. This suggests that policy rate forecasts by the Fed at the ZLB managed to affect real yields without adversely affecting monetary policy credibility.

How Do Local Policy Makers Learn about Climate Change Adaptation Policies? Examining Study Visits as an Instrument of Policy Learning in the European Union

Study visits are an underresearched phenomenon, particularly in the field of climate change adaptation. Drawing on interviews with key local stakeholders, this article investigates study visits organized by European municipal climate networks. The results of this exploratory research show that study visits about adaptation policies can (1) particularly stimulate conceptual learning, (2) increase the credibility of policies within municipal administrations, (3) be used as strategic instruments by mentor cities, (4) be more successful if the peer-cities are not too different (in terms of size, institutional context), and (5) under certain conditions, lead to policy adoption in a learning city. Future research needs to critically discuss the mass suitability of learning from frontrunner cities. Furthermore, a call is raised for more research and practical action on how to initiate and improve learning exchanges beyond the strict division between mentors and learners. Instead, the focus needs to be on mutual learning exchanges.

Comfort in Floating

Chile offers an example of a country that has overcome the fear of floating by reducing balance sheet mismatches, enhancing financial market development, as well as improving monetary, fiscal, and political institutions, and strengthening policy credibility. Under the floating regime, Chile’s economic adjustment to external shocks appears significantly improved, and its exchange rate pass-through has substantially declined. Our results reinforce the case that moving to a clear and credible floating regime can be associated with a reduction in the fear of floating via economic transformation (like smaller balance sheet mismatches, a larger hedging market, and a lower exchange rate pass-through).

How Large and Persistent is the Response of Inflation to Changes in Retail Energy Prices?

We estimate the dynamic effects of changes in retail energy prices on inflation using a novel monthly database, covering 110 countries over 2000:M1 to 2016:M6. We find that (i) inflation responds positively to retail energy price shocks, with effects being, on average, modest and transitory. However, our results suggest significant heterogeneity in the response of inflation to these shocks owing to differences in factors related to labor market flexibility, energy intensity, and monetary policy credibility. We also find compelling evidence of asymmetric effects—under sufficiently large shocks—in the case of high-income and low-income countries, with increases in retail fuel prices inducing larger effects on inflation than decreases in fuel prices.

How Large and Persistent is the Response of Inflation to Changes in Retail Energy Prices

We estimate the dynamic effects of changes in retail energy prices on inflation using a novel monthly database, covering 110 countries over 2000:M1 to 2016:M6. We find that (i) inflation responds positively to retail energy price shocks, with effects being, on average, modest and transitory. However, our results suggest significant heterogeneity in the response of inflation to these shocks owing to differences in factors related to labor market flexibility, energy intensity, and monetary policy credibility. We also find compelling evidence of asymmetric effects—under sufficiently large shocks—in the case of high-income and low-income countries, with increases in retail fuel prices inducing larger effects on inflation than decreases in fuel prices.

Can fiscal rules improve financial market access for developing countries?

A number of countries have introduced fiscal rules to deter fiscal profligacy, enhance the credibility of fiscal policy, and reduce borrowing costs. In this paper, we examine the outcome of fiscal rules in terms of improving financial market access for developing countries. We use entropy balancing and various propensity score matching. We find that the adoption of fiscal rules reduces sovereign bond spreads and increases sovereign debt ratings for a sample of 36 developing countries, which are part of the JP Morgan Emerging Markets Bond Index Global (EMBIG), for the period 1993-2014. We explain this finding by the effect of fiscal rules on the credibility of a country's fiscal policy: more credible governments are rewarded in the international financial markets by low sovereign bond spreads and high sovereign debt ratings. These results are robust to a wide set of alternative specifications. We also show that this favorable effect is sensitive to several country structural characteristics. Our findings confirm that the adoption and sound implementation of fiscal rules is an instrument for policy makers to improve developing countries’ financial market access.

Nigerian Transnational Companies and Economic Development across Sub-Saharan Africa

In examining how the private sector could be gainfully engaged in economic development of African countries, issues such as corporate social responsibility (CSR) framework, multinational enterprise and livelihood option suffice. These are some key elements of a credible policy package that will promote private sector development and boost intra-African trade. Another vital area that needs to be creatively addressed in the capacitation of African enterprises is access to financial resources, which studies suggest is one of the major constraints to private sector development in Africa. As one of the largest economies in Africa, Nigeria has played a leading role in private sector engagement in economic development. A number of Nigerian transnational companies have extended their operations and maintained active presence in some other Africa countries, particularly Sub-Saharan African countries. In addition to their primary business, they have invested heavily in some human development sectors such as health, workforce development and infrastructure—initiatives which not only benefitted them, but create richer economies and enhance human capital development of the host countries. The study is mainly focused on the capital investments of two Nigerian Transnational Companies— Globalcom, a Telecommunication company and the Dangote Group—a manufacturing and trading firm. The study uses their operations and investments across Sub-Saharan Africa as case studies of Nigeria’s private firms’ contribution to economic development in Africa. The study will look into published statistical records and other materials to generate information on trade and foreign investment within the study area. Keywords : Transnational Companies, Economic Development, Africa DOI: 10.7176/IAGS/83-05 Publication date: June 30 th 2020

Tourist arrivals in four major economies: another side of economic policy uncertainty and fear.

In this paper, we examine the direction of causal relationships among migration-related fear, economic policy uncertainty, tourism, and economic growth in the panel economies of France, Germany, the UK, and the USA. To the best of our knowledge, this study is the first to examine the interaction and interrelationship between these variables in a multivariate causality study, using a quarterly data over the period 1985Q1–2017Q4 via time-series causality approach as advanced by Emirmahmutoglu and Kose (Econ Model 28:870–876, 2011) that produces country-specific causality statistic and also captures slope heterogeneity in panel data. Empirical results show that migration-related fear is linked with EPU, tourism arrivals, and real income. Thus, we suggest fear-induced economic policy uncertainty, fear-induced tourism, and economic policy uncertainty–induced growth hypotheses with credible policy suggestions for tourist destinations.

Towards adopting inflation targeting: The credibility and limitations of monetary policy under the fixed exchange system—the case of Jordan

AbstractIn this paper, the interest rate pass‐through is examined within its intermediate lag of action to shed light on the credibility of monetary policy in Jordan, where the reputation of low inflation is imported through a fixed exchange rate system to the US dollar. We use time series methods which allow us to test for asymmetric adjustment. The results are compared to that of two inflation targeting countries at time proceeding building the credibility of price stability domestically: New Zealand and the UK. The empirical findings suggest that the interest rate pass‐through in Jordan is weak and slow. In addition, our results indicate the existence of non‐competitive pricing behaviour in the market. Comparing the results to the two inflation targeters, the study suggests that Jordan needs to move to a more resilient exchange rate arrangement.

Immigrant Entrepreneurship: An International Comparison

The actual triple-C, as a combination of economic and financial crises, in addition to the crisis in credibility of economic policy, has fostered North-North and South-North immigration. The objective of this work is to determine the dimension of immigrant´s entrepreneurship, according to their recipient countries being factor driven, efficiency driven, and innovation driven economies. We demonstrate that efficiency driven nations are characterized by modera-te demographic growth and immigrant´s entrepreneurial activity along with a very discrete immigration, while the innovation driven nations are defined by a negative demographic growth and discrete immigrant´s entrepreneurial activity along with an important reception of immigrants.

Republic of Moldova

This paper presents 2019 Article IV Consultation with the Republic of Moldova and its Sixth Reviews Under the Extended Credit Facility and Extended Fund Facility Arrangements. Moldova’s economic growth remained solid in the first three quarters of 2019, with output expanding nearly 5 percent, supported by strong domestic demand. The three-year program has been broadly successful in achieving its objectives. Comprehensive reforms have rehabilitated the banking system and strengthened financial sector governance, entrenching macrofinancial stability. Prudent and well-coordinated policies are needed to safeguard the progress achieved. Decisive governance and institutional reforms are necessary for faster, sustainable, and inclusive growth. Safeguarding central bank independence is a priority. The inflation-targeting (IT) regime remains appropriate, but additional efforts are needed to improve policy credibility, promote exchange rate flexibility, and disincentivize foreign currency intermediation. Widespread governance and institutional vulnerabilities are major impediments to accelerating income convergence. Addressing these could have significant growth dividends through faster capital accumulation, reduced labor and human capital headwinds from emigration, and higher productivity.

Determinants of foreign portfolio flows to Indian debt market

Purpose The volatile nature of foreign portfolio flows, especially flows into debt market, has large implications on financial and macroeconomic stability in recipient countries. It is necessary to identify the main drivers of portfolio investments in bond market of developing economies to design effective policies to enhance resilience of the economy and help in managing capital flow volatility. The determinants of foreign portfolio investment to Indian equity market have been examined in literature, but flows to bond market remain unexplored. Thus, the purpose of this paper is to identify the possible determinants of foreign portfolio flows to Indian bond market both in the short and in the long run. Design/methodology/approach This study carries out a time series analysis by deploying autoregressive distributed lag (ARDL) approach to cointegration of monthly data of the period from January 2002 to December 2016 for the Indian economy. A mix of pull and push factors has been analysed in this study. Domestic growth, domestic stock market performance, interest rate differential, exchange rate, volatility in exchange rate, stock market returns in other emerging economies, foreign output growth and dummy variables to trace the external developments such as global financial crisis and unconventional monetary policies of advanced economies have been used as explanatory variables. Findings The dominant pull factor such as interest rate differential explains the dynamics of flows in Indian bond market. The relationship between capital movements and interest rate differentials is the most accepted paradigm in international finance (Haynes, 1988). Among other domestic factors are stock market performance, volatility in exchange rates and domestic growth rates which are found to be significant drivers of foreign portfolio bond flows to India. The study also confirmed that global conditions could induce a fast outflow of capital from India. Research limitations/implications The study concludes that both domestic factors and external factors are equally important in determining the foreign portfolio investments in the Indian debt market. Practical implications The empirical analysis conducted in this study suggests that direct and indirect measures can be taken to increase and stabilise foreign investments in the Indian bond market. Direct policy measures refer to those tools which are under the ambit of policymakers. Indirect measures comprise those tools that are not under the direct control of the fiscal and monetary authorities but require coordinated efforts of the government and private sector. In this context, strengthening of not only financial and economic but also administrative institutions will be necessary. Creditworthiness and policy credibility should be improved to address erratic foreign portfolio investment in debt market of India. Originality/value This study is an original research study. This study adds to the existing literature and is expected to guide policymakers on the specific aspect of the management of capital flows as it gets affected by changes in monetary and fiscal policies.

Understanding the exchange rate pass-through to consumer prices in Vietnam: the SVAR approach

PurposeThe purpose of this paper is to examine the degree of the exchange rate pass-through (ERPT) to the consumer price index (CPI) at both aggregated and disaggregated levels in Vietnam. Updated data of the nominal effective exchange rate (NEER) and bilateral exchange rate (BiER) have been utilized in this study for the comparison purposes.Design/methodology/approachAdvanced time-series approaches such as a structural vector autoregressive framework, structural impulse response functions (SIRFs), and structural forecast-error variance decomposition (SFEVD) are utilized in this paper.FindingsEmpirical findings from this paper present an incomplete degree of the ERPT to the aggregated CPI. The ERPT based on the BiER is observed to have substantially larger magnitude than the NEER-based pass-through. For the disaggregated level, the degree of the ERPT varies considerably across sub-components of the CPI, with a higher magnitude of the ERPT elasticity being found from the BiER estimations. The index of housing and construction materials has the largest ERPT based on the BiER, followed by the food and foodstuffs (1.00 and 0.56, respectively). The macroeconomic and financial environments as well as an economic integration into the global market may be the main causes of a higher ERPT in Vietnam in comparison with other ASEAN countries.Research limitations/implicationsThe significant and incomplete pass-through of the exchange rate in Vietnam can affect firms’ and households’ budget planning, savings and profits. This finding generally implies that the cost of devaluation of the domestic currency affects the society as the whole in terms of welfare. The State Bank of Vietnam should carefully consider the overall effect of welfares when formulating and implementing strategies of currency devaluation. In addition, the Vietnamese economy becomes more sensitive to external vulnerabilities via changes of the exchange rate during an increasingly economic integration into the global market. In order to maintain inflation stability, it is vitally important to reduce the impact of exchange rate movements on the domestic prices, both aggregated and disaggregated levels, by pursuing either monetary policy credibility or inflation targeting.Originality/valuePrevious studies on the ERPT literature in the Asia region or for emerging countries focus mainly on the aggregated data of the CPI. Previous studies were conducted before the global financial crisis in 2008/2009. The current paper is the first of its kind to examine the pass-through from exchange rates to consumer prices in Vietnam using both aggregated and disaggregated data.