Domestic Monetary Policy Research Articles

Correction to: An empirical examination of the effect of domestic monetary policy on external commercial borrowings to India

Correction to: An empirical examination of the effect of domestic monetary policy on external commercial borrowings to India

ტრიფინის პარადოქსი ოცდამეერთე საუკუნეში

This article presents a fresh perspective on the Triffin Paradox, a concept introduced by economist Robert Triffin in the mid-20th century that continues to have a significant impact on global financial systems and policies. Despite the passage of time and the evolution of the economy, the fundamental principles of the Triffin Paradox remain relevant in today's financial discussions. The paper provides a thorough analysis of the ongoing relevance of the Triffin Paradox in the modern global economy. It draws upon historical context, theoretical frameworks, and empirical evidence to shed light on how the paradox continues to manifest itself in the current financial landscape. Specifically, it explores how the dominance of the U.S. dollar as the world's primary reserve currency perpetuates structural imbalances and systemic vulnerabilities, echoing the concerns raised by Triffin. Moreover, the paper delves into the implications of the Triffin Paradox for various stakeholders, including policymakers and central banks. It examines the challenges posed by the pursuit of domestic monetary policy objectives in an interconnected world, where the stability of the global financial system relies heavily on the stability of the reserve currency issuer. Additionally, the paper explores potential strategies for mitigating the risks associated with the Triffin Paradox and fostering a more sustainable international monetary order. By integrating insights from economics, finance, and international relations, this paper contributes to a deeper understanding of the Triffin Paradox and its enduring significance in shaping contemporary financial dynamics. It emphasizes the need for policymakers and stakeholders to address the inherent structural tensions in the global monetary system, with the goal of promoting financial stability, economic resilience, and inclusive prosperity worldwide.

Macroeconomic news, senior officials' speeches, and emerging currency markets: An intraday analysis of price jump reaction

We examine intraday emerging currency jumps in response to domestic and foreign macroeconomic news announcements, as well as US senior officials' speeches. We use the robust-to-jump volatility estimator to estimate currency jumps. We provide evidence that both emerging currency jumps and cojumps exhibit significant and pronounced responses to US monetary policy and real activity news releases. Moreover, we find that domestic monetary policy and economic real activity data, and senior Federal Reserve officials' speeches, trigger significant jumps in emerging currencies, leading to large currency fluctuations that would disrupt market stability, undermining economic resilience and potentially diminishing ESG ratings.

Central Bank Independence, Inflation and Money Growth: Evidence from South Africa

Purpose: This article evaluates the impact of the de jure independence of the South African Reserve Bank (SARB) on the credibility and discipline of domestic monetary policy. Credibility captures the extent to which economic agents trust the SARB to pursue its price stability mandate and is measured by the relationship between the SARB’s independence and domestic inflation. Discipline relates to the effect of independence on money growth rates, while independence is associated with a more disciplined central bank and moderate money growth rates. Methodology: A simple autoregressive distributed lag (ARDL) econometric specification and Granger causality tests are employed. Following the extant empirical literature, existing indexes of central bank independence (CBI) are regressed on annual rates of inflation and M2 money growth. Findings: A statistically significant negative relationship is established between both i) CBI and inflation and ii) CBI and money growth for the South African economy. This suggests that the SARB’s legal independence plays an important role in containing inflation (credibility) and limiting excessive money growth (discipline). Contribution: This article fills a gap in the extant literature by being the first attempt at formalising the empirical link between de jure CBI, inflation, and the rate of money growth in the South African economy.

An empirical examination of the effect of domestic monetary policy on external commercial borrowings to India

An empirical examination of the effect of domestic monetary policy on external commercial borrowings to India

Assessing the Impact of US Monetary Policy on Foreign Currency Debt and Credit Growth in Emerging Markets During the COVID-19 Pandemic”

ABSTRACT This paper analyses the impact of US monetary policy on external debt and credit growth in emerging market economies (EMEs) during the COVID-19 period. Using quarterly data from 13 EMEs and employing a panel autoregressive methodology, the study reveals the following key findings: First, global monetary policy plays a vital role in determining external debt and credit availability in EMEs during the COVID-19 period. Second, the global monetary expansion during the COVID-19 crisis led to the accumulation of external debt through the risk-taking channel of the exchange rate. Third, weak domestic monetary policy transmission hinders the stabilization of credit growth. The empirical findings suggest that the central bankers to choose an optimum policy mix to stabilize the economy during crisis.

International energy trade and inflation dynamics: The role of invoicing currency use during the low carbon transition

In most international energy trades, the US dollar is the invoicing currency. Our empirical and theoretical analysis examines how this affects inflation dynamics in energy trade. Empirical results reveal that countries’ with higher shares of trade invoiced in dollars would experience more inflation in their energy sector, primarily because of exchange rate fluctuations. Theoretical modeling, based on a new open economy Keynesian framework, demonstrates that when all products are priced in US dollars, imported inflation varies with exchange rates. We observe that the dominant issuer’s monetary policy has greater spillover effects than non-dominant countries. Furthermore, in a counterfactual analysis, we consider invoicing conventional energy products in dollars while invoicing renewable energy products in alternative currencies. The results highlight two benefits of currency coordination in renewable energy products: a domestic monetary policy would be more effective, and the foreign monetary policy produces fewer spillovers to domestic inflation.

The endogeneity of monetary policies of emerging market economies

ABSTRACT We analyse the responses of the monetary policy of five (Brazil, Chile, Mexico, India, and South Africa) emerging market economies (EME) to domestic and external (U.S.) shocks. We argue that the domestic policy rate is sensitive to risk premiums, financial markets, and the world economy, showing that Taylor’s Rule can benefit from the inclusion of these variables to understand the behaviour of the monetary authority. Therefore, our results suggest the following: i) policy rates are affected by risk premiums, ii) domestic monetary policy is affected by exchange rates, stock markets, and the U.S. and iii) there is heterogeneity in the factors explaining the behaviour of central banks.

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Purpose: This research aims to investigate the presence of monetary policy trilemma in the Middle Eastern region and evaluate the spillover effects of US monetary policy on the region. Theoretical framework: Middle Eastern economies follow the dollar pegged exchange rate policy with open capital account and this poses a question about the autonomy of the monetary policy stance adopted by the regional central banks. In this context, current research considers variables such as domestic interbank interest rate, domestic liquidity, oil price and federal fund rate to test the monetary policy trilemma in the region Design/methodology/approach: To investigate the presence of monetary policy trilemma in the Middle Eastern region, this research employs the time - varying Bayesian panel vector autoregression approach and selects a panel of five Middle Eastern countries which include Saudi Arabia, United Arab Emirates, Qatar, Oman and Kuwait while considering the monthly data for the sample period 2009m10 until 2021m12. Findings: This research finds that a positive shock in US federal fund rate increases the domestic interest rates in the Middle Eastern economies. In addition, this research finds a negative relationship between oil price shocks and domestic interest rates. Whereas a positive shock in US federal fund rates induces a reduction in the oil price. Research, Practical & Social implications: Current research provides insights for policy makers to determine the autonomy of domestic monetary policy stance to achieve its broader macroeconomic objectives. . Originality/value:This research is unique as it examines the monetary policy trilemma while considering oil price as a control variable in the system under a time varying Bayesian panel vector autoregression specification.

Shock and awe? Bond yield responses to domestic monetary policy in a small-open economy

We use Switzerland as a case study to assess the channels through which the domestic monetary policy of a small-open economy affects benchmark interest rates. Monetary-policy shocks are identified via changes in expectations on announcement days. We show that the shocks have a persistent effect on long-term government bond yields because they influence expectations about future short-term rates (the so-called signaling channel). By contrast, monetary-policy shocks have little impact on the term premium component of the bond yields (portfolio rebalancing channel). The full effect of the monetary-policy shocks takes time to build up, but eventually transmits one-to-one to long-term yields, in turn conducting the transmission of monetary policy to the wider economy.

Testing Monetary Policy Trilemma for Middle Eastern Economies Under a Bayesian Panel VAR Specification

Purpose: This research aims to investigate the presence of monetary policy trilemma in the Middle Eastern region and evaluate the spillover effects of US monetary policy on the region.
 
 Theoretical framework: Middle Eastern economies follow the dollar pegged exchange rate policy with open capital account and this poses a question about the autonomy of the monetary policy stance adopted by the regional central banks. In this context, current research considers variables such as domestic interbank interest rate, domestic liquidity, oil price and federal fund rate to test the monetary policy trilemma in the region
 
 Design/methodology/approach: To investigate the presence of monetary policy trilemma in the Middle Eastern region, this research employs the time - varying Bayesian panel vector autoregression approach and selects a panel of five Middle Eastern countries which include Saudi Arabia, United Arab Emirates, Qatar, Oman and Kuwait while considering the monthly data for the sample period 2009m10 until 2021m12.
 
 Findings: This research finds that a positive shock in US federal fund rate increases the domestic interest rates in the Middle Eastern economies. In addition, this research finds a negative relationship between oil price shocks and domestic interest rates. Whereas a positive shock in US federal fund rates induces a reduction in the oil price.
 
 Research, Practical & Social implications: Current research provides insights for policy makers to determine the autonomy of domestic monetary policy stance to achieve its broader macroeconomic objectives.
 
 Originality/value: This research is unique as it examines the monetary policy trilemma while considering oil price as a control variable in the system under a time varying Bayesian panel vector autoregression specification.

Research on the Internationalization Path of RMB based on the Analysis of Peripheral Circulation

The internationalization of RMB is of great significance to China's financial development and the reform of the international monetary system, and it is the inevitable result of the evolution of the world economic structure. The internationalization of RMB is the inevitable result of China's economic development and the reflection of China's international competitiveness. The internationalization of RMB will help China to become a world economic power. The circulation around RMB is only the initial stage of currency internationalization. Currency internationalization requires strict conditions and must bear the price of giving up the independence of domestic monetary policy. The "the belt and road initiative (B&R)" initiative promotes China enterprises to enter the global market and increases the opportunities for RMB capital export. Some progress has been made in the internationalization of RMB, which has been recognized by the international community. Based on the significance of currency internationalization, this paper expounds the influence of RMB internationalization on China, and further studies the mode and strategy choice of RMB internationalization on the basis of analyzing the circulation path around RMB.

The transmission of euro area monetary policy to financially euroized countries

AbstractThis paper provides a comprehensive analysis of the interest rate pass‐through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroization and on the transmission channels of monetary policy spillovers. The results suggest that in the long run, more than the one‐third of all euro retail rates in euroized countries of central, eastern, and south‐eastern Europe is linked to the euro area shadow rate. Compared with euro area monetary policy, the share of cointegration of the domestic monetary policy rate is on average lower, suggesting that domestic central banks in euroized countries with independent monetary policy can only partially control the “euro part” of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission.

Does the Exchange Rate Respond to Monetary Policy in Mexico? Solving an Exchange Rate Puzzle in Emerging Markets

AbstractThis paper argues that the null or weak response of emerging market currencies to domestic monetary policy documented in the literature is the result of wide event windows. An event study with intraday data for Mexico shows that an unanticipated tightening appreciates the currency and flattens the yield curve, consistent with the evidence for advanced economies. With daily event windows, however, only the yield curve responds to monetary policy. Noise in daily exchange rate returns explains the lack of response of the currency. Such noise gives rise to a bias that declines after controlling for potential omitted variables.

Supply Side Liberalization and Foreign Exchange Management in Nigeria

The daunting challenge of foreign exchange control in Nigeria has remained a burdensome economic issue to deal with economic management. Virtually in every socio-political debate, the exchange rate management is yet to be a resolved paradigm. This study empirically examined the supply side liberalization as proxy of personal diaspora remittance and exchange rate management in Nigeria. Technique of Vector Autoregression (VAR) was employed to examine the direction of shocks arising from the exchange movement with respect to diaspora remittances (REMIT), and foreign direct investment (FDI). The findings showed that, growth of remittance results in exchange rate appreciation when pass through official channel, and vice versa. While, controlling for FDI, exchange rate movement improves with growth of FDI in the short run, and decreases due to improper capital control mechanism. Policy recommendation has it that: The Nigerian Monetary Authority should harmonize the dual exchange rate aimed at maximizing the gains of capital control and achieve domestic monetary policy success; Government should implement friendly tax policies, zero charges and lowered administrative bottlenecks to clearing personal diaspora remittance inflow aimed at minimizing diversion of foreign capital into unofficial route.

CHALLENGES OF THE INTRODUCTION OF THE DIGITAL EURO - SEARCH FOR A COMPATIBILITY MODEL FOR NORTH MACEDONIA

The introduction of the digital euro will have an impact on the implementation of the financial policy of North Macedonia. Based on an assessment of its own interests and capabilities, North Macedonia can decide on a model for compatibility with the digital euro. The paper analyses three possible models for cross-border system compatibility. Assuming that a digital euro provides a new channel for the transmission of domestic monetary policy shocks, the basic cross-border effects of the introduction of the digital euro can be summarised as an increase in euroisation, a reduction in monetary policy independence and a reduction in the creditor function of last resort. These effects need to be countered with integrated smart features such as automatic remuneration and bilateral cooperation with the ECB or a combination of these models. According to the analysis, this functionality can be achieved through the model, which is a technological bridge between the systems, as opposed to the model, which is a separate system, or the model, which is integrated. Although the proposed model is the most desirable in terms of potential gains and addressing potential risks, this model involves the development of an own digital currency (digital denar).

DOES INTERNATIONAL MONETARY POLICY INFLUENCE THE BANK RISK? EVIDENCE FROM INDIA

This study empirically examines the impact of international monetary policy on bank risk in the Indian context. Using annual data from 64 banks and employing panel OLS and GMM techniques, this study finds that: (1) a contractionary international monetary policy increases bank risk; (2) an appreciation of the domestic exchange rate induces bank riskiness; (3) the domestic monetary policy affects bank risk through the “search for yield” channel; and (4) the international monetary policy is relatively significant in explaining the bank riskiness in the post-global financial crisis period.

Reaction of the Philippine Stock Market to Domestic Monetary Policy Surprises: An Event Study Approach

This paper uses an event study analysis to assess how stock prices in the Philippines have reacted to domestic monetary-policy changes using data at a daily frequency from 2017 to 2022. A major contribution of this paper is the construction of a monetary-policy surprise measure for the Philippines, as the difference between the actual change in the monetary policy rate and the change anticipated by professional forecasters. My results are consistent with the literature, suggesting that unanticipated monetary policy changes exert a significant influence on stock prices in the Philippines. Overall, I find that an unexpected increase of 25 basis points in the monetary policy rate increases stock prices by about 1.09% on average. These results are robust to the inclusion of additional control variables in the baseline regression model, such as the implementation of restrictions to economic activity to curb the spread of the COVID-19 outbreak or revisions to macroeconomic forecasts released concomitantly with the monetary-policy rate announcement.

GOOD LUCK OR GOOD POLICY? A RECENT MACROECONOMIC HISTORY OF NEW ZEALAND

The Great Moderation was a global phenomenon marked by stable economic growth and inflation. However, how much monetary policy contributed to its success remained a popular debate in the literature. Answering this question became imperative after the global financial crisis since global conditions became relatively more important than past. I examined the recent macroeconomic history of New Zealand through the lens of a regime-switching structural vector-autoregression model to understand the contributions of domestic monetary policy and global conditions to its macroeconomic stabilization. A small open economy structure is essential to facilitate the identification of structural shocks that spillover from the globe.

Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy

AbstractExploring bank-level data from a small open economy, we present evidence that global funding conditions limit the effectiveness of domestic monetary policy in terms of shaping both the volume and the riskiness of bank lending. We show that more favorable global funding conditions associated with a local currency appreciation encourage banks to increase lending, leverage up, take more risks, and thus insulate themselves from lean-against-the-wind domestic monetary policy. These results support the existence of a risk-taking channel of currency appreciation at the bank level.