Easy Monetary Policy Research Articles

Too Low for Too Long: Could Extended Periods of Ultra Easy Monetary Policy Have Harmful Effects?

Too Low for Too Long: Could Extended Periods of Ultra Easy Monetary Policy Have Harmful Effects?

Credit risk contagion and optimal dual control—An SIS/R model

In order to help regulators to control credit risk contagion effectively when the financial crisis happens, this paper first proposes a new nonlinear SIS/R (Susceptible–Infected–Susceptible/Removed) model to describe the real dynamic of risk spreading, which is more reasonable compared with traditional epidemic models. We provide a comprehensive nonlinear analysis of monotonicity, threshold conditions, stability properties, and asymptotic convergence for the SIS/R model. Moreover, we formulate a time-varying optimal dual control problem considering the macro-prudential tools and the easy monetary policy. By applying Pontryagin’s minimum principle, we obtain the existence of a solution and its uniqueness for sufficient small regulatory deadlines. At last, the theoretical results are confirmed by numerical simulations. We show the effectiveness of the optimal dual regulatory strategy against the constant dual strategy and no control strategy. The sensitivity of the control cost to the model parameters is also shown.

Interest Rates, House Prices, Fertility, and the Macroeconomy

This study differentiates between housing wealth and financial wealth and investigates whether changes in house prices and changes in interest rates have positive effects on the fertility rate. The study uses U.S. data between 1975–2020, a structural VAR model, and a Toda–Yamamoto causality test to perform the empirical investigation. The results show that changes in house prices and interest rates have a significant positive effect on changes in the fertility rate. The causality test finds that unidirectional causality exists between house prices and interest rates and fertility. The results indicate that children are consumer durable goods. The study predicts that a high fertility rate could be a by-product of an easy monetary policy through the channel of high house prices.

CEOs' Financial Background and Non-financial Enterprises' Shadow Banking Business.

In recent years, the “financial-like” behavior of non-financial enterprises has contributed to the “off real to virtual,” which has seriously restricted the virtuous cycle of finance and economy. This study selects non-financial enterprises listed on Chinese A-shares from 2008 to 2019 as the research sample, and empirically analyzes the impact of CEOs’ financial background (FB) on the shadow banking business of non-financial enterprises and its mechanism. The results show that: (1) CEOs’ FB has a positive effect on shadow banking business of non-financial enterprises; among which, the positive effect generated by non-banking FB is stronger. The conclusions still hold after robustness tests by replacing the measurement of variables, controlling for other shocks, changing the parameter estimation method, and considering the endogeneity problem. (2) The mechanism analysis reveals the positive effect mainly by reducing the level of entity investment by enterprises. (3) The heterogeneity analysis finds that, on the one hand, with respect to the internal micro characteristics of enterprises, the positive effect is more significant in state-owned enterprises, non-manufacturing enterprises, and non-growth stage enterprises. On the other hand, with respect to the external macro environment, the positive effect is more significant in periods of easy monetary policy, in industries with a higher competition or in regions with a better institutional environment. This study reveals the intrinsic mechanism of CEOs’ FB and non-financial enterprises’ shadow banking business, enriches the study of the influencing factors of non-financial enterprises’ shadow banking business, and provides micro-level empirical support to alleviate the “off real to virtual” of the economy.

The Dynamic Effects of Urban–Rural Income Inequality on Sustainable Economic Growth under Urbanization and Monetary Policy in China

Income inequality in China has become increasingly serious since the beginning of the economic reform period in the 1970s, with urban–rural income inequality playing a large role. Urbanization policy and monetary policy are currently important economic policy tools for the Chinese government. In order to investigate the influence of inequality on the economy and to provide recommendations for ensuring the sustainability of growth, we study the effect of urban–rural income inequality on economic growth in the context of urbanization and monetary policy in China between 2002 and 2021. Using a flexible time-varying parametric structural vector auto-regression (TVP-VAR) model and a robust Markov chain Monte Carlo (MCMC) algorithm, our empirical results show that the effect is time-varying, with inequality promoting growth in the early years but affecting it adversely at later stages. Currently, urbanization mitigates inequality and promotes growth simultaneously, while easy monetary policy worsens inequality and affects growth adversely in the long term. We suggest that the authorities need to consider the implementation of policy rebalancing to ensure that the sustainability of economic development is not jeopardized because of worsening income disparity. Proactive urbanization policy and prudent monetary policy are viable rebalancing options.

The Impact of Macroeconomic Factors on Banks Liquidity Risk: Evidence From Pakistan

The aim of the study is to identify the factors that influence liquidity risks of the banks by considering the panel of 18 top listed banks in Pakistan during a period of 2010 -2016. The study employed panel random effect regression model to absorb time-invariant shocks, which gives robust inferences. The results of liquidity risk confirmed that the country’s economic growth and price inflation further escalates liquidly risk while, FDI inflows reduces liquidity risks in Pakistani’s banks, thus it is concluded that bank’s liquidity risks required easy monetary policy to advancing loans and charging low interest rate, which ultimately will increase ROA, and ROE, while it would helpful to decrease high risk of bank’s liquidly in a given country.

Risky Corporate Bonds in 2021: A Bubble, or Rational Underwriting in a Low-Rate Environment?

In response to the pandemic, the Federal Reserve and US Treasury aggressively supported the corporate debt markets in 2020, both through easy monetary policy and direct participation. As the economy recovered, the Fed maintained an easy monetary policy in pursuit of more robust employment, gross domestic product growth, and inflation targets. Many observers have asserted that these policy actions and other factors have driven a bubble in risk assets, such as equities, special purpose acquisition companies, real estate, commodities, cryptocurrencies, nonfungible tokens, and risky bonds. Others believe that the valuations for at least some of these assets reflect investors’ rational incorporation of the current interest rate environment and economic outlook into their underwriting assumptions. Here, the authors analyze this question with regard to one of the riskiest classes of debt securities—the CCC-rated portion of the corporate high-yield debt market—to draw broader conclusions about the leveraged credit markets in the United States. Using historical market metrics, this portion of the market at its recent peak offered almost no excess return to compensate investors for the risk taken relative to low-risk alternatives. From this, the authors conclude that investors are underwriting significantly more optimistic outcomes than those reflected in historical averages. Although the authors believe that this segment of the market falls short of a true bubble, as they define it, they warn that current conditions pose key risks to investors and to the broader economy. <b>Key Findings</b> ▪ The US high-yield bond market, like other asset classes in the wake of the current easy monetary environment, has reached peak levels. ▪ Consistent with past bubbles, investors have moved up the risk curve, disproportionately bidding up the riskiest portion of this market. ▪ Although this reflects excessive risk appetite on the part of investors, it falls short of a true bubble as we define it. ▪ That said, these conditions pose key risks to investors and to the broader economy.

Bank Loans for Small Businesses in Times of COVID-19: Evidence from China

ABSTRACT Using representative loan-level data in China, this paper shows that bank loans for small businesses are more generous and flexible during the pandemic. In places more severely affected by the pandemic, loans for small businesses have lower costs, shorter maturities, larger amounts, are more likely to be unsecured loans. Small businesses are also more likely to extend the loan repayment, while the probability of defaulting shows no significant differences. Although the easy monetary policies implemented by central banks help small business financing, the government should pay attention to the potential NPL concerns in the post-pandemic periods.

HOUSING FINANCE: IMPACT OF HEAVY INTEREST INCOME TAX

Heavy taxation of interest income becomes a structural driver of property prices in a low-interest-rate environment. Inflation-adjusted price appreciation in 1996-2017 is approximately 200 basis points higher in 14 countries allowing no exemptions on interest income than in 37 countries that tax interest income at favorable rates or provide exemptions. Results for average returns over long-term periods are confirmed in models with annual frequencies, city-level data, and in a sample of 39 OECD countries for which price/rent ratios are available. It appears that investors view direct real estate, a heavily tax-favored asset, as an inflation hedge and/or alternative to fixed income asset. Higher interest income taxation may be fueling demand for direct real estate investments by retail investors. Separately, my empirical findings suggest that easy monetary policy effects can be magnified through the housing channel in countries that do not allow exemptions on interest income. Consequently, we should expect larger investment misallocations due to asset prices departure from fundamentals in some geographies. &#x0D; JEL Classification Codes: E3, E4, F3, G1, G5, H2.

Trust in the European Union project and the role of ECB

Was the European Central Bank able to assure the relaunch of the European project after the weakening of the post-crisis period? To answer this question, this paper presents an empirical analysis connecting citizen trust in the European Union with a variable intended to be a measure of the monetary policy strategy of the European Central Bank, namely, the interest rate on government bonds extracted from the 1-year maturity yield curve. The dynamic panel technique, applied to nineteen Eurozone countries for the time span of 2004–2018, estimates the presence of a long-run common relationship between the variables despite allowing different short-run adjustment mechanisms. Results are revealed to be not univocal: the easy monetary policy strategy is associated for the whole period with a decline of trust, and therefore, despite its impressiveness, it was not sufficient to relaunch the European Union project. However, when considering the change in strategy of the post-2013 period, it seemed to have contributed to a slight inversion of the decline of trust. These results highlight the importance of non-conventional measures and call for further support from coordinated policy action as a response to the negative shock deriving from the COVID-19 pandemic.

Monetary Policy and Unemployment—A Study on the Relationship Exists in the United States

This paper intends to make research on the relationship between monetary policy and unemployment of the United States from the first quarter of 1983 to the second quarter of 2018. Data is collected and later divided into two groups, namely an ex-crisis group and a post-crisis group, based on the event of the 2008 world financial crisis. This paper uses an extended version of the original Taylor’s rule by adding the concept of unemployment degree. The results suggest that in both periods, the unemployment gap degree does make a positive impact on the Fed interest rate and has a constantly significant impact on the Fed rate. As a result, Central Banks should adopt an easy monetary policy to stimulate the domestic economy from recession.

Central bank responses to COVID-19.

Central bank responses to COVID-19 have been extraordinary in speed, in size and in scope. Much easier monetary policy, massive liquidity provision, and targeted credit support to the real economy all played a role in stabilizing financial conditions and credit. On net, there is preliminary evidence that central bank actions have been a positive—for access to credit and for the real economy—during very trying times. But the first six months have made clear that central bank policy can only indirectly address the core economic policy challenges of the crisis, whose trajectory remains highly uncertain. The risks to the economy and financial system remain very large, and key policy questions—on the degree of fiscal policy support to the real economy, about the limits of central bank risk taking and monetization of debt, and about the wisdom of heavy reliance on central bank policies given their impact on leverage and debt levels—remain just that.

NKV: A New Keynesian Model with Vulnerability

We present a New Keynesian model with endogenous risk. The conditional output gap volatility depends on the price of risk, giving rise to a vulnerability channel of monetary policy. Lower interest rates not only shift consumption intertemporally but also shift conditional output risk. The model fits estimates of the conditional output gap distribution 1 to 12 quarters ahead and suggests an intertemporal risk return trade-off for policymakers. Via the impact on risk taking, easy monetary policy lowers short-term downside risks to growth but increases medium-term risks. The framework can be used to jointly consider macroprudential and monetary policy.

An Aggregate-Level Macro Model for the Indian Economy

We make an empirical attempt to model the Indian economy at an aggregate level with annual data, ranging from 1980 to 2019. Our major theoretical premise mimics the New Keynesian framework, which is based on the microeconomic foundations of Keynesian economics. We propose a whole economic structure in the form of nine equations. Aggregate demand is modeled with the help of four equations, representing consumption, private investment, exports, and imports. Aggregate supply assumes the form of a simple neoclassical production function where labor, capital, and exogenous technical progress are considered as inputs. Further, inflation is assumed to follow a New Keynesian representation whereas the LM curve has its standard form with income and short-term rate of interest as its determinants. Subsequently, a linking equation, expressing long-run interest rates as a function of short-term interest rates and government investment, is proposed to unify monetary policy and fiscal policy to the goods market. Finally, tax is estimated as a function of per capita income. A structural equation model is employed for the empirical analysis and findings support the theoretical expectations. Consumption follows the absolute income hypothesis, and private investment is governed by the accelerator principle. Further, the negative sign of nominal interest rates in the investment function confirms an inverse relation between the former and private capital formation. Exports are found to be influenced by world income, exchange rates, and government capital formation, and import demand is determined by domestic income, the difference between domestic and international inflation, and the lagged exchange rate. From the policy perspective, we suggest the suitability of fiscal and monetary policies for increasing growth in the Indian economy. However, the effectiveness of expansionary fiscal policy is observed to have a larger impact on growth than easy monetary policy. This inference is drawn mainly on the basis of a simulation exercise for the proposed structural equation model.

Monetary Policies versus Regulatory Policies: Management of Peer to Peer Market Interest Rates

AbstractThis paper studies how monetary and regulatory policies manage peer to peer (P2P) interest rates. Based on selected representative monetary and regulatory policies, this paper finds that easy monetary policies reduce the demand for online loans, thus reducing the market's interest rates. Monetary policies may increase the supply of online loans through rational expectation channels or reduce the demand for online loans through bank risk‐taking channels. Normative market‐based regulatory policy enables the P2P market to return to rationality, eliminates high‐risk investors and borrowers, and subsequently reduces market interest rates. Risk disposal‐based regulatory policy reduces market supply to some extent, resulting in a small increase in interest rates. Both easy monetary policies and regulatory policies have a great impact on the normal platforms. The interest rate of high‐risk platforms is less affected by the relevant policies, which is evidence that such platforms do not behave in accordance with the financial rules in general. Monetary policies mainly affect platforms with interest rates in a relatively normal range, while regulatory policies mainly focus on platforms with abnormal interest rates.

A Note on the Impact of News on US Household Inflation Expectations

Monthly dis-aggregated US data from 1978 to 2016 reveals that exposure to news on inflation and monetary policy helps to explain inflation expectations. This remains true when control- ling for household personal characteristics, perceptions of government policy effectiveness, future interest rates and unemployment expectations, and sentiment. We find an asymmetric impact of news on inflation and monetary policy after 1983, with news on rising inflation and easier monetary policy having a stronger effect in comparison to news on lowering inflation and tightening monetary policy. Our results indicate the impact on inflation expectations of monetary policy news manifested through consumer sentiment during the lower bound period.

Contemporary Contemplation on Integrated Global Financial Climate

Although the global economy nurtured at a noteworthy pace in 2018 (3.7 per cent according IMF and 2.9 per cent according to World Bank) on the back of a strong fiscal expansion in the USA and easy monetary policy by the central banks around the world, the risks to the stance for worldwide economy are tilted downwards on the concerns of monetary tightening cycle and slowdown in the global trade. IMF slashed its global growth outlook from 2019 to 2020 marginally lower to 3.5% and 3.6% respectively, mainly due to undesirable properties of tariff gallops ratified in the economies of US and Chinese, and lighter drive in Europe in the post-half yearly of 2018. Growths in the United States are likely to sluggish to 2.5 per cent in 2019 and 1.8 per cent in 2020 as we had compared from 2.9 per cent in 2018. Progression in the Euro area set to moderate from 1.8 per cent in 2018, 1.6 per cent in 2019 and 1.7 per cent in 2020. Japan’s economy set to disseminate by 1.1 per cent in 2019 and to 0.5 per cent in 2020.

An Analysis of China's Money Supply and Its Changes in 2008-2010

China divides the money supply into three levels: cash in circulation M0, cash that fl ows outside the banking system; the second is the narrow money supply M1, that is, M0 plus the deposit of enterprises and institutions; Money supply M2, that is, M1 plus enterprises and institutions of time deposits, household savings deposits and other deposits. In September 2008, China's monetary policy moderates easing in response to the serious impact of the international fi nancial crisis. At the beginning of 2009, the State Council put forward an annual growth of about 17% M2, more than 5 trillion yuan of new loans, relative to the expected 8% GDP growth rate and 4% of the CPI index is still a moderately easy monetary policy. China's monetary policy this shift is correct, strong with the government's active fi scal policy, the role of economic stabilization and recovery is more obvious.

The Spillovers from Easy Liquidity and the Implications for Multilateralism

Exchange rate appreciation in capital-receiving countries, induced by easy monetary policy in funding countries, increases the expected net worth of firms in receiving countries and their ability to buy assets. Anticipating this higher liquidity for their assets, corporations in capital-receiving countries lever up, and neglect alternative sources of debt capacity such as maintaining the pledgeability of their cash flows. When monetary policy in source countries tightens, receiving country exchange rates depreciate, and liquidity dries up in their corporate sector even if country prospects are sound. Since pledgeability has been neglected, debt capacity plummets, leading to a sudden stop in funding and subsequent financial distress. Exchange rate intervention by recipient countries to slow appreciation (and depreciation) may improve outcomes.

Can monetary policy affect renewable energy enterprises investment efficiency? A case study of 92 listed enterprises in China

This paper aims to objectively identify the impact of monetary policy on renewable energy enterprises' investment efficiency, further analyze the effectiveness of the Renewable Portfolio Standard, and then put forward some suggestions that are good for the government to implement the monetary policy rationally, guide the direction of renewable energy investment, improve the investment efficiency, and promote the development of the renewable energy industry. We use data on 92 renewable energy listed enterprises in China from the first quarter of 2007 to the third quarter of 2017 as a sample, the Richardson Model to calculate the investment efficiency of related enterprises, and the Regression Discontinuity Model to measure the effectiveness of the Renewable Portfolio Standard. We find that, first, underinvestment is common among China's renewable energy enterprises during the sample period; second, the influence of monetary policy on investment efficiency varies from different transmission channels, and the effect of the credit channel is more significant. The monetary policy status is measured by the growth rate of M2, and the Monetary Policy Perception Index promotes renewable energy enterprises' investment efficiency by 0.3635% and 0.0344%, respectively; they are promoted by 0.8389% and 0.0940%, respectively, through the credit channel; third, easy monetary policy can increase the investment opportunities of renewable energy enterprises in general and then ease their external financing constraints; fourth, the Renewable Portfolio Standard of China promotes the overall renewable energy investment efficiency by 0.2573% and strengthens the promoting effect of monetary policy on renewable energy enterprises' investment efficiency. To some extent, this proves the effectiveness of the policy.