Effects Of Monetary Policy Research Articles

How US Fiscal and Monetary Policy affect the GDP of Countries with Fixed and Flexible Exchange Rates: Estimates using Korean Data from 1963 to 2022

The simplest large country IS/LM/BP model (Mundell-Fleming Model) predicts that an increase in Government spending in the US would cause an increase in Gross Domestic Product (GDP) for countries with flexible exchange rate regimes and decreases in GDP for countries with fixed exchange rate regimes. In contrast, increases in the US money supply would cause an increase in GDP for countries with fixed exchange rate regimes and decreases in GDP for countries with flexible exchange rate regimes. This paper uses a solution to the omitted variables problem of regression analysis to estimate the effects of US fiscal and monetary policy on the Republic of Korea using quarterly data. The data splits into two sections: (1) from 1962 through 1997, Korea had a fixed exchange rate regime and (2) from 1998 through 2022, Korea had a flexible exchange rate regime. The empirical results fit the Large Country IS/LM/BP predictions.

The Supply-Side Effects of Monetary Policy

The Supply-Side Effects of Monetary Policy

Is government debt a burden on workers' income share? An investigation on Italian dynamics

This paper aims to explore if there is a connection between public debt and wage share; the intention is to contribute to the literature regarding both the efficacy of fiscal policy and financialisation of economics. The paper examines the case of Italy between 1960 and 2019, a rather long period during which the country, much like many other advanced economies, was affected by the contemporaneous presence of deteriorating public accounts and a reduced share of national income going to labour. The empirical analysis employs a long run dynamic technique and finds that an increase in debt decreases wage share, challenging the effect of fiscal policies on employment and national income. However, when distinguishing between the components fuelling debt, the estimates reveal controversial outcomes: primary deficit increases wage share, while interests in public debt decrease it. The results are consistent with the changes in policy strategy that occurred in three subperiods and suggest that public debt should be managed, accounting for the reciprocal effects of fiscal and monetary policy and considering the introduction of a common safe asset to preserve labour income.

Reforming the Eurozone financial system: A system-dynamics approach

The effectiveness of the current monetary policy of the European Central Bank (ECB) in maintaining (price) stability in the eurozone is assessed using a system dynamic model. The model combines a neoclassical growth model with a stock-flow representation of the eurozone financial sector at a high level of aggregation. With endogenous money creation, the multidirectional relationship between asset prices and net income, and also the dual causality of both liquidity and investment relative to interest rates as the main features of the model, the developments of the past 50 years can be understood and extrapolated to 2050.The simulation experiments indicate that the current pro-cyclic system is inherently unstable. This instability can only be overcome by monetary policy that eases and tightens the total amount of money in the system in a countercyclical manner. An obvious way to achieve this is the introduction of 100% Central Bank Digital Currency (CBDC). This calls for the ECB's mandate to become the sole "monetary authority" that creates and controls the amount of money in the system, with the sole and unambiguous objective of price stability. Money creation to achieve price stability at a targeted level of inflation with simultaneous repayment of public debt varies between €200 billion and €500 billion per year. This money can be channelled into the real economy through the EU's governance structure and spent on tax cuts and/or direct public investments, for example in physical and social infrastructure.

Intensive and Extensive Margins of Labor Supply in HANK: Aggregate and Disaggregate Implications

AbstractThis paper studies how adjustment along intensive and extensive margins of labor supply affects aggregate and disaggregate effects of monetary policy. To this end, I develop a heterogeneous‐agent New Keynesian (HANK) economy where a nonlinear mapping from hours worked into labor services generates operative adjustment along intensive and extensive margins of labor supply. I find that monetary policy has significantly different effects on earnings inequality, depending on the extent to which margin is dominant, even if it generates similar aggregate responses.

Oligopoly banking, risky investment, and monetary policy

Oligopolistic competition in the banking sector and risk in the real economy are important characteristics of many economies. We build a model of monetary policy transmission that incorporates these characteristics which allows us to analyze the long-run consequences of variations in the degree of banking competition. We show theoretically that various equilibrium cases can occur, and that the effect of monetary policy varies greatly across equilibrium cases. We calibrate the model to the U.S. economy in 2016-2019 and find that monetary policy pass-through is incomplete under imperfect competition. Further, we show that a decrease in the policy rate during the calibration period would have increased expected welfare, but also bank default probability.

Analysis of the Effect of Monetary Policy on Bank Profitability in Indonesia During the Pandemic

Analysis of the Effect of Monetary Policy on Bank Profitability in Indonesia During the Pandemic

The impact of COVID‐19 pandemic on the Thai economy and the effectiveness of monetary policy: A Bayesian DSGE model approach

AbstractThis study estimates a medium‐scale dynamic stochastic general equilibrium model for the Thai economy to evaluate the impact of the COVID‐19 pandemic containment policy on key macroeconomic aggregates. The shock to labor supply is considered as the main transmission channel. The paper discussed the role of monetary policy in regard to economic recovery and also identified the dominant shocks driving the business cycle. Thai quarterly series from 2011Q1 to 2021Q2 is used for the Bayesian estimation of the model. Though the pandemic shock caused a sharp decline in output, consumption and investment, the results suggest a fast recovery in the growth rates of the variables in about 2.5 years. At the same time, the dominant shocks that account for output variation in the medium to long term are investment, labor supply and productivity shocks. Monetary policy is effective in shortening the recovery due to its impact on private investment. The key drivers of Thai household consumption in the long run are investment, labor supply and productivity shocks. On average, the investment shock appears to be the key driver of the business cycle at all horizons.

Extension and Revision of Monetary Policy Transmission Mechanisms and Domestic Real Investment in Nigeria: A Time Series Study Between 1981-2015 by Lucky Anyike Lucky & Uzah Cheta Kingsley

The study by Lucky Anyike and Uzah Cheta Kingsley examines the impact of monetary policy on domestic real investment in Nigeria, using Gross Fixed Capital Formation to Gross Domestic Product ratio as a proxy for domestic real investment. The study uses various independent variables, including the maximum lending rate, credit to private sector as a percentage of GDP, naira to US dollar exchange rate, savings rate, monetary policy rate, prime lending rate, and Treasury bill rate. The authors conclude that monetary policy has a significant effect on the domestic real investment rate. The extension of this paper examines the impact of both monetary and fiscal policy on domestic real investment in Nigeria, while also considering the influence of political biases and the fact that a significant portion of fiscal policy spending may be allocated to current expenditures rather than capital expenditures. While mainstream economic theory suggests that fiscal policy should have a positive effect on real investment rate, this theory may be challenged in Nigeria due to the specific context and allocation of fiscal resources. We also examine the effect of monetary policy on domestic real investment rate in Nigeria by incorporating additional variables in our analysis.

An Assessment of Kenyan Diplomatic Strategies in Managing Its Kenya-Somalia Maritime Border Disputes

In LDCs like Ethiopia, one of the major macroeconomic problems is the absence of effective monetary policy. The money demand function play a major role in macroeconomic analysis, especially in selecting appropriate monetary policy actions. The objective of monetary policy in the least developing countries (LDCs) is usually related to money and credit control, price stabilization and economic growth. Many LDCs considered, price stability as the most important objective of monetary polices and it is important to testing the stability of parameter of money demand function indicate the effectiveness of the conduct of monetary policy. The research to be conducted therefore is to investigate the determinants of money demand function. Based on the data, which could be found an error correction model (ECM) was applied to estimate the money demand function in Ethiopia. From the study it is found that, money demand is positively related with real GDP and it is negatively related with expected inflation. The coefficient of real effective exchange rate is positive or negative depending on the magnitude of the appreciation and depreciation of local currency. Thus the studies calls for appropriate formulation and implementation of sound monetary policy capable of bringing stability in the coomy coupled with sustainable growth. Keywords : money demand , economic growth , error correction model DOI : 10.7176/DCS/9-1-02

An Empirical Study on the Dynamic Impact of Monetary and Fiscal Policies on the Herding Behavior among Manufacturing Companies

This paper investigates the dynamic interplay between monetary and fiscal policies and their influence on herding behavior among manufacturing companies in China. Herding behavior, characterized by the tendency of firms to mimic the actions of others rather than making independent decisions, can significantly affect market stability and efficiency. The study employs a comprehensive dataset spanning a period that encompasses various monetary and fiscal policy interventions, alongside fluctuations in market conditions. Using advanced econometric techniques, including Vector Autoregression (VAR) models and Granger causality tests, we analyze the short-term and long-term effects of monetary and fiscal policies on herding behavior within the manufacturing sector. The study also examines the moderating role of firm-specific characteristics such as size, industry, and financial health on the relationship between policies and herding behavior. Preliminary findings suggest a complex and dynamic relationship between policy interventions and herding behavior. Monetary policy tools, such as interest rate adjustments and open market operations, exhibit significant short-term effects on herding behavior, influencing firms' decisions to follow prevailing market trends. Similarly, fiscal policy measures, including tax incentives and government spending, demonstrate varying degrees of impact on herding behavior, contingent upon the economic context and firms' financial positions. Furthermore, the study explores the transmission channels through which monetary and fiscal policies influence herding behavior, including their effects on market liquidity, risk perceptions, and investor sentiment. Understanding these mechanisms is crucial for policymakers and market participants to anticipate and mitigate the adverse effects of herd behavior on market stability and efficiency. In conclusion, this empirical study contributes to the existing literature by providing insights into the dynamic relationship between monetary and fiscal policies and herding behavior among manufacturing companies in China. The findings have important implications for policymakers aiming to design effective policy interventions to foster a more resilient and stable market environment, ultimately promoting sustainable economic growth and development.

Will the establishment of city commercial banks improve resource allocation efficiency?–Concurrently on bank risk-taking channels of monetary policy in China

Improving resource allocation efficiency is an essential approach to accelerate the construction of a dual circulation development paradigm. This article takes the intensification of heterogeneous competition between local banks caused by the establishment of city commercial banks as a quasi-natural experiment. Based on urban panel data obtained by matching the China Industrial Enterprise Database and the Urban Statistical Yearbook, empirical research finds that the establishment of city commercial banks generally deteriorates resource allocation efficiency. However, after incorporating bank risk-taking channels of monetary policy into the analysis framework, tight monetary policies are conducive to alleviating the deterioration of resource allocation efficiency. Further research indicates that this mitigating effect mainly comes from enterprises with high productivity and strong financial constraints. In the context of global quantitative easing policies, the findings of this article can contribute to a deep understanding of the relationship between banking sectors and resource allocation efficiency and provide significant policy insights for further promoting resource allocation efficiency, improving the pass-through effect of monetary policies, and advancing high-quality development of the banking industry.

Urban Economic Resilience and Supply Chain Dynamics: Evaluating Monetary Recovery Policies in Global Cities during the Early COVID-19 Pandemic

The COVID-19 pandemic has profoundly impacted global economies, underscoring the urgency of deriving lessons to enhance future crisis preparedness. This study explores the effects of monetary recovery policies on supply chain dynamics across key global cities during the pandemic’s initial phase, emphasising policy interactions, industry engagement, and economic resilience. Utilising principal component analysis (PCA), data envelopment analysis (DEA), and tobit regression, we present a pioneering method to unravel the complex relationship between economic policies and urban supply chains. PCA simplifies data complexity and reveals complex policy-resilience relationships, while DEA facilitates a comparative efficiency analysis. Our findings underscore the critical importance of supply chain resilience in fostering early economic recovery, indicating that cities implementing diverse, sector-specific policies achieved more notable improvements in gross domestic product (GDP). This research not only advances methodological approaches for policy evaluation but also provides valuable insights for optimising urban economic recovery strategies amidst global challenges.

Can we Use High‐Frequency Data to Better Understand the Effects of Monetary Policy and its Communication? Yes and No!*

We examine the effects of three facets of monetary policy in Australia using high‐frequency yield changes around the Reserve Bank of Australia's announcements: current policy, signalling/forward guidance and changes in premia. Shocks to current policy have similar effects to those identified using conventional approaches, but the effects of signalling and premia shocks are imprecisely estimated. Still, the approach provides the following evidence: forward guidance shocks raised future rate expectations in the mid‐2010s as the Reserve Bank of Australia highlighted housing risks; COVID‐era policy mainly affected term premia, unlike pre‐COVID policy; shocks to the expected path of rates are predictable, suggesting markets misunderstand the RBA's reaction to data.

Relationship between monetary policy and financial asset returns in Türkiye: Time, frequency, and quantile-based effects

This study analyzes the effect of monetary policy, which are proxied by weighted average cost of funding (WACF) and Borsa Istanbul repurchase interest rate (REPO), on the returns of the main financial assets of monetary policy in Türkiye. Using daily data between January 4, 2011 and August 31, 2023, the study applies novel nonlinear time-series methods, such as wavelet coherence (WC) and quantile-on-quantile regression (QQ) as baseline methods and quantile regression (QR) for robustness. The findings demonstrate that (i) monetary policy has a stronger effect on financial asset returns at middle and higher frequencies across different periods; (ii) monetary policy has mainly declines (increases) effect on financial asset returns at lower and middle (higher) quantiles; (iii) the robustness of the outcomes is confirmed. Thus, the outcomes show that monetary policy has a significant effect on financial asset returns, and the effects vary across times, across frequencies, quantiles, and financial assets.

Effect of Monetary Policy on Macro Economic Variables of Nepal

This study examines the effect of monetary policy on macroeconomic variables such as gross domestic product, real interest rate, inflation, unemployment and balance of payment etc. All the variables are intertwined with each other, and one way or the other it affects each other in both short run and long run. It is secondary research with causal comparative research design. It has quantitative nature and time series data are extracted from year 1990 to 2017 of six different macro-economic variables for the study. Statistical tools and applied econometrics namely, descriptive statistics, ADF, Johansen cointegration test, Engle- Granger error correction model are applied. The result from the statistical analysis shows that instruments of monetary policy has influence on the selected macroeconomic variables to some extent and satisfies to be relatively effective. Findings of the study reveals that there is long-run relationship between monetary policy and the selected macroeconomic variables in the Nepalese economy significantly from the error correction mechanism.

The Effects of Fiscal Policy and Monetary Policy on Borrowing Costs and Credit Access for SMEs: An Empirical Study

The objective of this study is to investigate the impact of fiscal policies (FP) on borrowing costs and credit access (BCAC) for SMEs, considering the role of monetary policy (MP) as a the second independent factor. This research aims to understand more deeply how fiscal and monetary policies can be utilized to support growth and access to finance for SMEs, as well as identify remaining barriers to access to finance. Through comprehensive analysis, this study is expected to provide effective policy recommendations to improve access to credit for SMEs, which in turn can support economic growth and job creation. This study adopts a quantitative research design using statistical analysis to examine the impact of fiscal policies on borrowing costs and credit access for Small and Medium Enterprises (SMEs). The analysis will be conducted using the SMARTPLS 3.0. Sample size based on valuable samples are 120 of SME. The sampling technique used in this study will be purposive sampling. This approach will involve selecting SMEs that meet specific criteria, such as size, sector, and eligibility for relevant government programs or incentives. Result of this study state Fiscal Policy (FP) and Monetary Policy (MP) have a significant effect on Borrowing Costs and Access to Credit (BCAC).

Empirical Analysis of Monetary Policy and Economic Growth in Nigeria (1990-2022)

This study examines the effects of monetary policy on economic growth in Nigeria throughout 1990-2022. The Autoregressive Distributed Lag (ARDL) bound cointegration is employed to analyse both the short-term and long-term dynamics. The research incorporates various monetary policy instruments as variables, namely Broad Money Supply (MS), Interest Rate (INTR), Inflation Rate (INFR), and Exchange Rate (EXR). Additionally, Economic Growth is measured by the Real Gross Domestic Product Growth Rate (RGDP). It utilises published data from the Central Bank of Nigeria (CBN). Results indicate the long-term statistical significance of the money supply (MS), inflation rate (INF), and exchange rate concerning their impact on the Growth Rate of RGDP. In the short run, it was seen that the MS exhibited statistical significance and exerted a positive influence on RGDP. Conversely, both INTR and EXR were statistically significant and were associated with a negative and significant association with RGDP. Consequently, the study suggests implementing monetary policy to cultivate a conducive investment climate. This may be achieved by promoting market-driven interest and currency rates, stimulating domestic investment, and enticing foreign direct investment.

Capital controls, banking competition, and monetary policy

AbstractHow do capital controls and banking concentration affect economic development? This paper develops a general equilibrium model to study these important issues. To do so, we construct a framework with heterogeneous agents and imperfectly competitive financial intermediaries who help depositors manage liquidity risk. Importantly, higher levels of concentration raise the cost of domestic borrowing which increase the reliance on international capital markets. Finally, once the rate of money growth is sufficiently high, capital controls bind and the effects of monetary policy on capital formation are more pronounced.

The relationship between monetary stability and central bank independence: The case of Azerbaijan

The independence of the central bank is one of the most important factors for effective monetary policy. Central bank independence is closely related to monetary stability, which is an important part of monetary policy. In this study, the purpose of the analysis is to understand whether monetary stability functions effectively for central bank independence in Azerbaijan using the vector autoregression method. In addition, the Granger Causality test was conducted to empirically investigate how central bank independence affects the provision of monetary stability in the economy of Azerbaijan over the data period from 1996 to 2022. In this framework, indices or variables are the exchange rate stability index (ERS) in 1996–2022, the level of monetary independence index (MI) in 1996–2020, taken from the “trilemma indexes”, which are defined as the consumer price index (CPI) in 1996–2022, and the broad money supply (M2) in 1996–2022. The findings of the study show that the independence of the central bank has a positive effect on the monetary stability of the Azerbaijani economy.