Effectiveness Of Monetary Policy Instruments Research Articles

Analysing the evolving effectiveness of monetary policy instruments in China: insights from the TVP-SV-MF-bfavar framework

ABSTRACT The application of monetary policy rules requires careful consideration across different macroeconomic stages. As the largest developing nation, China has undergone significant economic reforms over the past few decades, providing valuable insights into the effectiveness of various monetary policy rules at different stages of development. This study introduces an innovative research framework, the TVP-SV-MF-BFAVAR model, and employs mixed-frequency data (quarterly, monthly, daily) spanning 20 years to construct relevant proxy indices. It empirically examines the evolving trends in the effectiveness of price-based and quantity-based monetary policy rules in China. The findings indicate that as the economy matures and interest rate marketization progresses, the effectiveness of price-based monetary policy has improved, while quantity-based measures remain reliable policy instruments. Moreover, the effectiveness of monetary policy rules exhibits distinct time-varying characteristics in response to macroeconomic fluctuations, suggesting the need for policy adjustments across different economic stages. Developing nations should actively promote interest rate marketization reforms to foster an enabling environment for the effective implementation of monetary policy.

Transmission Mechanisms of Inflation Targeting: Analysis of Transmission Processes

The purpose of the study is an analytical review of the main theories of inflation targeting and transmission mechanism. Inflation targeting is a monetary policy strategy in which the central bank sets a specific inflation rate as the main target and makes decisions on the interest rate and other measures to achieve this goal. The insufficient capitalization of second-tier banks and the low quality of existing borrowers create difficulties in linking the structural liquidity surplus and require its sterilization by using monetary policy instruments with longer terms. As the economy recovers, the impact of the transmission mechanism on inflation will deepen. Improving the channels of the transmission mechanism by gradually eliminating constraining factors will increase the effectiveness of transferring monetary policy decisions to inflation. The effectiveness of monetary policy instruments largely depends on the effectiveness of transmission channels, through which signals of the influence of the National Bank of the Republic of Kazakhstan (NBK) on internal economic processes, including inflation, are transmitted. The measures taken by the NBK to curb inflation primarily include reducing the depreciation of the tenge by raising the base rate, which ensures the attractiveness of tenge instruments. The base rate of the NBK is the main benchmark for the cost of money and lending to the country's economy. Starting from the government and ending with small and medium-sized businesses, they attract funding based on the base rate of the NBK. This indicates the presence of serious imbalances in the functioning of certain channels of the transmission mechanism of the NBK's monetary policy, along with structural problems of the economy. Impact on inflation expectations. Inflation targeting is aimed at forming and maintaining low and stable inflation expectations among the population and entrepreneurs. Changes in inflation expectations can affect the behavior of consumers and firms, which, in turn, can affect prices and wages.

THE MONETARY COMPONENT IN ENSURING THE FINANCIAL SECURITY OF THE STATE

The paper studies the place and degree of the monetary component's influence on the level of financial security of the state in the conditions of political and socio-economic imbalances in the development of Ukraine. The aim of the research is to investigate the effectiveness of monetary policy instruments, to determine the level of the monetary component's impact on the financial security of the state, as well as to form perspectives for balancing the symbiosis of "monetary policy and national financial security". Based on the conducted research, it is established that in recent years the role of the financial security system formation at all levels has significantly increased, whether it is macroeconomic security, the security of economical subjects, or the financial security of a household. At the same time, the monetary component plays a significant role in ensuring the financial security of the state, namely, it affects macroeconomic processes in the country. Therefore, in order to ensure macroeconomic stability and economic growth in the context of ensuring the financial security of Ukraine under martial law, it is necessary to improve the mechanisms of monetary policy. The article analyzes the latest threats that lead to the negative impact of the monetary component on the financial security of the state. These include: the consequences of russian military aggression on the economic development of Ukraine, continued COVID-19 outbreaks, the introduction of administrative restrictions on the use of monetary policy instruments by the National bank of Ukraine, violations of the economic security of financial institutions, an insufficient level of financial inclusion, and the contradictory nature of the coordination of monetary and fiscal policies. In the context of establishing the decisive role of the monetary component in ensuring the financial security of the state, the adopted development strategies at the level of national security of Ukraine and at the level of the monetary sector of Ukraine are considered and systematized. The block diagram of the implementation of monetary policy in the context of ensuring the financial security of the state is proposed. It is proved that the mechanism of such interrelationship is implemented through the instruments and methods of monetary policy in combination with key macroeconomic indicators. To confirm the proposed hypothesis, the econometric model of the influence of monetary instruments on the level of financial security of the state is developed. As a proxy indicator of the financial security of Ukraine, the Financial Stress Index is used, which reflects the current state of the financial sector (without considering future risks) and consists of sub-indices for the banking sector, households, government and corporate securities, and foreign exchange market. Estimated and re-estimated models made it possible to determine the most influential indicators of the monetary component of the Financial Stress Index, namely: consumer price index; producer price index; GDP to monetary aggregate M2 ratio; cash to GDP ratio; share of foreign currency in monetary aggregate M3; NBU key policy rate (annual average); share of non-performing loans (NPL). The proposed model can be used to forecast the influence of the parameters of the monetary component on the level of financial security of the state.Based on the results of the study, it is proved that, despite the difficult political and economic situation in Ukraine, it is necessary to focus on improving the coordination of monetary and fiscal policies, considering the further implementation of the main provisions of international documents adopted by International Monetary Fund on this issue.

Effectiveness of Monetary Policy Instruments on Bank Liquidity Management

Recognising the importance of monetary and price stability for sustainable growth, many countries’ Central Banks often set certain liquidity targets to be achieved using various monetary policy instruments. This study fills the gap in the literature by employing the ARDL Bounds test to examine the relative effectiveness of a combination of quantity- and price-based policy instruments used by the Central Bank of Nigeria to regulate the level of bank liquidity. Also, the likelihood ratio test is used to determine whether monetary policy instruments work better as a complement (or substitute) concerning liquidity management. Using quarterly data covering 2008/Q1-2020/Q2, we found that, price-based instruments mostly impact liquidity levels in the short- and long-run. The quantity-based instrument shows a significant impact at second lag. However, the impacts of some policy instruments were inconsistent which is partly due to their low usage as short-run measures. We found all the six monetary instruments considered in this study to be complementary for liquidity management. By implication, the combination of monetary instruments for liquidity management is in order. While MPR remains crucial in determining liquidity, a continuous review of its operationality to identify and reduce possible distortions will be beneficial. Also, there is a need for CBN to reassess the disbursement of interventions and their implications on liquidity.

THE IMPACT OF MONETARY POLICY ON THE ECONOMIC GROWTH OF KUWAIT FOR THE PERIOD OF 1980-2020

The government of Kuwait has shifted its focus from the dependence on oil and has concentrated on applying a long-term strategic vision that seeks to recover the economy and raise the citizens’ standard of living. To accomplish these objectives, monetary policy should be formulated appropriately by the government. However, it seems that the effects of monetary policy instruments on the economic growth of Kuwait are not obvious. Therefore, the main purpose of this study is to empirically explore the effect of monetary policy on Kuwaiti economic growth. This research uses annual time series data on real GDP, exchange rate, broad money supply (M2), consumer price index, and deposit interest rate over the period (1980 - 2020) and applies Vector Error Correction Model (VECM). The results of the empirical analysis show the presence of a long-run relationship between real Gross Domestic Product and monetary policy instruments. Specifically, it finds that broad money supply (M2), deposit interest rate, and consumer price index affect economic growth positively and statistically significant. While the exchange rate affects real Gross Domestic Product negatively and statistically insignificant. The Granger causality test based on VECM shows two unidirectional causal relationships running from broad money supply and consumer price index to real GDP in the short run. Thus, the study suggests that policymakers concentrate on improving the economy by managing interest rates and maintain supporting environment for sustainable economic growth and development.

U.S. Monetary Policy and Commodity Prices: A SVECM Approach

AbstractThis article discusses how U.S. monetary policy shocks can influence commodity prices. Historically, a lot of studies in the literature have investigated the impact of short‐term interest rates on different types of commodity prices. This article takes a more comprehensive approach and contributes to the literature by analysing the effect of both short‐ and long‐term interest rates as well as M2 money stock on commodity prices at aggregate and sub‐indices levels. The “B‐model” variant of structural vector error correction models (SVECMs) is used to estimate the restricted contemporaneous impact matrix (SR) and the restricted long‐term impact matrix (LR). Furthermore, SVECMs impulse response functions are used to evaluate the extent to which monetary policy shocks explain commodity prices. In contrast with the results of previous studies, we do not find evidence of a strong response pattern of commodity prices to monetary policy shocks in the short term. However, monetary policy shocks can explain commodity prices and their components in the long term. From a policy point of view, monetary authorities should exercise caution in using short‐term effects of monetary policy instruments on commodity prices, given their long‐term impact is inflationary while there are no beneficial short‐term effects.

The effectiveness of monetary policy instruments under dollarization: a cross-country analysis

ABSTRACT This paper investigates the effectiveness of monetary policy instruments under dollarization in association with economic growth and inflation using 30 countries from 2000 to 2016. The estimation results indicate that first, the monetary aggregates, M2, are more relevant policy instruments while the interest rates including policy rates exhibit overall limited effectiveness under dollarization. Second, the effectiveness of monetary aggregates in association with economic growth is more significant and sizable in the countries with floating exchange rates. Finally, the relevancy of interest rate rules for monetary policies is relatively improved for the de-dollarization countries.

ЕФЕКТИВНІСТЬ МОНЕТАРНОЇ ПОЛІТИКИ ЦЕНТРАЛЬНИХ БАНКІВ У СФЕРІ ФІНАНСОВОЇ АКТИВНОСТІ ДОМОГОСПОДАРСТВ КРІЗЬ ПРИЗМУ НОВОЇ КЕЙНСІАНСЬКОЇ ШКОЛИ

The monetary policy of the central bank of any state is designed to regulate the money supply through the use of many monetary instruments. The use of the discount rate, foreign exchange interventions, the reduction or increase of required bank reserves according to classical Keynesianism should influence the intertemporal choice of households. However, not all tools have the same effect on household choices and therefore studying the effectiveness of their use is relevant. The purpose of the article is to study the impact of the central bank's monetary policy on financial and investment activities of the population. Determining the effectiveness of monetary policy instruments used by central banks through the prism of the new Keynesian school. The following scientific methods were used during the research: analysis and synthesis, deductive method, analogy method, modeling, system approach, abstraction method. Monetary policy of central banks affects the economy. Changes in the discount rate increase the number of loans and deposits, change interest rates in the loan capital market. In the long run, this affects the dynamics and growth rates of loans and deposits. However, household income and consumption levels have a significant impact on household decisions about current and future consumption, intensification or, conversely, reduction of financial and investment activities. Reducing the discount rate to 6% did not lead to an increase in retail deposits and the number of securities. It is established that the decrease in inflation did not lead to an increase in incomes and consumption of goods and services. Financial activity is most affected by income levels and wealth. The impact of monetary instruments on households is adjusted and even often offset by «sticky prices», «sticky wages», «sticky information» and income heterogeneity in the structure of households. According to the study, the reduction of the discount rate did not affect the increase in deposits and savings in securities of the population. Therefore, when formulating monetary policy, the NBU should also take into account the relationship with income and wages, between liquid and illiquid assets, the marginal propensity to consume with low incomes, taking into account the intermediate choice, «sticky prices», «sticky wages» and «sticky information».

An Empirical Analysis of The Effect of Monetary Policy on Inflation in Nigeria; 1970 – 2018

This study empirically analysed the effect of monetary policy on inflation in Nigeria; 1970 – 2018. The objective is to determine the effectiveness of monetary policy instruments on inflation in Nigeria. In doing this, relevant literature was reviewed and theoretical relationship between monetary policy and inflation was established following the quantity theory of money by Irving Fisher. The study employed time series data sourced from the statistical bulletin of Central bank of Nigeria (CBN) 2018. Stationarity test was also conducted on the time series data to determine the order of integration using Augmented Dickey Fuller (ADF) test. The unit root test revealed that inflation rate was stationary at level i.e. I(0) while monetary policy rate, treasury bill rate and cash reserve ratio were stationary at first difference i.e. I(1). The estimated results showed that there is cointegration between monetary policy variables and inflation rate in Nigeria. The results revealed that Monetary Policy Rate (MPR) was statistically significant in the short run after first difference, which indicates that monetary policy rate (MPR) exerts significant effect on inflation in Nigeria in the short run. Based on these findings, the study concluded that monetary policy variables alone are not sufficient enough in maintaining price stability in Nigeria. Therefore, the Federal government, Central Bank of Nigeria (CBN) and policy makers should simultaneously use monetary and fiscal policy instruments to maintain price stability in Nigeria.

The Effectiveness of Monetary Policy Instruments Applied for Financial Stability in Turkey

As a result of the financial problems that emerged with the 2008 global crisis, central banks have developed non-traditional monetary policies within macroprudential policies due to protect the financial structure. In this context, the Central Bank of the Republic of Turkey (CBRT) has established a new monetary policy framework covering financial stability as of 2010. The aim of this study is to analyze the effectiveness of monetary policy tools applied for financial stability in Turkey. In the study, the effectiveness of monetary policy instruments applied for financial stability in the period 2010-2016 was analyzed within the VAR model. According to the results of the study, a meaningful causality relationship was found between the instruments of monetary policy applied to financial stability and the variables of financial stability. The findings of the analysis show that monetary policy instruments used by the CBRT within the new monetary policy have contributed to financial stability when used together.

CRITICAL ASPECTS OF THE EVALUATION OF MONEY AND CREDIT POLICY BASIC PRINCIPLES OF THE NATIONAL BANK OF UKRAINE

Introduction. The article deals with the problems and drawbacks of the formation of the fundamental principles of money and credit policy. The key elements of money and credit are considered. Among these elements the authors distinguished the goals and instruments of policy implementation, the monetary regime, mechanisms for ensuring price and exchange rate stability. On the basis of the results of critical analysis of the fundamentals of money and credit policy, the authors have worked out their own recommendations to optimize the document itself and the money and credit policy of the National Bank of Ukraine as a whole. Purpose. The research aims to determine the important weaknesses in the formation of the fundamental principles of money and credit policy as an integral strategic document to form the proposals for its optimization on the basis of the necessity to revise the monetary policy of the National Bank of Ukraine in the direction of achieving financial stability and stimulating economic growth. Method (methodology). In the course of the research we have used the methods of system analysis to assess the effectiveness of the fundamental principles of money and credit policy; methods of analogy and comparison to study the money and credit policy instruments of the National Bank of Ukraine and the leading central banks of the world; statistical methods to analyse the dynamics of macroeconomic indicators. Results On the basis of the complex analysis of the fundamental principles of monetary policy, the existence of the National Bank's surface analysis of global trends in the development of the world economy and possible risks for Ukraine has been substantiated. The ineffectiveness of scenario planning of the Ukrainian economy development has been proved. The incomplete account of risks that negatively affect the efficiency of money and credit policy has been considered. Particular attention is paid to analysis of the effectiveness of monetary policy instruments in the context of ensuring price stability and supporting sustainable economic growth. It has been developed a number of methodological recommendations concerning the introduction of transitional monetary regime, optimization of monetary policy instruments, in particular long-term refinancing instruments, improvement of the analysis of external shocks and scenario planning of economic development, grounding of more logical and structured approach to the construction of the fundamental principles of money and credit policy.

Indirect Monetary Policy Instruments and Poverty Reduction in Nigeria: An Empirical Evidence from Time Series Data

The paper examines the effectiveness of indirect monetary policy instruments in reducing poverty in Nigeria using a multiple regression model as well as time series data covering the period 1986 to 2012. The Ordinary Least Squares (OLS) technique was used in the estimation of the regression model. The OLS regression result revealed that interest rate (INTR), banking sector’s credit to the economy (BSCE), bank reserve requirement (BARR), bank liquidity ratio (BLQR), central bank discount rate (CBDR) and inflation rate (INFR) could not significantly impact on poverty rate except money supply (MS), real gross domestic product (RGDP), unemployment rate (UNEMPR) and balance of payment (BOP). A major implication of this result is that indirect monetary policy instruments alone were grossly inadequate measure/policy to reduce poverty in Nigeria during the period under review. The paper therefore recommends that in addition to combining monetary policy with other economic policies (fiscal, income policies) etc to fight poverty in Nigeria, the monetary authorities as a matter of obligation must strengthens banking rules and regulations to enhance compliance with CBN’s rules and directives by commercial banks in order to further facilitate and enhance the effectiveness of monetary policy instruments in the economy in order to influence poverty reduction in Nigeria.

Unraveling the Monetary Policy Transmission Mechanism in Sri Lanka

In this paper we examine the channels through which innovations to policy variables— policy rates or monetary aggregates—affect such macroeconomic variables as output and inflation in Sri Lanka. The effectiveness of monetary policy instruments is judged through the prism of conventional policy channels (money/interest rate, bank lending, exchange rate and asset price channels) in VAR models. The timing and magnitude of these effects are assessed using impulse response functions, and through the pass-through coefficients from policy to money market and lending rates. Our results show that (i) the interest rate channel (money view) has the strongest Granger effect (helps predict) on output with a 0.6 percent decrease in output after the second quarter and a cumulative 0.5 percent decline within a three-year period in response to innovations in the policy rate; (ii) the contribution from the bank lending channel is statistically significant (adding 0.2 percentage point to the baseline effect of policy rates) in affecting both output and prices but with a lag of about five quarters for output and longer for prices; and (iii) the exchange rate and asset price channels are ineffective and do not have Granger effects on either output or prices.

Factor-augmented VAR analysis of the monetary policy in China

We investigate the transmission mechanism of monetary policy in China over the past decades with emphasis on the post-Asian crisis period. A factor-augmented VAR method is used to study the effectiveness of monetary policy instruments in stabilizing the Chinese economy. We find that repo rate, benchmark lending rate, and a market-based monetary stance have little impact on the Chinese economy, and are only mildly effective when the exchange rate is more market-determined. The non-market-based measures of People's Bank of China, such as growth rates of total loan and money supply, are effective in adjusting the real economy and price level. Given the slow pace of exchange rate reform, China is likely to continue employing non-market-based policies in the near future.

A Macro Model of the Credit Channel in a Currency Union Member: The Case of Benin

This paper applies and extends a theoretical model built by Agenor and Montiel (2007) by exploring the effectiveness of government bonds and monetary policy in a small, open, credit-based economy with a fixed exchange rate. The model is applied to Benin, a member of a currency union, using a general equilibrium model with stochastic simulation. Model calibration replicates the historical pattern for 1996–2009. Policy experiments simulated an increase in government securities in Benin’s regional market and a cut in the reserve requirement. Simulations produced mixed results. It appears that, among other factors, excess bank liquidity lowers the effectiveness of monetary policy instruments through the credit channel and that government bonds can help mop up excess bank liquidity.

A Macro Model of the Credit Channel in a Currency Union Member: The Case of Benin

This paper applies and extends a theoretical model built by Agenor and Montiel (2007) by exploring the effectiveness of government bonds and monetary policy in a small, open, credit-based economy with a fixed exchange rate. The model is applied to Benin, a member of a currency union, using a general equilibrium model with stochastic simulation. Model calibration replicates the historical pattern for 1996–2009. Policy experiments simulated an increase in government securities in Benin’s regional market and a cut in the reserve requirement. Simulations produced mixed results. It appears that, among other factors, excess bank liquidity lowers the effectiveness of monetary policy instruments through the credit channel and that government bonds can help mop up excess bank liquidity.

Inflation, Growth, and Financial Intermediation

The authors summarize the recent empirical work on the growth effects of monetary policy instruments and compare the empirical findings with the implications of quantitative models in which monetary policy can affect growth rates. 

Endogenous money supply and monetary policy in asset markets with alternative rationing schemes

In this paper we consider quantity determination in financial markets where the rates of return on deposits and bank loans are assumed to be rigid but the rate on securities is flexible, and the agents taking part in the financial markets make dual decisions and portfolio selections. Our model is motivated by observations of Japan's postwar financial markets. We also examine and compare the effects of monetary policy instruments between the two regimes which differ from each other in the effective disequilibrium condition in the market for bank loans. J. Japan. Int. Econ., March 1987, 1(1), pp. 110–129. Institute of Social Sciences, University of Tsukuba, Sakura, Ibaraki 305, Japan.