Formulation Of Monetary Policy Research Articles

Regional effect of monetary policy based on GVAR model and machine learning

Monetary policy is an important means for a country to regulate macroeconomic operations and achieve established economic goals. Moreover, a reasonable monetary policy improves the efficiency of financial operations on a global scale and effectively resolves the financial crisis. At present, scholars from various countries have begun to pay attention to the issue of differentiated formulation of monetary policy among regions. This paper combines machine learning to construct a monetary policy differentiation effect analysis model based on the GVAR model. Moreover, this paper uses the gray correlation analysis method to obtain the gray correlation matrix between industries, and then introduces the industry’s own characteristics, industry relevance and macroeconomic factors into the macro stress test of credit risk. In addition, this paper constructs a conduction model based on the industry GVAR model, and uses the first-order difference sequence of GDP growth rate, CPI growth rate and M2 growth rate of each economic region to construct a GVAR model to test the impulse response function. The results of the test show that the monetary policy shocks of various economic regions are significantly different. All in all, the research results show that the performance of the model constructed in this paper is good.

Analysis of heterogeneity of inflation expectation based on genetic algorithm and time series model

The heterogeneity of inflation expectations, especially the residents’ inflation expectations, has a great influence on controlling the actual inflation rate and the effective implementation of my country’s monetary policy. In the process of monetary policy formulation, the monetary authorities need to pay more attention to the heterogeneous expectations among microeconomic individuals. This paper introduces the genetic algorithm, a new artificial intelligence method, to analyze the demand for the heterogeneity of inflation expectations and explains the basic steps to use it and how to apply it to explain problems in economics. Moreover, this paper uses a genetic algorithm-based generation overlap model to simulate the dynamic evolution of inflation heterogeneity among residents and the equilibrium selection process of price levels in a wide search space. The results of the simulation experiment show that it is of practical significance to use genetic algorithms to simulate the dynamic process of the heterogeneity of residents’ inflation expectations.

The Role of Board Oversight in Central Bank Governance

This paper discusses key legal issues in the design of Board Oversight in central banks. Central banks are complex and sophisticated organizations that are challenging to manage. While most economic literature focuses on decision-making in the context of monetary policy formulation, this paper focuses on the Board oversight of central banks—a central feature of sound governance. This form of oversight is the decision-making responsibility through which an internal body of the central bank—the Oversight Board—ensures that the central bank is well-managed. First, the paper will contextualize the role of Board oversight into the broader legal structure for central bank governance by considering this form of oversight as one of the core decision-making responsibilities of central banks. Secondly, the paper will focus on a number of important legal design issues for Board Oversight, by contrasting the current practices of the IMF membership’s 174 central banks with staff’s advisory practice developed over the past 50 years.

STRATEGIC DIRECTIONS AND MEASURES FOR REFORMING UKRAINE'S ECONOMIC POLICY

Topicality. The task of growth of the gross domestic product of the state necessitates the implementation of processes of demonopolization and deregulation of the economy, creation of conditions for free fair competition, effective functioning of strategic commodity markets, expanded reproduction of the labor potential of the country. Nowadays, the issue of development and implementation of the new economic policy of Ukraine taking into account specific factors of influence on the national economic system in the context of its stable reproduction development is of particular relevance and importance. Aim and tasks. The purpose of the article is to substantiate the strategic directions, measures and instruments of reforming the economic policy of Ukraine, as the basis of the national platform of the new economic course of the state. During the research the following methods were used: dialectical, theoretical generalization and comparison, graphical, structural-logical method. Research results. In the article the author substantiates the expediency of creation of multidisciplinary All-Ukrainian associations and their main tasks. Proposals for systematic reformation of the most important taxes have been worked out: personal income tax, single social contribution, value added tax and income tax. Attention is drawn to the need to achieve a rational level of aggregate tax burden in Ukraine. The expediency of risk insurance in business lending, the use of international principles and practices in the formulation of antitrust and monetary policy in Ukraine is substantiated. Based on the analysis of the commodity structure of domestic exports, the necessity to support the production and export of high value-added processing products has been proved. The need for educational reform, changing the paradigm of cheap labor, conducting a high-quality multidimensional analysis of the labor market and adopting an updated labor code were emphasized. Conclusion. The proposals developed in the article form the conceptual basis of the national platform of Ukraine's new economic course. The development of a step-by-step plan of action, changes to legislation and the legal framework, a system of mechanisms and measures for their practical implementation determine the prospects for further research in this area.

Monetary policy formation under the conditions of «smoothing» of the short-term Phillips curve

The Phillips curve is an important component of the theory and practice of monetary policy, aimed at providing important conditions for economic development and improving the welfare of the population. Since 1958, when the English economist W. Phillips first described (17) the relationship between inflation and the level of economic activity, the concept of the Phillips curve has undergone significant changes. Data from developed countries since the 1990s, especially after the 2008 crisis, indicate a weakening of this dependence. The «smoothing» of the Phillips curve became the basis for allegations of the completion of this story. However, before abandoning this theory, one should understand the reasons for the changes that will be crucial for the choice of future monetary policy.

Monetary policy under economic transformation in Ukraine

The research subject includes the theoretical basis and mechanisms of monetary policy formation and realization as an instrument of macroeconomic regulation. The aim of the study is to determine the features of domestic monetary policy and to systemize the policy’s stages under economic transformations. Methods. In order to achieve the appropriate tasks, we used a set of methods and approaches, that helped to ensure the conceptual unity of our investigation. The dialectical, systemic and structural approaches, methods of analysis and synthesis, comparison, generalization, scientific abstraction are applied. Results. The peculiarities of formation and realization of monetary policy of Ukraine under economic transformations are determined. The main stages of national monetary policy’s development are systemized. The dynamics of monetization, exchange rate and index of consumer price from 1992 to 2018 is investigated. Practical implications. Monetaryl policy and instruments of its implementation. Conclusions. Nowadays, the monetary policy has a formed institutional mechanism in order to reach the main goal and tasks. We identified the main phases of monetary policy of Ukraine. In the initial stage the main elements of monetary architectonics are established, also the powers and tasks of central bank are defined. The stage of functional improvement characterized by the restriction on central bank repayment of bonds on the primary market, decreasing the monetization of national economy, introducing the currency exchange corridor. At the steady development phase, we determined the exchange rate stability and gradual increasing of monetization level. Within the transitional stage of modification, the raising of monetization was continued, moreover, the combined using of methods on the currency market was carried out to stabilize it. Also, National bank defined the priority directions to enhance the bank system. The stage of institutional modernization is characterized by the monetary strategy formation, increasing the central bank institutional and financial independence, the adoption of inflation targeting regime, the improving of basic statements of currency transaction, the developing of macroprudential regulation to ensure financial stability.

Role of Oil Prices in Exchange Rate Devaluation: Risks of the Russian Ruble and Other Currencies

Subject and topic. Currently, the decrease in payments on foreign debts and a decrease in imports have an impact on the demand in the foreign exchange market. As a result, a situation has arisen due to the actions of the Bank of Russia, caused by threats of sanctions that provoked the absence of excessive demand and adequate supply in the foreign exchange market and led to a decrease in ruble exchange rate fl uctuations due to oil price movements.The subject of research is to determine the role of oil prices in the formation of monetary policy, which can be a key driver of economic growth.Objective. Identifi cation of exchange rate management practices with the search for the relationship between the current account of the balance of payments and the volatility of the national currency exchange rate.Research methods, the main provisions. Methods used grouping, comparing and summarizing economic indicators to study the characteristics and trends of the monetary policy of China, South Korea and Latin American countries.A critical analysis of the various points of view of leading scientists on the negative or positive impact of the exchange rate on the development of the economy was carried out. At the same time, it is interesting to analyze the views of individual economists that the dependence of the ruble exchange rate on oil prices has recently largely decreased.The main results of the study. Determination of the theoretical relationship between the price of oil and the exchange rate, based on the shock component, either in oil prices or in the exchange rate, with testing the response of the economic variable to this shock.Main conclusions. It was concluded that in the conditions of the economic situation of the last decade, the main problem of export-oriented and import-oriented countries is the imbalance of the current account of the balance of payments, as well as its relationship, primarily with the prices of export goods.

Monetary Policy Transmission via Financing Channel for Islamic Banks in Malaysia

Purpose – This paper sought to identify monetary policy transmission via financing channel in the light of systemically more important Islamic financial system in Malaysia. Focus will be centred on whether the financing channel of Islamic banks response appropriately towards monetary policy stance of Bank Negara Malaysia (BNM) which is essential in meeting the objective of the monetary policy implementation. Design/methodology/approach – The study employs the Autoregressive- Distributed Lag (ARDL) techniques to measure the relationships between variables associated with financing, base financing rate (BFR), overnight policy rate (OPR), bond yield, exchange rate, economic output as well as inflation. Findings – The outcome of the ARDL estimates indicate that the monetary policy transmission via financing channel is observed on short-run model. However none of the variables are statistically significant based on long-run model. Practical implications – Result of this study could justify new approach and strategy for monetary policy formulation and implementation in Malaysia. Originality/value – There were already a number of studies being conducted to measure the monetary policy transmission for Islamic banks in Malaysia and these studies in general proved that Islamic banks are the important conduit for channelling the monetary policy impacts. This study takes into account the recent development concerning Islamic banks and thus seeks to measure how more systematically important Islamic banks could post a threat to the overall efficiency of monetary policy transmission. The data used also reflect recent figures (January 2009 until December 2018).

Characterizing Monetary and Fiscal Policy Rules and Interactions when Commodity Prices Matter

We examine the extent to which commodity price fluctuations matter for monetary and fiscal policy formulation in high primary commodity export economies. Markov mixture specifications of monetary and fiscal policy rules, stylized to account for commodity price slacks are estimated using specifically designed Bayesian techniques. We find that policymakers do indeed respond to commodity price slacks, and with varying degrees, depending on the policy regime in place and the country under investigation. Policy is characterized by distinctive episodes of active and passive policy regimes, driven by the response of monetary policy to inflation and the response of fiscal policy to past government debt. Moreover, monetary authorities fail to act aggressively enough to achieve announced inflation targets or to synchronize with fiscal authorities. The results hold implications for the correct specification of policy rules and interactions in DSGE models for these economies.

The information content of market-based measures for the long-term inflation expectations of professionals: evidence from a midas analysis

ABSTRACTLong-term inflation expectations taken from the Survey of Professional Forecasters are a major source of information for monetary policy. Unfortunately, they are published only on a quarterly basis. This article investigates the daily information content of market-based measures, such as inflation-linked swaps and breakeven inflation rates, for the next survey outcome. Using a mixed data sampling approach, we find that professionals account for the daily dynamics of market-based measures when they submit their long-term inflation expectations. We propose a daily indicator of professionals’ inflation expectations that outperforms alternative indicators that ignore the high-frequency dynamics of market-based measures. To illustrate the usefulness of the new indicator, we provide new evidence on the (re-)anchoring of U.S. inflation expectations.

How effective is central bank communication in emerging economies? An empirical analysis of the chinese money markets responses to the people\u2019s bank of China\u2019s policy communications

Central banks, in both developed and developing economies, are responding to the increased demand for transparency in monetary policy formulation and implementation. It is argued that central bank communication enhances market efficiency and calms down market volatility. This paper investigates to what extent that the People Bank of China’s (PBC) communication influences the Chinese money market. Three communication indexes were constructed and used in the empirical analysis. The findings indicate that the PBC’s communication has a significant effect on the country’s money market. Secondly, informal communication appears to be more effective than formal communication. Overall, the results suggest that policy makers and market observers could pay much more attention to the informal communications, such as speeches of the bank’s officials, than formal ones, such as the bank’s report and minutes.

Wage Growth Puzzle and Capacity Utilization

Wage growth and consumer price inflation in the United States remain weak, despite robust labor market and a healthy economy. This has been a conundrum for policymakers and economists alike, albeit it is not without parallels. In this paper, we analyze recent trends in the labor market. We point out that a number of indicators are providing mixed signals about the tight labor market, including wage growth that has remained muted, vacancy duration rates that have stayed remarkable stable in certain sectors, and the rate of capacity utilization, which is cyclically low and out of sync with other measures of resource utilization (e.g., output gap and unemployment rate). This leads us to conclude that there could be other forces that explain these phenomena. In this paper, we focus on capacity utilization and contend that low capacity utilization rates are the outcome of strategic decision-making by corporations, rather than inefficient demand, which permits firms to manage their resources more effectively. It seems to be particularly important when economic and policy uncertainties are elevated, such as in the post-financial crisis environment. More flexible use of capacity has implications not only for the labor market, but also for investments. Understanding capacity utilization would contribute to monetary policy formulation when the signal coming from the rate of capacity utilization is not consistent with those coming from the labor market and the output gap. This points to the need to continue monitor a broad range of indicators to avoid potential policy errors.

Demonetization, economic restructuring and monetary sustainability in war prone Afghanistan

Demonetization is a transitory economic intervention for currency regulation in the economy where a ban is imposed on legal currency circulation in the economy. This study analyses the impact of demonetization on the economic conditions of war-prone Afghanistan. The data for analysis is taken from World Bank database, Da Afghanistan Bank, Central Statistics Organization (CSO) and IMF websites for the period 2002 to 2017. T-test, GVA, Trend Forecasting and OLS are used in the analyzing the data. The present study showed the impact of demonetization on different sector of Afghanistan economy. The gross value added of Afghanistan in post demonetization showed a fluctuation trend in agriculture sector in long-run, in some year it‘s slightly decreasing compared to the previews years, but in the initial years demonetization impact is highly positive. As per the t-test analysis the positive effect of demonetization on GDP is significant in long-run. Through regression analysis and trend projection, we found that there is a linear trend in GDP i.e. GDP is increasing over the time. Findings suggest that Demonetization brought economic growth, as well as progress in financial sector through reforms and developments in formulation of monetary policy and fiscal policy in Afghanistan. The study will provide useful insights to Central Bank of Afghanistan, policy makers, and contribute to the general body of Knowledge.

Islamic banking system: a credit channel of monetary policy – evidence from an emerging economy

Since its inception, Islamic banking in Pakistan has shown remarkable growth and development. Most recent statistics reveal that industry has captured around 13% of the total banking market in Pakistan. This outstanding growth of the industry highlights the crucial role of Islamic banks for monetary policy considerations. This study aimed to evaluate the role of Islamic banks in the monetary transmission process in Pakistan. The study examined the role of two most crucial balance sheet items of Islamic banks in the monetary transmission process: (1) Islamic deposits and (2) Islamic financing. The paper employed time series techniques such as the J.J. co-integration test, Vector Auto Regression, Variance Decomposition Analysis and Impulse Response Function to investigate the role of Islamic banks in the monetary transmission process. The study sample covered the time period 2007–2017. The results revealed the significant role of Islamic banks in transmitting monetary decisions to the real economy. Moreover, the evidence demonstrated the active bank lending channel of Islamic banking in Pakistan. The findings also corroborated the functional role of Islamic banks along with their conventional counterparts for effective formulation of monetary policy in Pakistan.

The Role of Board Oversight in Central Bank Governance: Key Legal Design Issues

This paper discusses key legal issues in the design of Board Oversight in central banks. Central banks are complex and sophisticated organizations that are challenging to manage. While most economic literature focuses on decision-making in the context of monetary policy formulation, this paper focuses on the Board oversight of central banks-a central feature of sound governance. This form of oversight is the decision-making responsibility through which an internal body of the central bank-the Oversight Board-ensures that the central bank is well-managed. First, the paper will contextualize the role of Board oversight into the broader legal structure for central bank governance by considering this form of oversight as one of the core decision-making responsibilities of central banks. Secondly, the paper will focus on a number of important legal design issues for Board Oversight, by contrasting the current practices of the IMF membership's 174 central banks with staff's advisory practice developed over the past 50 years.

Financial Sector Reforms, Monetary and Output Uncertainties and the Behavior of Money Demand in Kenya: The Divisia Index Approach

The financial sector reforms implemented by the Central Bank of Kenya (CBK) resulted in rapid financial innovation (such as the popular M-Pesa mobile money services) growth, and expansion of several interest earning financial instruments. These developments affect the definition and composition of monetary aggregates, posing a question on the correctness of the current money measures used by CBK. The simple sum aggregates were identified with several theoretical and empirical shortcomings. The rapid financial sector development might affect the stability of money demand function. This study constructs Divisia monetary aggregates for Kenya over the period of 2000’s first quarter to 2015’s third quarter and applies the ARDL method in investigating the stability of money demand function. For the first time, monetary uncertainty and output uncertainty variables are introduced to the Kenyan money demand model. The results reveal that both monetary and output uncertainty has significant influence on money demand in Kenya. This implies that omitting the two variables in the Kenya money demand function might lead to a wrong specification. The money demand function is stable over the period. It means that monetary aggregates targeting is the right framework for monetary policy formulation by the CBK.

Global Shocks Alert and Monetary Policy Responses

The study examines the role of global predictors on national monetary policy formation for Kenya and Ghana within the New Keynesian DSGE framework. We developed and automatically calibrated our DSGE model using the Bayesian estimator, which made our model robust to rigorous stochastic number of subjective choices. Our simulation result indicates that global factors account for the inability of national Central Banks to predict the behaviour of macroeconomic and financial variables among these developing nations.

Analysing the spillover of inflation in selected Euro-area countries

We examined the spillover of inflation in selected Euro-area countries using monthly consumer price index (CPI) based inflation data covering the period 1955M1 to 2017M4. To achieve our objective, we used two recently developed methods of spillover: a time-domain spillover method, Diebold–Yilmaz (hereafter referred as DY method) and a frequency-domain method, Barunik–Krehlik (hereafter referred as BK method). We analysed 1–4 months and more than 4 months spillovers. The study has importance because the co-movement in the international inflation rates, among others, may be produced by common shocks, similarities in central bank reaction functions, international trade and the operation of purchasing power parity theory. However, to assess the synchronisation of inflation fluctuations across countries or regions, it is critical to understand the inflation behaviour and formulation of correct monetary policy.

Revisiting Money Demand Stability in India: Some Post-reform Evidence (1996–2016)

In the evidence of the globalised world economy and changing economic structure, the traditional policies require a close examination. This is particularly true in the case of emerging economies like India, which have experienced a rapidly changing policy environment since 1991. The demand for money is an important ingredient for monetary policy formulation. Therefore, the present study re-examines the stability and specification issues of money demand in India’s post-reform era. The study takes care of structural breaks in the macroeconomic series while using a unique quarterly dataset from 1996: Q2 to 2016: Q3. Despite the structural breaks, the application of Gregory and Hansen (1996) and autoregressive distributed lag models demonstrate the existence of a stable short-and long-run relationships between real money balances and their determinants. These empirical findings are having a lot of policy implications in the current monetary policy framework of India—inflation targeting framework.

Regime-shifts in India’s monetary policy response function

Objectives of monetary policy have always been debated intensively. This debate has resurfaced during past few years in some countries including India where formulation of monetary policy has undergone significant change during the last two decades and is increasingly responding to changing macroeconomic environment. Against this backdrop, this paper models the monetary policy response function for India, for the period April 1996–July 2015. Using 91-day Treasury bill rate as the policy rate, the study finds that monetary policy in India has been responsive to inflation rate, output gap and exchange rate volatility (proxied by the rate of depreciation of INR/USD) during this period. This paper finds evidence in favour of substantial time varying behavior in the reaction function. The regime shift tests show that the transition is governed by inflation gap as well as exchange rate volatility (depreciation rate). Highly complex dynamics of interest rate restricted estimation of multiple models, but the models which are estimated show that the response function responds to inflation gap as well as exchange rate volatility. Another important finding of the study is high degree of inertia in the policy rates.