Formulation Of Monetary Policy Research Articles

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.

Texas Service Sector Outlook Survey: Survey Methodology and Performance

The Texas Service Sector Outlook Survey (TSSOS) and Texas Retail Outlook Survey (TROS) are monthly surveys of service sector and retail firms in Texas conducted by the Federal Reserve Bank of Dallas. TSSOS and TROS track the Texas private services sector, including general service businesses, retailers and wholesalers. The surveys provide invaluable information on regional economic conditions—information that Dallas Fed economists and the Bank president use in the formulation of monetary policy. This paper describes the survey’s methodology and analyzes the explanatory and predictive power of TSSOS and TROS indexes with regard to Texas employment growth. Regression analysis shows that several TSSOS and TROS indexes help explain monthly variation in Texas employment. In addition, most TSSOS and TROS indexes are also useful in forecasting Texas employment growth.

MONETARY POLICY OF GEORGIA IN XI-XII CENTURIES AND ITS INFLUENCE ON THE INTERNATIONAL FINANCIAL AND ECONOMIC RELATIONS

This works we have researched the matters of formation of monetary policy of feudal age and their effect on development of foreign trade, methods of money formation important for the present world, which correct choice may provide increase of production volume and economic activity. Currency policy, geopolitical and geostrategic localization proved the country to turn into one of the economically strong economic states with high standard of life, developed system of socioeconomic relations approached to the international standards and democratic institutions.

HAS MONETARY POLICY CAUSED HOUSING PRICES TO RISE OR FALL IN CHINA?

This paper examines whether broader money supply (M2) and interest rate as two monetary policy tools may have differently affected housing prices in China. Empirical results show that there is a co-movement between housing prices and M2 in the short run and it becomes more pronounced after 2006 in the medium run. In addition, generally M2 positively affects housing prices. This supports the asset price channel which indicates that an easing monetary policy offers ample liquidity and results in raising the housing prices. The excess liquidity after 2008 spread to housing market, resulting in too much money chasing relatively few assets and triggering a surge in housing prices. On the other hand, we observe that co-movement between housing prices and interest rate is not very evident in most time. Moreover, we find that interest rate has a positive effect on housing prices which is not consistent with the user cost approach and indicates that a contracting monetary policy is not effective in curbing housing market. Not completely liberalized interest rate system and the high return on housing investments reduce the impact of interest rate on housing prices. These findings indicate that money supply is more effective than interest rate as channel to control the housing prices in China. The results are helpful for the scientific formulation of monetary policy for reasonable regulation of the market.

A Quarter Century of Inflation Targeting & Exchange Rate Pass-Through: Evidence from the First Three Movers

This study has analysed the implications of Inflation Targeting for the Exchange Rate Pass-Through (ERPT) to inflation and trade balance. In this endeavour, we have focused on the first three movers i.e. New Zealand, UK and Canada. Drawing on the monthly data from October 1976 to September 2017, we employed a Time-Varying Structural Vector Auto-regressive framework in which the sources of time variation were both the coefficients and variance-covariance matrix of the innovations. Our key findings suggest that there is significant evidence of time-variation in the ERPT to inflation and trade balance in all three countries. In specific to inflation, the results showed that contrary to the notion that the ERPT to inflation has decreased in the Inflation Targeting economies, in fact, there is strong evidence that if there is anything, it is the other way around. The results using the ADF unit root test with a structural break (with innovation and additive outliers) suggested that the coefficients for inflation showed a decrease in oscillations which corresponded with the start of inflation targeting. However, this coincident cannot lead to infer that the ERPT has lost its significance. There is also a considerable amount of heterogeneity in the ERPT in the under-analysis countries. Specifically, in response to the positive Real Effective Exchange Rate (REER) shock, the inflation fell in the UK and New Zealand whereas, in Canada, it had the opposite effect. On the ERPT to the Trade Balance, the results on the UK showed a clear evidence of J-curve whereas in Canada, the impact was rather instantaneous and the trade balance quickly deteriorated. In New Zealand, the trade balance also showed deterioration in response to the REER shocks, although comparatively there was milder response than Canada and UK. Our findings have profound implications for monetary policy formulation under inflation targeting regimes and the influence of EPRT on price stability and external balance.

Monetary System of Georgia in XI-XII Centuries and Its Effect on Economic Activity

This works covers peculiarities of formation of Georgian monetary system in XI-XII centuries and their effect on the international financial and economic relations. In this works we have researched the matters of formation of monetary policy of feudal age and their effect on development of foreign trade, methods of money formation important for the present world, which correct choice may provide increase of production volume and economic activity. Currency policy, geopolitical and geostrategic localization proved the country to turn into one of the economically strong economic states with high standard of life, developed system of socioeconomic relations approached to the international standards and democratic institutions.

Government Debts, Term Premium and Monetary Policy Choice

The global financial crisis derived from America in 2008 has brought about tremendous shocks to world economy. In order to halt economic decline, State Council launched the four trillion investment plan. Under guidance of this plan, both center and local governments borrow heavily to promote infrastructure construction, thereby resulting in a significant rise in both central and local government debts. According to Audit Results of National Government Debt issued by National Audit Office in December 2013, by end of June 2013, size of debts which local governments are liable for repayment has reached 10.9 trillion yuan. And according to authors' estimation, at present, this size may get close to 20 trillion yuan. In meanwhile, financial debt balance of central government has raised from 5.28 trillion yuan in 2008 to 10.20 trillion yuan in 2015. What's more, after 2008, leverage rate of government sectors also encounters a rapid increase, from 41 percent to 57.8 percent in 2014 year by year.At present, central government debts are all long-term bonds. After implementation of Budget Law in 2015, local government debts are swapped by bonds of 5 to 10 years. By time of July 2017, swap size of local government debts has overwhelmed 10 trillion while stock of local government debts still exceeds 13 trillion, which is larger than size of central government bonds. Such government debts inevitably hammer long-term debt market and then influence term premium strongly. However, this point is ignored by existing literature of government debts. This paper takes term premium as starting point and establishes DSGE model containing long-term and short-term bonds to analyze influence and mechanism of government debt expansion on macro economy. In China, as over 60% of treasury bonds are held by banks, so we assume that households cannot directly participate in long-term debt market and can only perform short-term funding in financial sectors like banks. In addition, banks under capital constraints play an important role in our model. They maximize their expected profits by absorbing resident deposits, lending to capital goods firms and purchasing government bonds.Numerical simulation with parameters of calibration and Bayesian estimation shows that after expansion of government debts, both term premium and yield rate of long-term debts increase, crowding out private investment and consumption, and diminishing output. The segmentation of bonds market and restriction of adjustment costs faced by banks lead to result that there is no chance to arbitrage between short-term and long-term bonds to lower down term premium. Furthermore, we investigate monetary policy selection under expansion of government debts. We find that monetary policy being pegged to term premium can reduce distortion caused by expansion of government debts and thereby improve social welfare.As China's economy steps into new normal phase, monetary policy should be better utilized to serve macro-economic operation. Based on welfare analysis, we suggest that when there is a rapid increase in government debts, central bank can make monetary policy being pegged to term premium and partially solve stock in interest rate conduction, thereby improving scientific nature and accuracy of monetary policy formulation. This is in accordance with guidance in 13th Five-Year plan to perfect macro-control mechanism and create control thoughts and policy instruments.Our major contributions lie in following point:firstly, we study influence and mechanism of debt expansion on macro-economy taking bond market as intermediary from perspective of term premium for first time in domestic research. Besides, we find that monetary policy being pegged to term premium can reduce distortion caused by expansion of government debts and improve social welfare, which provides a feasible way for policy-making sector to solve distortion arising from debt expansion.

Does Black Income Impact Monetary Aggregates, Inflation and Interest Rate In India? An ARDL Analysis with Granger Causality

Black income is presently the most important economic issue in India. This study demonstrates its macroeconomic impact on base and broad money, currency with the public, interest and inflation rate. Black income is co-integrated with them. The long-run causality between black income and these variables is unidirectional and stable. Black income Granger causes monetary aggregates and nominal interest rate in short run, but Granger causes inflation rate only in the long run. It has predictive content for monetary aggregates, nominal interest and inflation rate that could be used in monetary policy formulation.

Monetary policy credibility and macrodynamics: evidence from Ghana

ABSTRACTWe compute a time-varying metric of monetary policy credibility based on Ghana’s experience, using both symmetric and asymmetric approaches. We then follow-up with some empirical evidence to address the linkages between macroeconomic developments and central bank credibility. The empirical results reveal high and low credibility cycles with an average duration of 2 years over the study period. Particularly, higher levels of credibility were associated with stable domestic currency and lower nominal interest rates. This reinforces the notion that efficient monetary policy delivers higher central bank credibility with better outcomes for macroeconomic variables. In contrast, the level of credibility tends to worsen in the wake of weakening macro fundamentals which are not adequately countered by monetary policy decisions. There is therefore the need for efficient monetary policy formulation to achieve a stable macroeconomic environment in Ghana. This will in the long-run build policy credibility towards attaining the central bank’s medium-term inflation target.

Forecasting output gaps in the G-7 countries: the role of correlated innovations and structural breaks

ABSTRACTTrend GDP and output gaps play an important role in fiscal and monetary policy formulation, often including the need for forecasts. In this article, we focus on forecasting trend GDP and output gaps with Beveridge-Nelson trend-cycle decompositions trend-cycle decompositions and investigate how these are affected by assumptions concerning correlated innovations and structural breaks. We evaluate expanding window, one-step-ahead forecasts indirectly for the G-7 countries on the basis of real GDP growth rate forecasts. We find that correlated innovations affect real GDP growth rate forecasts positively, while allowing for structural breaks works for some countries but not for all. In the face of uncertainty, the evidence supports that in making forecasts of trends and output gap policy-makers should focus on allowing for the correlation of shocks as an order of priority higher than unknown structural breaks.

Volatile Capital Flows and Macroeconomic Performance in Indonesia: An SVAR Analysis

We estimate a small open economy structural vector autoregressive model for Indonesia that takes into account its susceptibility to significant cross‐border capital and financial flows. In anticipation of a recovering U.S. economy accompanied by monetary policy normalisation, global push factors are important drivers of capital flows and domestic economic performance for Indonesia. In the post‐1997 period, exchange rate stabilisation remains a key element of monetary policy formulation with the aim of anchoring investor confidence and maintaining inflation stability. Counterfactual simulations show that volatility in inflation and exchange rate increases when endogenous monetary policy responses are switched off.

Global slack hypothesis: evidence from China, India and Pakistan

It is widely believed that globalization has changed inflation process. The global resource capacity reduces responsiveness of inflation to domestic activity and increases responsiveness of inflation to global resource capacity. This global slack hypothesis is tested using different theoretical specifications, which also relate domestic output elasticity and foreign output elasticity to the degree of trade openness of an individual economy. The results reject this hypothesis. The global resource capacity does not drive domestic inflation. The impact of globalization has not increased in the inflation process, and the results yield important policy implications for monetary policy formulation. The global resource capacity does not affect ability of the central banks to stabilize inflation, real economic activity and also respond to the volatility of output growth.

Communicating Monetary Policy Rules

Sixty-two countries around the world use some form of inflation targeting as their monetary policy framework, though none of these countries express explicit policy rules. In contrast, models of monetary policy typically assume policy is set through a rule such as a Taylor rule or optimal monetary policy formulation. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. The approach requires central banks to specify an inflation target, tolerance bands, and economic projections. When inflation moves outside the band, the central bank must also specify a time frame over which inflation will return to within the band. We show how communication about time horizons and tolerance bands can uniquely pin down a policy rule, and highlight how different types of communication can be used to convey different policy rules.

Quarterly Projection Model for India: Key Elements and Properties

This paper outlines the key features of the production version of the quarterly projection model (QPM), which is a forward-looking open-economy gap model, calibrated to represent the Indian case, for generating forecasts and risk assessment as well as conducting policy analysis. QPM incorporates several India-specific features like the importance of the agricultural sector and food prices in the inflation process; features of monetary policy transmission and implications of an endogenous credibility process for monetary policy formulation. The paper also describes key properties and historical decompositions of some important macroeconomic variables.

Quarterly Projection Model for India: Key Elements and Properties

This paper outlines the key features of the production version of the quarterly projection model (QPM), which is a forward-looking open-economy gap model, calibrated to represent the Indian case, for generating forecasts and risk assessment as well as conducting policy analysis. QPM incorporates several India-specific features like the importance of the agricultural sector and food prices in the inflation process; features of monetary policy transmission and implications of an endogenous credibility process for monetary policy formulation. The paper also describes key properties and historical decompositions of some important macroeconomic variables.

Monetary Programming in Albania

The development of every country is supported in formulation and implementation of macroeconomic program. Policies are formulated to correct disequilibrium between aggregate supply and demand, misbalances shown in the balance of payments, price increase and low increase of national product. An important part of this process is monetary programming as a main duty for the Bank of Albania. The object of this article is to prove the indicator that can be easily monitored to follow up the operational actions of the Bank of Albania aiming the achievement of main objective. On the economic analysis presented on this article we explain if the monetary aggregates could be used as operational objectives. Friedman (1998) suggests that timing and relations with main objectives are key elements for monetary aggregates. McCallum (1999) that the identification of monetary aggregates is added value on the framework of monetary policy formulation. Econometric analysis consists on the models realized to explain and test the relations of the monetary aggregates with macroeconomic indicators. Models are drafted based on three hypothesis. Other objectives of this study are related to brief analyses on the monetary policies compiled and realized from the Bank of Albania. Also through regression analysis we will show the relations of monetary aggregates and their impact on macroeconomic indicators, such as Gross Domestic Product and Consumer Prices Index. DOI: 10.5901/ajis.2016.v5n3s1p171

Dynamic stochastic general equilibrium (DSGE) modelling in practice: identification, estimation and evaluation

ABSTRACTIn recent years, dynamic stochastic general equilibrium (DSGE) models have come to play an increasing role in central banks, as an aid in the formulation of monetary policy (and increasingly after the global crisis, for maintaining financial stability). DSGE models, compared to other widely prevalent econometric models (such as vector autoregressive or large-scale econometric models), are less a-theoretic and with secure micro-foundations based on the optimizing behaviour of rational economic agents. Additionally, the models in spite of being strongly tied to theory, can be ‘taken to the data’ in a meaningful way. A major feature of these models is that their theoretical underpinnings lie in what has now come to be called as the New Consensus Macroeconomics (NCM). This paper concentrates on the econometric structure underpinning such models. Identification, estimation and evaluation issues are discussed at length with a special emphasis on the role of Bayesian maximum likelihood methods.

Virtual Currencies, the Money Market, and Monetary Policy

Virtual currencies are in vogue mainly due to two factors. First, as a protest against authority-driven monetary policy decisions and second, as alternatives to deficits in some monetary systems arising out of political instability or other causes. Assuming that virtual currencies indeed (partially) replace national currencies as payment vehicles, we attempt, in this article, to integrate the virtual currency supply and demand into the Keynesian money market framework. This article presents a few results for the central banks and outlines problems that may result for monetary policy formulation. Since this is the first such attempt to model a national money market as a combination of nationally-issued currency and globally-issued virtual currency, certain simplistic assumptions have been made. Nevertheless, the model offers directions on the impact of virtual currencies on the monetary system and the national money market. Additionally, the paper integrates the official standpoints of the European Central Bank and the Bank of England on this topic.

Private shareholding: An analysis of an eclectic group of central banks

Although the title seems to be a contradictio in terminis, this paper identifies a small, eclectic number of central banks with private shareholders about which little has been published. It is shown that only the central banks of Belgium, Greece, Italy, Japan, South Africa, Switzerland, Turkey and the United States (US) Federal Reserve allow shareholding other than by the government of the respective countries, although not in all instances by the general public. This paper considers private shareholding in this eclectic group of central banks, despite the trend of nationalising central banks that commenced in 1935. Private shareholding is defined as shareholding in a central bank by any party other than the respective government or governments (e.g. the European Central Bank) where the central bank is located.Large differences in the classes of shareholders of these eclectic central banks and differences in their approaches to dividend payments are highlighted in the paper. The conclusions reached are, firstly, that investment only in the shares of the central banks of Belgium and Greece (albeit only for residents in the latter instance) can be regarded as growth investments. Secondly, shareholding in the Italian central bank has been used to recapitalise ailing commercial banks. Thirdly, shareholders play no role in the formulation and implementation of monetary policy. Lastly, the shareholding structure of these banks contributes to improved governance in the case of the central banks of Belgium, Greece, Italy, South Africa, Switzerland and Turkey, but no evidence can be found that central banks with shareholders in any way outperform central banks without shareholders.