Monetary Policy Framework Research Articles

Strengthening the Monetary Policy Framework in Korea

Adoption of inflation targeting by the Bank of Korea (BOK) in 1998 contributed to low and stable inflation. However, after the global financial crisis (GFC) monetary policy faced more challenging conditions. Inflation slipped below the target range in 2012 and remains below it despite a cut in the target to 2 percent in 2016. Policy also became more complex with the addition of financial stability to the central bank's mandate. To address these challenges, this paper proposes a two-pronged approach to strengthen the effectiveness with which monetary policy can meet its objectives: first, enhanced communication on how the target will be achieved over the medium-term, building on a forecasting and policy analysis system; and, second, by clarifying the complementary role of macroprudential policy in containing financial stability risks so that monetary policy can focus on the inflation target. Simulation of a macro model calibrated to Korea illustrates how it can be used to provide this greater medium-term focus on achieving the inflation target and strengthen communication.

The Direction and Intensity of China's Monetary Policy Conduct: A Dynamic Factor Modelling Approach

The recent upgrade of the People’s Bank of China’s monetary policy framework establishes a corridor system of interest rates. As the revamped policy arrangement now features a multiple-instrument mix of liquidity tools and pricing signals, we employ a dynamic factor modelling approach to derive an indicator of China’s monetary policy stance. The approach is based on the notion that comovements in several monetary policy instruments have a common element that can be captured by a single underlying, unobserved component. To clarify and interpret the derived index, we employ a baseline DSGE model that can be solved analytically and allows tracing of the expansionary and contractionary on-and-off phases of Chinese monetary policy.

The Effects of Conventional and Unconventional Monetary Policy on Forecasting the Yield Curve

We investigate how conventional and unconventional monetary policies affect the dynamics of the yield curve by assessing the performance of individual yield curve models and their mixtures. Out-of-sample forecasts for U.S. bond yields show that the arbitrage-free Nelson-Siegel model and its mixtures with other models perform well in the period of conventional monetary policy, whereas the random walk model outperforms all the other models in the period of unconventional monetary policy. The diminished role of the no-arbitrage restriction in forecasting the yield curve since 2009 can be attributed to unconventional monetary policy, which resulted in low correlations between short- and long-term bond yields and little variation in the short-term rates. During the period of the maturity extension program in 2011--2012, the superiority of the random walk forecasts is more pronounced, reinforcing our finding that the monetary policy framework affects yield curve forecast accuracy.

An Introduction to Monetary Policy Framework in Pakistan: Instruments, Objectives, and Mechanism

An Introduction to Monetary Policy Framework in Pakistan: Instruments, Objectives, and Mechanism

The time-varying effect of monetary policy in China

ABSTRACTA sound understanding of monetary transmission mechanism is valuable because it helps the central bank to determine the proper course of monetary policy to balance growth and inflation. As China’s domestic financial markets deepen and develop further towards a market-based system, the country’s monetary policy instrument and transmission should continue to improve for managing economic conditions. Using a short-term key interest rate as standard monetary policy tool and time-varying parameter techniques, this study empirically demonstrates that China’s monetary policy framework is in the midst of transitioning to a market-based approach.

The Monetary Transmission Mechanism in the Tropics: A Case Study Approach

Many central banks in low-income countries in Sub-Saharan Africa are modernising their monetary policy frameworks. Standard statistical procedures have had limited success in identifying the channels of monetary transmission in such countries. Here we take a case study approach and centre on a significant tightening of monetary policy that took place in 2011 in four members of the East African Community: Kenya, Uganda, Tanzania and Rwanda. We find evidence of the transmission mechanism in most of the countries. Variations across countries can be explained mainly by differences in the policy regime.

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.

The Interaction between Financial Cycle and Business Cycle in China: An Empirical Analysis Based on the Dynamic Spillover Index

Currently, it is believed that the economy in China is at a very specific period of three-phase superposition”, where the coexistence of economic downward pressure and accumulated financial risks brings higher requirements and more challenges to macroeconomic regulation and financial supervision. In this situation, a thorough study of the dynamic interaction between financial cycle and business cycle would contribute to a better understanding of the macroeconomic in the new era, specifically the essence of the financial system. Furthermore, it could be considerably practical to formulate financial supervision and macroeconomic regulation policy scientifically, and to enhance the ability of financial risk control and the support from the financial system to the real economy, hence guarantee the stability of the macro-economy and the financial system. In this paper, interest rate, exchange rate, money supply, aggregate financing to the real economy and asset prices are selected to build the financial condition index （FCI）, which could be helpful to analyze the characteristics of financial cycle fluctuation in China. Furthermore, the dynamic spillover index method, based on generalized prediction error variance decomposition, is adopted to focus on the interaction between financial cycle and business cycle in China. It is revealed in the results that the interaction between macro-finance and economic fluctuation is affected by numerous factors, such as the shock of the international financial market, the openness of the economic and financial market, the development of the financial market, and the innovation of financial instruments. Besides, the impact of financial fluctuation on economic fluctuation is significantly high, while that of economic fluctuation on financial fluctuation remains apparently lower constantly. Hence, the phenomenon called off real to virtual” in the financial system deserves vigilance. The research not only obtains the interaction between financial cycle and business cycle from time-varying and directional aspects, but also provides useful decision-making basis enlightenment for financial risk supervision policy and macroeconomic regulation. This paper holds that on the one hand, considering the important influence and the amplification effect of financial cycle fluctuation on macroeconomic fluctuation, we should pay close attention to the domestic and international economic and financial situations, strengthen supervision and anticipation management of financial risks, actively guide the financial sector return to the service standard, and avoid the financial system losing contact with the real economy and become a self-service system. On the other hand, we are supposed to further improve the dual-pillar regulatory framework of monetary policy and macro-prudential policy based on the financial-economic endogenous linkage mechanism, and actively explore the monetary policy regulatory model that takes into account financial stability while improving the local regulatory and supervision of macro-prudential policy for financial imbalances, so as to achieve the dual stability and coordinated development of the macro-economy and the financial system.

Understanding China’s monetary policy: an institutional perspective

ABSTRACTGiven China’s status as a large transitional economy, analysing the country’s monetary policy requires an understanding of the institutional and policy environment within which monetary policy operates. As China’s monetary policy has multiple objectives and the central bank is subordinate to the State Council in monetary policy decisions, addressing deep-rooted structural issues and improving governance and institutions are essential so that monetary policy can be more focused and effective. Confronted with the Impossible Trinity dilemma, China faces daunting challenges in tackling the inevitable policy choice between monetary autonomy and exchange rate control as its capital account increasingly liberalises. This article analyses China’s unique and evolving monetary policy framework from an institutional perspective and evaluates the challenges to monetary management and reforms. Relevant policy implications for monetary policy implementation are also discussed.

Monetary policy, financial uncertainty, and secular stagnation

A monetary policy framework describing how to cope with a financial crisis might alleviate a recession; however, it might also result in subsequent secular stagnation. Based on an empirical New Keynesian model with financial uncertainty, this study investigates how monetary policy can avoid sluggish economic recovery in response to financial shocks. The results show that a protracted sluggish response of an output gap to a financial shock is triggered by inflation targeting, without considering interest rate variations. In such a policy, the uncertainty causes additional sluggish behavior after a sharp reduction in the output gap. In contrast, in a speed limit policy, the output gap recovers rapidly, regardless of the central bank’s approach to interest rate variations, and the uncertainty mitigates reductions in the output gap. Finally, the results are robust under several alternative settings.

Indian Monetary Policy in the Time of Inflation Targeting and Demonetization

This paper provides a narrative of Indian monetary policy since the North Atlantic Financial Crisis (NAFC) in the mid‐2008 till the current period. The period 2009–2013 was dominated by the joint monetary and fiscal stimuli of the Indian authorities prompted by the NAFC. These, along with some structural shocks and a hands‐off attitude in forex market intervention, could have had their role in rising inflation and external account instability (leading up to the taper tantrum episode). In such a backdrop, after considerable discussion during 2013–2014, a Monetary Policy Framework Agreement was signed between the Government of India and the Reserve Bank of India on February 20, 2015 that formally adopted flexible inflation targeting (IT) in India. While the IT regime so far has coincided with significant reduction in inflation in India, the atmosphere has been benign. Now that fuel prices have started moving in the north‐east direction, the government has proposed a revised framework for the minimum support price in the Union Budget for 2018–2019 and fiscal slippages have started happening, it remains to be seen whether IT can wither more rough weather in the days to come. Finally, in recent years, Indian monetary policy has been dominated by two significant events: the emergence of significant deterioration of Indian public sector balance sheets, and the demonetization episode in November 2016. Monetary policy in both of these periods wrestled with fashioning an appropriate strategy for managing the impossible trinity.

Comment on “Indian Monetary Policy in the Time of Inflation Targeting and Demonetization”

Comment on “Indian Monetary Policy in the Time of Inflation Targeting and Demonetization”

Interkoneksi Volatilitas Nilai Tukar Dan Tujuan Domestic Impossible Trinity Pada Asean-4: Dornbusch Overshooting Model

The purpose of this research is to identify the issues of becoming of the volatility of the exchange rate that is seen the theory of exchange rate overshooting by Dornbusch with the assumptions that goods prices are sticky. Then implicates in determining the monetary policy framework in a country known as the impossible trinity. Impossible Trinity consists of three the policy are not fully always dominant used simultaneously, namely the stability of exchange rates, the mobility of capital flows (FDI), and monetary independent policy, namely GDP, inflation, and the interest rate. The research period lasts 1987Q1-2016Q4 with the country which became the object of Indonesia, Malaysia, Thailand, and the Philippines. In this research model is the model Dynamic Vector Error Correction models (VECM) models.The result of the analysis indicate that all countries experienced the phenomenon of overshooting. Then in the determination of policies Monetary found, that Indonesia puts more emphasis on inflation and GDP, Malaysia on interest rates and Foreign Direct Investment, Thailand on inflation and interest rates and Philippines on exchange rate and GDP trails through inflation. Exchange rate overshooting determines of the monetery policy that depend on the characteristic and economic priority of a countries .

On two notions of imperfect credibility in optimal monetary policies

We explore how outcomes of optimal monetary policy with loose commitment (Schaumburg and Tambalotti, 2007; Debortoli and Nunes, 2010) with the non-reoptimization probability of α can be interpretable as outcomes of deeper optimal policy under sustainable plans (Chari and Kehoe, 1990) with N-period punishment. In a standard monetary-policy framework, we show that, for any sufficiently high value of α, there exists an integer N such that impulse responses to the cost-push shock under each policy are similar to each other.

Macroeconomic Policies and Transmission Dynamics in India

Against the backdrop of the move to an inflation targeting monetary policy framework beginning 2014 with consumer price index (CPI) inflation as the nominal anchor, this paper revisits monetary transmission dynamics. Rather than confining to the typical three equation New Keynesian model, this paper assesses transmission in a broader, disaggregated model incorporating external sector, fiscal policy, banking sector and financial market variables to capture the interactions among key macroeconomic policies and macroeconomic aggregates. The empirical analysis confirms the role of monetary policy in containing demand and inflationary pressures. In view of the ongoing structural reforms, deregulation and opening up of the Indian economy, as well as ongoing initiatives in the monetary policy operating framework to improve the efficacy of monetary transmission, the transmission dynamics can be expected to evolve over time.

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.

Financial repression policy: Latin America and Spain’s lessons for Russia

Global financial crisis that in 2008 struck the economy and revealed many structural problems for the first time after the Great Recession had developed countries with high debt level at its core. The world’s richest economies such as Spain, Italy, Portugal, United States, the UK and Japan found themselves at the brink of default. Meanwhile emerging markets remain a volatile area with high fluctuations in portfolio investment. Lower economic growth rate in Argentina, Chile, Colombia, Brazil or México caused by a slump in commodity prices created a hole in national budgets. Therefore, within a framework of nonconventional monetary policy both developed and emerging nations resorted to measures of financial repression between 2009 and 2014 to alleviate public debt problem and generate additional revenue for the government. However, recent studies dedicated to the phenomenon ambiguously assess the role of financial repression in achieving more efficient results of internal regulation. This article contributes to further quantitative analysis of a joint effect of financial repression measures. The purpose of the study is to identify macroeconomic consequences of the policy on the growth rate of GDP and its components.

Rethinking The Current Inflation Target Range In South Africa

With critics suggesting that inflation targeting is not an appropriate monetary policy framework for developing and emerging countries, this paper assesses whether or not the 3%-6% inflation target is the optimal inflation target band in South Africa. The optimal inflation target band is determined based on the time-varying non-accelerating inflation rate of unemployment (the NAIRU). The estimation results provide an estimated inflation range that is wider than the current range pursued by the South African Reserve Bank. This may suggest that the current range of inflation hinders real activities, especially employment in South Africa.

Monetary Policy and Financial Stability: Cross‐Country Evidence

AbstractWe explain the heterogeneous response of central banks to financial stability risks based on a financial stability orientation (FSO) index, which reflects statutory, regulatory, and discretionary components of central banks' monetary policy frameworks. Our baseline results from a cross‐country panel of modified Taylor rules suggest that central banks with a high FSO increase their policy rates in response to elevated financial stability risks by 0.27 percentage points more than central banks with a low orientation. Back‐of‐the‐envelope calculations suggest that this policy rate differential translates into a reduced crisis probability but also into considerably lower inflation and output growth rates.

The state of monetary policy and industrial asset allocation: the Ghanaian perspective

Purpose The purpose of this paper is to investigate whether asset allocation across various industries listed on the Ghana Stock Exchange (GSE) varies across different monetary policy states. Design/methodology/approach This paper adopts the Markov Chain technique to split monetary policy into three different states. The authors further adopt the Markowitz portfolio optimization technique to find the minimum variance and optimum portfolio for the industries listed on the GSE. Findings The finding reveals a dynamic asset allocation, which varies the industry’s weight mix across the various monetary policy states enhance excess returns compared to the static asset allocation. Specifically, the authors find risk-return trade-off among industries listed on the GSE. Financial and Food and Beverage industries portfolios record high returns relative to the Government of Ghana 91-day Treasury bill. The Food and Beverage portfolio is the only portfolio that records relatively high excess returns across all the monetary policy states. The authors also find that, during expansionary state (high monetary policy rates) of the monetary policy, investors are to allocate about 69 and 30 percent of their investment into food and beverages and financials, respectively. Corner solution is found in the transient state where 100 percent of wealth is allocated to financial to obtain the optimum portfolio. The optimum portfolio in the contraction state assigns 52 percent to financials and 42 percent to manufacturing. In summary, the result supports the dependence of investors’ asset allocation decisions on monetary policy. Practical implications Therefore, the authors propose an investment strategy which is dynamic and takes into consideration the monetary policy states rather than static asset allocation which maintains the same industry weight mix over the investment period. Social implications In sum, the authors interpret the result as support for the dependence of investors’ asset allocation decisions on monetary policy. In Ghana, an increase in the monetary policy appears to support industries listed on the equity market. The result also gives knowledge about investors’ asset allocation decisions on the GSE, which is practical balanced source of information for investors’ risk and return choices. For a prudent monetary policy framework, the monetary policy committee should monitor industries listed on the GSE. The result from the analysis has also an implication for investors, portfolio managers and fund managers to consider the state of the monetary policy in Ghana when making investment decisions. Originality/value The study differs from earlier research on asset allocation by breaking new grounds on two levels. First of all, based on the notion that different industries have different exposures to monetary policy states, the authors extend the portfolios by grouping the equities listed on the GSE into their industrial sectors. Second, the authors examine how investors’ optimal portfolio allocation may change depending on the state of monetary policy.