Implications For Monetary Policy Research Articles

Exploring the dynamics of Bangladesh bank's monetary policy: A factor analysis approach

This study examined the factors influencing the monetary policy of Bangladesh Bank using a structured questionnaire to interview 207 sample respondents from Bangladesh Bank and 19 listed private conventional commercial banks. The study analyzed and interpreted respondents' opinions using descriptive statistics and varimax rotated factor analysis. The study identified the effect level of various factors influencing the monetary policy of the Bangladesh Bank and ranked the factor variables from 1 to 24 based on the adjusted mean score. The researchers found that the most influential factors in the monetary policy of Bangladesh Bank are price risk, market operations, political-economic variables, and governance. In contrast, the most negligible significant factors are price stability and market liquidity based on the varimax rotated factor analysis. Therefore, the study found that the researcher's set of monetary policy factors has significant implications for the Bangladesh Bank's monetary policy.

Cryptocurrency blockchain and its carbon footprint: Anticipating future challenges

This study investigates the environmental impact of cryptocurrency blockchain technology, specifically focusing on the adoption of Bitcoin and Ethereum. Utilizing instrumental regression analysis, it examines the consensus mechanisms—Proof of Work (PoW) and Proof of Stake (PoS)—and their association with carbon footprint. The findings reveal a clear correlation between the adoption of PoW-based cryptocurrencies like Bitcoin and carbon emissions. Notably, PoW-based cryptocurrencies generate approximately 0.86 metric tons of carbon emissions per transaction, which is significantly higher than PoS-based transactions like Ethereum. Concerns also arise regarding the sustainability of Bitcoin mining after the fourth halving period and potential shortages in PoW-based mining resources. As mining rewards decrease, the challenge of timely block creation intensifies. By projecting future BTC mining phases, the study anticipates diminishing rewards in each halving period, potentially leaving around 2500 BTC units available for mining by 2120. This suggests that achieving the full 21 million BTC may prove practically unattainable within the current blockchain framework. Furthermore, the research highlights the speculative and risky nature of cryptocurrencies lacking regulatory oversight, which tends to attract irresponsible investors. It stresses the importance of developing a nuanced understanding of the environmental implications of PoW cryptocurrencies and advocating for responsible innovation. Additionally, the study underscores the necessity of considering the monetary policy implications and raising awareness among investors to ensure responsible decision-making.

Monetary policy implications of the new fiscal regime in Nigeria: A simulation study

In this policy research, we examine the effects of the new fiscal regime [the signing of the new Finance Act 2023, the setup of a tax reform committee, and the removal of fuel subsidy] on the Nigerian economy and its implication for fiscal and monetary policy coordination in Nigeria. We explore these by estimating a macro-econometric model, which comprises a fiscal rule, monetary policy rule, and a Phillips curve relation to simulate the impacts of the regime on fiscal, macro and monetary fundamentals in Nigeria. We find in the model estimation that (a) lower public debts can be achieved faster through a reduction in expenditure than by an increase in revenue, (b) inflation in Nigeria is driven by demand and supply-side factors, (c) the monetary policy instrument does not possess stabilizing power over the economy. The forecasting analyses show that the contractionary fiscal regime that raises the revenue by about 75 per cent will instantaneously clear out the fiscal deficit and lead to significant reductions in public debts but at the cost of higher inflation. We suggest sufficiently reducing the monetary policy rate to the optimal value obtained from the structural model, and coordination of demand management and supply-side policies by both the monetary and fiscal policy authorities in Nigeria.

Macroeconomic impact of environmental policy uncertainty and monetary policy implications

This paper evaluates the macroeconomic implications of uncertainty arising from delays or unpredictability regarding the timing and extent of environmental policy implementation. An environmental dynamic stochastic general equilibrium (E-DSGE) model shows that increasing uncertainty about environmental policies is associated with a subsequent decline in investment, as firms prefer to postpone investment decisions. The decline in physical investment within polluting sectors subsequently induces a fall in employment, consumption and output. Using a novel climate policy uncertainty index developed by Gavriilidis (2021), alongside Google Trend data index, the paper shows that uncertainty about climate regulations has both recessionary and inflationary effects, corroborating the theoretical findings. Further analysis suggests that appropriate monetary policy tools could moderate the welfare cost arising from the environmental policy uncertainty, emphasizing the need for Central Banks to adopt a more aggressive stance in stabilizing GDP and inflation in the face of environmental policy uncertainty shocks.

Consumption categories, household attention, and inflation expectations: Implications for optimal monetary policy

What inflation measure should central banks target? This paper highlights a mechanism where monetary policy optimally targets headline inflation if households pay limited attention to different consumption categories when forming inflation expectations. This result stands in contrast to standard rational expectations models, where optimal policy targets core inflation. The core inflation rate excludes volatile energy and food prices (non-core) from headline inflation. Using novel survey data on inflation expectations for disaggregated consumption categories, I find household expectations are disproportionately driven by beliefs about future non-core prices. A model of bounded rationality accounts for the empirical evidence. While forming inflation expectations, households pay more attention to the volatile non-core components. Embedding this framework into a multi-sector New Keynesian model, I show that targeting headline rather than core inflation provides welfare gains.

The Impact of Digital Currency on Demand for Money: Evidence from Indonesia

The purpose of this study is to examine the impact of digital currency transaction variables on the demand for money in Indonesia. The data used are data on the volume of mobile banking transactions, internet banking, interest rates, the level of currency fluctuations, and inflation on the demand for money for the period 2013 to 2022. Data analysis uses Autoregressive Distributed Lag (ARDL) cointegration method. The results of regression testing can be concluded that the long-term relationship is valid. In addition, using CUSUM and CUSUMQ from the quadratic test, the demand for money in Indonesia is relatively stable using the narrow definition of money, it implies that there haven't been significant and persistent shifts in either the mean or the variance of the narrow money supply. A stable demand for money suggests that the economic agents in Indonesia, such as households and businesses, are not undergoing substantial changes in their preferences or behaviors related to holding money. This stability can have implications for monetary policy and economic planning, as it indicates a certain level of predictability in the demand for money. However, it's crucial to keep in mind that economic conditions and factors influencing the demand for money can change over time. Therefore, continuous monitoring and periodic reassessment of the stability of the demand for money are necessary for accurate economic analysis and policy formulation.

Inflation—Who Cares? Monetary Policy in Times of Low Attention

AbstractI propose an approach to quantify attention to inflation and show that attention declined after the Great Inflation period. This decline in attention has important implications for monetary policy as it renders managing inflation expectations more difficult and can lead to inflation‐attention traps: prolonged periods of a binding lower bound and low inflation due to slowly adjusting inflation expectations. As attention declines, the optimal policy response is to increase the inflation target. The lower bound fundamentally changes the normative implications of declining attention: lower attention raises welfare absent the lower‐bound constraint, whereas it decreases welfare when accounting for the lower bound.

Global supply chain pressures, inflation, and implications for monetary policy

How should policymakers respond to the recent surge in inflation? This paper examines the impact of global supply chain pressures on euro area inflation and the implications for monetary policy. Results from a Bayesian structural vector autoregressive model show that shocks to global supply chain pressures were the dominant driver of euro area inflation in 2022, and that these shocks have a highly persistent and hump-shaped impact on inflation. Furthermore, a two country New Keynesian model with international trade in intermediate goods shows that the optimal monetary policy response to global-supply-induced inflation is a non-linear function of the degree of global value chain participation.

Inflation surprises in a New Keynesian economy with a “true” consumption function

AbstractThe resurgence of inflation has been accompanied by a reversal of prospects of growth, with a prominent role assigned to the fall of households' purchasing power. Yet this real income effect of inflation surprises, independent of restrictive monetary policy, is not present in the standard New Keynesian models for monetary policy. The reason lies in the formulation of the consumption‐based “IS equation”. The paper shows how the income effect can be introduced by reformulating the consumption function, with the consequence that it exerts an autonomus stabilization effect on inflation. The main monetary policy implications are examined by means of simulations.

Beyond the Balance Sheet Model of Banking: Implications for Bank Regulation and Monetary Policy

Beyond the Balance Sheet Model of Banking: Implications for Bank Regulation and Monetary Policy

Inflationary oil shocks, fiscal policy, and debt dynamics: New evidence from oil-importing OECD economies

Appropriate fiscal and monetary policies are essential for mitigating the surging inflation caused by post-Covid 19 commodity price shocks, whilst minimizing real output losses. Considerable attention, however, has focused on the implications for monetary policy but somewhat neglected the fiscal dimension. By estimating Proxy-VARs we study the impact of inflationary oil supply and demand shocks on the dynamics of the fiscal balance and public debt in seven oil-importing OECD economies and the Eurozone bloc. The results indicate that fiscal balances actually increase in the medium-term following an inflationary oil shock, and public debt-to-GDP ratios fall. A key implication is that policy makers have more fiscal space than typically assumed, and will run the risk of an excessively contractionary macroeconomic policy stance if they do not account for this increase in the fiscal balance following inflationary oil shocks.

The Natural Rate of Interest: Selected Conceptual Differences among Wicksell, von Mises and Woodford and Implications for Estimation and Monetary Policy

The Natural Rate of Interest: Selected Conceptual Differences among Wicksell, von Mises and Woodford and Implications for Estimation and Monetary Policy

Central Bank Digital Currency and the Monetary Policy and Financial Stability Implications

Central Bank Digital Currency and the Monetary Policy and Financial Stability Implications

Does country risk rating explain shadow banking development? Insights from advanced and emerging market economies

This study fills a research gap by specifically investigating the effect of country risk rating (CR) on shadow banking (SB) development from a global perspective using a dynamic panel estimation approach covering the period 2010–2019. Furthermore, the study explores whether a country's characteristics impact this nexus by grouping countries into advanced and emerging market economies based on their development level. To the best of our knowledge, few empirical studies have been conducted looking into this relationship from this perspective, and these findings open a new debate in banking literature. The empirical results reveal that CR positively impacts SB in advanced, emerging, and global samples of countries, implying that lower vulnerability to risk factors causes SB expansion. In addition, the results highlight that traditional macroeconomic and institutional factors impact SB development, although the extent of the effect and statistical significance of the factors vary and depend on countries' development levels. Remarkably, the empirical results confirm the validity of the complementarity and regulatory arbitrage hypotheses and support the possible asymmetric implications of monetary policy on SB. The results are robust when alternative model specifications are used and have significant implications for policymakers and regulatory bodies.

The Exchange Rate and Interest Rate Nexus: Evidence From the Symmetric Panel ARDL Approach

The exchange rate and interest rate nexus is a crucial area of research as it has significant implications for monetary policy, international trade and financial stability. This article investigates the dynamic relationship between exchange rates and interest rates in the context of the Brazil, Russia, India, China and South Africa (BRICS) countries. Employing a dataset spanning the period from February 1999 to August 2021, we employ a panel data approach to analyse the relationship between exchange rates and interest rates across the BRICS nations. The study incorporates key macroeconomic indicators such as inflation rates, GDP growth, treasury bill rate, money supply growth, call money rate to capture the complicated nature of the exchange rate and interest rate dynamics. Our empirical analysis employs various econometric techniques, including panel unit root tests, panel cointegration analysis and panel autoregression distribution models. These methodologies enable us to assess both the short-run and long-run dynamics between exchange rates and interest rates while accounting for potential heterogeneity across the BRICS countries. The findings reveal substantial heterogeneity in the exchange rate and interest rate nexus among the BRICS nations.

Application of Bayesian Vector Autoregressive Models in the Analysis of Quasi Money and Money Supply: A Case Study of Nigeria

Aims: The aim of this study is to model the relationship between Nigerian quasi money and money supply using the Bayesian Vector Autoregressive (BVAR) model.
 Study design: The study collected and analyzed monthly data from the Central Bank of Nigeria (CBN) money and credit statistics over an 8-year period (November 2015 to December 2022). The analysis utilized both Vector Autoregressive (VAR) Model and BVAR model to examine the dynamics between these variables and their implications for monetary policy.
 Methodology: The study employed the Bayesian Vector Autoregressive (BVAR) model to analyze the relationship between Nigerian quasi money and money supply. Monthly data from the Central Bank of Nigeria (CBN) over an 8-year period was collected and subjected to both Vector Autoregressive (VAR) Model and BVAR model for analysis.
 Results: The findings indicated that there is no long-run relationship between Nigerian narrow money and quasi money, but quasi money does granger cause changes in narrow money, and vice versa. This suggests a multi-directional effect between the two variables. The BVAR model consistently outperformed the VAR model in terms of higher Adjusted-R² values, indicating its stronger ability to explain the variance in the data. The BVAR model provided a more robust and accurate representation of the relationship between these variables. The model exhibited stability and the absence of heteroscedasticity in the residuals, indicating a stable relationship between the variables. The impulse response function showed an immediate impact of changes in narrow money on the overall money supply in Nigeria.
 Conclusion: This study contributes to existing knowledge by empirically examining the relationship between Nigerian narrow money and quasi money and also concluded that there existed no co-integrating relationship between narrow money and quasi money, which has important implications for effective monetary policy strategies, particularly in Nigeria.

Does risk matter more in recessions than in expansions? Implications for monetary policy

We employ a nonlinear vector autoregression and a non-recursive identification strategy to show that an equal-sized uncertainty shock generates a larger contraction in real activity when growth is low (as in recessions) than when growth is high (as in expansions). An estimated New Keynesian model with recursive preferences replicates these state-contingent responses when approximated to third order around its risky steady state due to a stronger upward nominal pricing bias in recessions than in expansions. Empirical evidence supports this state-contingent channel, and we show that it can greatly reduce the ability of systematic monetary policy to stabilize output during recessions.

The Economic Impact of the US Unconventional Monetary Policy, Global Commodity Shocks, and Oil Price Shocks on ASEAN 3

This study examines the implications of the United States unconventional monetary policy, global commodity prices, and the oil price shock on monetary policy responses and economic growth in the ASEAN 3 countries of Indonesia, Malaysia, and the Philippines. The empirical evidence suggests that the shock from the United States unconventional monetary policy led to the change in ASEAN's monetary policy. The fluctuation of crude oil and global commodity prices considerably impacts ASEAN's monetary policy response 3. The Central Bank can use such evidence as a reference to alter monetary policy in reaction to the global oil price and the unconventional monetary policy of the United States. The government will also be able to foresee the impact of global oil and commodities prices and preserve ASEAN 3's economic growth.

Regional house price convergence: implications of monetary policy

ABSTRACT Motivated by the structural change since the adoption of inflation targeting in October 1992, this research investigates regional house price convergence in the UK over the period 1973:Q4–2020:Q4. By using subsample comparisons, results show that all regions in the inflation-targeting regime converges to one club until the Global Financial Crisis. The finding suggests that the successful inflation-targeting policy can promote integration among regions.

Capital flows to developing countries: Implications for monetary policy across the globe

AbstractThe public sectors in many developing countries receive capital inflows from advanced countries. Notably, we show that higher levels of foreign borrowing play an important role in promoting economic activity in developing countries by relieving crowding out problems from local sovereign debt. Moreover, in comparison to previous contributions, we also show how participation affects economic activity in advanced countries. Using a micro‐founded two‐country model of money and banking, we show that there are crowding‐out effects in high income economies when the advanced country funds official foreign debt. Moreover, we find that there are significant implications for the effects of monetary policy when banks in the developed world hold more official foreign debt. In addition, the typical destructive effects of money growth in developing countries are weaker in the presence of higher levels of international borrowing. By comparison, the effects of monetary stimulus in the advanced country become more pronounced as banks hold more foreign bonds. Our analysis concludes by looking at optimal debt policy. Interestingly, the results suggest that developing countries should limit their reliance on foreign capital inflows.