Independent Monetary Policy Research Articles

International spillovers of quantitative easing

This paper develops a two-country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy. The model is able to replicate the key empirical facts on emerging countries' response to large scale asset purchases conducted abroad, including inflow of capital to local sovereign bond markets, an increase in international comovement of term premia, and change in the responsiveness of the exchange rate to interest rate differentials. According to our simulations, quantitative easing abroad boosts domestic demand in the small economy, but undermines its international competitiveness and depresses aggregate output, at least in the short run. This is in contrast to conventional monetary easing in the large economy, which has positive spillovers to output in other countries. We also find that limiting quantitative easing spillovers might require policies that affect directly international capital flows, like purchasing assets by the small economy's central bank.

Twentieth Anniversary of the Euro: Why are Some Countries Still Not Willing to Join? Economists’ View

Twenty years after the introduction of the euro, some European countries are still not willing to join the monetary union. Sweden, Czechia, Hungary, and Poland, although obliged to introduce the euro, decided to postpone this process indefinitely. There are various economic, political, legal, sociological, and even emotional factors underlying such a decision. In this paper, we focus on the key economic argument against euro adoption in these countries—the cost of the loss of monetary policy independence. Our results indicate that there already is a high correlation and synchronicity in key interest rates and business cycles between the euro area and non-euro area European countries. Most importantly, our analysis also suggests that business cycles in both groups of countries are predominately driven by the same (common) shocks. Following the postulates of the OCA theory, we therefore provide evidence supporting the view that the common monetary policy in these countries would, most likely, be an adequate substitute for national countercyclical policies.

TIME VARIATION OR ASYMMETRY? THE INFLATION AND INFLATION UNCERTAINTY NEXUS: A CASE OF CHINA

This investigation tests the dynamic and quantile causality between inflation and inflation uncertainty of China with constructing a rolling-window based quantile causality test. The result shows unidirectional causality from inflation to inflation uncertainty, which is significantly asymmetric and time-varying. Inflation more likely causes inflation uncertainty in higher quantiles, indicating the linear model based on conditional mean may overestimate this impact in a lower quantile interval. Furthermore, the influence also exhibits a consistent time-varying property that cannot be explained simply by the conditional distribution. The causality shows more significance since 2007 when China cancelled the mandatory settlement system, which led to the increase of monetary policy independence. The time-varying nature indicates institutional changes may lead to regime switching of this causality. Our result supports the Friedman–Ball hypothesis [ Friedman, M ( 1977 ). Nobel lecture: Inflation and unemployment. Journal of Political Economy, 85(3), 451–472; Ball, L ( 1992 ). Why does high inflation raise inflation uncertainty? Journal of Monetary Economic, 29(3), 371–388] to a certain extent and implies that the purpose of controlling inflation uncertainty of China can be achieved by controlling inflation if and only if it is relatively high on the premise of the independence of monetary policy.

Exchange rates, local currency pricing and international tax policies

Empirical evidence suggests that for many countries, retail prices of traded goods are sticky in national currencies. Movements in exchange rates then cause deviations from the law of one price, and exchange rate misalignment, which cannot be corrected by monetary policy alone. This paper shows that a state contingent international tax policy can be combined with monetary policy to eliminate exchange rate misalignment and sustain a fully efficient welfare outcome. But this monetary-fiscal mix cannot be decentralized with non-cooperative determination of monetary and fiscal policy. Non-cooperative use of taxes and subsidies introduces strategic spillovers which opens up a fundamental conflict between the goals of output gap and inflation stabilization and those of terms of trade manipulation in an open economy. The implementation of an efficient monetary-fiscal mix requires effective cooperation in fiscal policy, while leaving monetary policy to be determined non-cooperatively. In addition, while an efficient outcome requires state contingent taxes and subsidies to eliminate exchange rate misalignment, it is still necessary to have flexible exchange rates and independent monetary policy.

Inflation Targeting and World Monetary Shocks: Evidence from Developing Economies

The paper assesses the co-movement of local and foreign interest rate for developing countries with a full-fledged inflation targeting framework during and after the 2008 financial crisis. A panel linear optimizing monetary model is estimated by the fixed effects with spatial correlation standard errors over quarterly span from Q12007 to Q2 2019. The results suggest that inflation targeters are highly vulnerable to external monetary shocks, even after years of notable efforts to de-dollarization and complete shift towards a full-fledged inflation targeting. From a regime evaluation prospective, the inflation targeters’ response to world monetary shocks is compared to that of a group of fixed exchange rate rule economies and managed exchange rate countries with other monetary regimes. The findings provide evidence that inflation targeting countries are not different in their interest rate response to world monetary shocks compared to non-inflation targeting countries’, and instead of having more flexibility, inflation targeters show stronger reaction to world monetary shocks. These results are found robust when generated out from different subsamples and under assumptions of strict and flexible inflation targeting and policy inertia. The findings indicate that adopting inflation targeting as a framework for monetary policy does not by itself support the overall macroperformance and independence of monetary policy or force continuing commitment to the inflation targeting conditions.

Fiscal and Currency Union with Default and Exit

Countries which share a common currency potentially have strong incentives to share macroeconomic risks through a system of transfers to compensate for the loss of national monetary policy. However, the option to leave the currency union and regain national monetary policy can place severe limits on the size and persistence of transfers which are feasible inside the union. In this paper, we derive the optimal transfer policy for a currency union as a dynamic contract subject to enforcement constraints, whereby each country has the option to unpeg from the common currency, with or without default on existing obligations. Our analysis shows that the lack of independent monetary policy, or an equivalent independent policy instrument, limits the extent of risk-sharing within a currency union; nevertheless, in the latter, the optimal state-contingent transfer policy take as given the optimal monetary policy as to implement a constrained efficient allocation that minimises the losses of the monetary union. At the steady state welfare is lower than in a fiscal union with independent monetary policies. Nevertheless, in our simulations, the macroeconomic stabilisation effects and the social values achieved, under the two different union regimes, are quantitatively almost the same.

Slovak Experience After 10 Years from the Introduction of the Euro as Globalization Factor

One of Slovakia’s globalization tendencies is the successful introduction of the Eurocurrency. It has been 10 years since the introduction of the euro in Slovakia. It is a sufficient time for us to continuously assess the real situation and attitudes of the citizens in this area. There are several publicly available studies, research findings conducted by Eurobarometer, Fincenter or the National bank, which focus on advantages and disadvantages of the euro currency. The most frequently mentioned advantages are price stability, transaction cost decrease in foreign trade and tourism, Slovak export increase and the removal of exchange rate risk. On the other side, Slovakia has lost its independent monetary policy and the member country is also expected to participate in the euro area rescue mechanism. Similarly the research team of the Faculty of Economics of J. Selye University was invited by Hungarian Pallas Athene Domus Educationis Foundation to participate in the research project named ten years of euro – Slovak experience. Based on this project initiative, the aim of the paper is to find out the experience regarding the euro among citizens, also with an emphasis on cross-border activity. In order to achieve the research objectives we applied primary data collection to obtain information about the researched issue. An anonymous questionnaire survey was conducted among the respondents. Data collection among the residents was realized with a help of an agent, but also an online questionnaire was provided for the respondents in 2018. Statistic indicators were used to verify our assumptions.

The Case for Central Bank Independence: A Review of Key Issues in the International Debate

This Occasional Paper analyses how significant expansions in central banks’ mandates, roles and instruments can result in challenges to the independence of monetary policy. The paper reviews, in particular, some of the key challenges to central bank independence brought about by the global financial crisis (GFC) of 2007 and assesses their impact on the de jure and de facto independence of selected central banks around the world in the past few years. It finds that although the level of de jure (legal) central bank independence did not deteriorate, the level of de facto (actual) independence of the central banks of some of the largest economies in the world may have weakened. The paper presents counterarguments to the key critiques raised against central banks due to their policy response during the GFC, and concludes that the case for central bank independence is as strong as ever.

Role of Central Bank Independence in Banking and Financial Stability Ensuring

This paper is devoted to defining the role of the central bank in ensuring banking and financial stability. The main purpose of the study is to assess the direction and strength of the impact of central bank independence in terms of its individual aspects on the parameters of banking and financial stability for different groups of countries. Systematization of literature sources and the results of existing empirical research has shown that the expected effects of increasing the independence of the central bank are to improve banking and financial stability. For the study, a sample of statistical data for 10 developed and 10 developing countries for the period 1991-2012 was formed. The methodological basis of the study were the tools of panel regression modeling with fixed effects with Stata software use. The article presents the results of empirical analysis, which showed that the independence of the central bank is an important factor in ensuring banking stability. At the same time, the impact on financial stability has not been conclusively confirmed. The study empirically confirms and theoretically proves that the stage of development of the country determines the strength of such influence. Thus, developed countries generally show closer links between central bank independence and banking and financial stability, which in most cases are directly dependent, while developing countries have less lasting effects. The results of the analysis of the links between certain aspects of central bank independence and the level of banking and financial stability are of great practical value. The results of the study create a scientific basis for substantiating the sequence of actions aimed at strengthening the independence of the central bank. Thus, in developing countries, the focus should be on defining and prioritizing central bank goals, while developed countries should take a deeper approach to this issue and ensure the independence of monetary policy and financial independence of the central bank. Keywords: central bank, independence, banking stability, financial stability, Z-score, non-performing loans, capitalization, developed countries, developing countries, panel data.

Impact of the monetary policy of the People’s Bank of China on the country’s economic development

This article analyzes the current monetary policy of China. The analysis of the monetary policy of the Central Bank of China and the impact of its individual instruments on economic growth will continue. Currently the Central Bank of China conducts an independent monetary policy and uses a number of classic and modern tools to implement it. This has a positive impact on the state of the entire Chinese economy. The author concludes that effective implementation of monetary policy is possible only if there is a stable functioning financial market and public confidence in the state. Direct and indirect methods of China’s monetary policy contribute to economic growth. Direct methods include direct financing of certain projects by the People’s Bank of China, as well as providing loans to commercial banks to Finance certain programs and projects. Indirect methods consist in formulating recommendations, as well as creating conditions for financial institutions involved in financing and investing in priority sectors of the economy. China does not seek to copy global trends in monetary policy, but rather pursues a monetary policy that is focused on the current needs of the economy. The authors conclude that the goals and instruments of the People’s Bank of China are adjusted in accordance with economic conditions. Through the banking system China develops the real sector of the economy, stimulates economic growth pursues a policy of strengthening the national currency and maintains inflation at the level necessary for the sustainable functioning of the economic system. The value of the study is that the conclusions made by the authors expand and define the understanding that monetary policy has a great impact on economic growth. Key words: monetary policy, economic growth, banking system, macroeconomic policy, reform, devaluation.

Managing External Volatility: Policy Frameworks in Non-Reserve Issuing Economies

Since the global financial crisis, non-reserve-issuing economies (NREs) have been highly sensitive to episodes of external pressures. With monetary policy independence constrained by this sensitivity, many NREs have utilized other policy instruments. This paper confirms the vulnerability of NREs to external shocks and finds that in some circumstances managing such shocks with multiple instruments can both lessen the policy response required from any one policy tool to financial and external shocks and increase the effectiveness of policies in stabilizing macro-financial conditions. Effectiveness however does not always imply appropriateness, which rests on an evaluation of potential trade-offs and unintended consequences.

Monetary Policy and Income Inequality in Ghana

Monetary policy, even if minimal and uncertain regarding the direction of impact, has been found to have distributional effects especially in the developed world. The purpose of this study is to determine the impact monetary policy has on income inequality in Ghana which can be a case study for a developing African Economy with independent monetary policy. Data for the period 2002Q1 to 2013Q4 is used. The study used the Impulse Response Functions (IRFs) by Local Projections methodology in estimating the degree and direction of impact of monetary policy on income distribution in Ghana. From the analysis, it is concluded that contractionary monetary policy leads to an increase in disposable income inequality in Ghana marginally.

Trinity Strikes Back: Monetary Independence And Inflation In The Caribbean

AbstractMonetary independence is at the core of the macroeconomic policy trilemma. This study examines the relationship between monetary autonomy and inflation in Caribbean countries over the period 1980–2017. The empirical results show that greater monetary policy independence, measured as a country's ability to conduct its own monetary policy for domestic purposes independent of external monetary influences, leads to lower consumer price inflation. This relationship—robust to alternative specifications and estimation methodologies—has clear policy implications, especially for countries that maintain pegged exchange rates relative to the US dollar with a critical bearing on monetary autonomy. © 2019 John Wiley & Sons, Ltd.

The dilemma phenomenon, logistics for monetary independence policy and foreign exchange reserves

The development of financial integration makes a country’s economic links difficult. This is especially so for emerging market countries, which are more vulnerable to economic shocks. The objective of this paper is to explore whether the emerging market countries which adopt floating exchange rate system have realized, at the same time, in the aftermath of a crisis, free movement of capital flow and independence of monetary policy. This is done by introducing foreign exchange reserves into Mundell–Fleming model to do derivation. The approach is supported by empirical research based on 20 emerging countries including China, Brazil, Poland and South Africa and others. It was found that: (1) after the crisis, the emerging market countries that implemented floating exchange rate system did not achieve monetary policy independence. Rapid accumulation of foreign exchange reserves weakened the positive effect of the increase in money supply on output; (2) As a result of holding foreign exchange reserves, the independence of monetary policy in emerging market countries has been challenged, independently of the type of exchange rate system adopted, which proves the existence of dilemma phenomenon. Finally, this study puts forward policy recommendations on the exchange rate system and capital account convertibility for China.

The impact of monetary policy on the development of the agricultural sector economic

The article deals with the problematic issues of creating a single monetary policy and a single electronic monetary sign on the territory of the countries of the Eurasian economic Union. The problems that complicate the transition to a single currency, including differences in macroeconomic indicators characterizing the economic development of the EAEU member States, are shown. The proposed currency integration should become an integral part of the common currency policy of the member States of currency integration, as well as in the functioning and interaction of interstate organizations engaged in interstate currency regulation Currency and, which will be an objective assessment for the formation of index systems using different single currencies is justified. In this economic situation, the Russian financial market is unstable and vulnerable, as is the Russian ruble. Therefore, we need a very careful approach to the creation of a single currency, to the development of the financial market, to the functioning of a single emission center, to a single coordinated financial policy to approach comprehensively, carefully and with a high degree of responsibility. Undoubtedly, in the territory of the EAEU, there is a need to form a unified, independent monetary policy and tighten cross-border capital flows. It is necessary to issue a single currency in the EAEU. But this decision requires a serious approach, legislation and technical resources. At the moment, the EAEU has not created conditions for monetary and financial integration, there are problems in the economic integration of the participating countries, different levels of development of their economies, instability of national currencies. The EAEU member States need a common strategy for the development of integration, a lending model, an economic development plan for the alignment of national economies, as well as a plan for coordination of activities in the monetary sphere. The article shows issues of the introduction of the single currency and its impact on the prospects of development of the agro-industrial complex of the EAEU countries are considered.

The Effect of the China Connect

We document the effect on Chinese firms of the Shanghai (Shenzhen)-Hong Kong Stock Connect. The Connect was an important capital account liberalization introduced in the mid-2010s. It created a channel for cross-border equity investments into a selected set of Chinese stocks while China's overall capital controls policy remained in place. Using a difference-in-difference approach, and with careful attention to sample selection issues, we find that mainland Chinese firm-level investment is negatively affected by contractionary U.S. monetary policy shocks and that firms in the Connect are more adversely affected than those outside of it. These effects are economically large, robust, and stronger for firms whose stock return has a higher covariance with the world market return. We also find that firms in the Connect enjoy lower financing costs, invest more, and have higher profitability than unconnected firms. We discuss the implications of our results for the debate on capital controls and independence of Chinese monetary policy. \

Is the Federal Reserve Constitutional? An Originalist Argument for Independent Agencies

Originalists have written off the Federal Reserve’s independent monetary policy decisions as an unconstitutional novelty. This Article demonstrates that the independent structure of the Federal Reserve dates back to a Founding-era agency known as the Sinking Fund Commission. Like the Federal Reserve, the Commission conducted open market purchases of U.S. securities with substantial independence from the President. The Commission’s independent structure was proposed by Alexander Hamilton, passed by the First Congress, and signed into law by President George Washington. Their decisions to create an independent Commission with multiple members to check the President and one another — and to include the Vice President and Chief Justice as Commissioners who could not be replaced or removed by the President — belie the notion that such independence violated the newly minted Constitution. The Sinking Fund Commission establishes that the Federal Reserve’s independent structure has an impeccable originalist provenance and does not violate the Constitution.

Trinity Strikes Back

Monetary independence is at the core of the macroeconomic policy trilemma stating that an independent monetary policy, a fixed exchange rate and free movement of capital cannot exist at the same time. This study examines the relationship between monetary autonomy and inflation dynamics in a panel of Caribbean countries over the period 1980–2017. The empirical results show that monetary independence is a significant factor in determining inflation, even after controlling for macroeconomic developments. In other words, greater monetary policy independence, measured as a country’s ability to conduct its own monetary policy for domestic purposes independent of external monetary influences, leads to lower consumer price inflation. This relationship—robust to alternative specifications and estimation methodologies—has clear policy implications, especially for countries that maintain pegged exchange rates relative to the U.S. dollar with a critical bearing on monetary autonomy.

International Capital Flows and the Independence of China's Monetary Policy

This article estimates the quantitative relationship between international capital flows and China's monetary policy. A major innovation over most previous studies is taking into consideration the effects of changes in the reserve requirement ratio. Employing the method of the Federal Reserve Bank of St. Louis, this article translates the change in the reserve requirement ratio into the change in the monetary base, while the money multiplier remains unchanged. The change in the reserve requirement ratio is combined with the other monetary policies that directly affect the monetary base to construct an integrated measure of monetary policy. We then construct a modified offset and sterilization coefficients model. We find that the failure to take reserve requirement ratio changes into account leads to an underestimation of both the degree of sterilization and of capital mobility as measured by the offset coefficients. The results show that China's capital flows are quite limited, while China's monetary policy is able to almost completely sterilize monetary base fluctuations caused by international capital flows. Thus, we find that China has been able to maintain a great deal of domestic monetary policy independence despite a limited degree of exchange rate flexibility.

The Economists and Monetary Thought in Interwar New Zealand: The Gradual Emergence of Monetary Policy Activism

The emergence of monetary thought in New Zealand after 1914 has not been subject to extensive analysis. This paper remedies this deficit for the interwar period. The focus is upon the propagation of monetary ideas in New Zealand and their intellectual sources. We apply a heuristic in which different monetary doctrines are situated along a continuum between extreme monetary policy ‘activism’ and extreme ‘minimalism’. In the 1920s, New Zealand economists betrayed a minimalist bias across several dimensions: money supply regulation, the role of money and the international monetary transmission process in the business cycle, and the operation of bank-credit allocation mechanisms. Incipient activism in the work of Condliffe and Belshaw was countered by Niemeyer's case for a minimalist central bank. Fisher adopted an anti-reflationist, forced savings approach to the 1930s crisis. Copland, Tocker, Belshaw and Hight downplayed these consequences. Extended debate over Reserve Bank legislation generated new meanings for the phrase ‘monetary policy independence’; it also turned most economists against extreme activism that prevailed from 1938. Throughout the interwar period, New Zealand entertained a vigorous contest of monetary ideas inherited from the work of Keynes, Hawtrey, Cannan, Robbins, and Hayek, though adapted to local conditions.