Independent Monetary Research Articles

Effects of trilemma policies patterns on monetary policy credibility

The open economy trilemma refers to the impossibility of a country fully and simultaneously achieving three political objectives: monetary policy independence, exchange rate stability and financial openness. However, corner configurations related to the three policies of the trilemma are increasingly rare. In fact, countries tend to choose a policy combination composed of partial financial integration, managed exchange rate flexibility and partial monetary independence. Given the possibility of intermediate choices, there exists an index able to measure the relative divergence (or convergence) regarding the policy choices of the trilemma. The index identifies whether countries are adopting similar (or divergent) policy mixes in relation to the trilemma policy options. However, the consequences of adopting a more (or less) convergent policy arrangement on monetary policy credibility are unknown. Hence, this study investigates the effects of trilemma policies convergence patterns on monetary policy credibility. The idea is to verify whether a more convergent arrangement of policies related to the trilemma in open economies helps build monetary policy credibility. Our database is formed by 94 (developed and developing) countries with different characteristics. Thus, we run estimates based on a family of Tobit models for different sub-samples of countries, and also considering different periods – before and after the Global Financial Crisis. The study brings important practical implications. In general, the findings show that a convergent strategy increases credibility. The estimates corroborate the idea that countries adopting divergent policies from the global standard tend to be more exposed to economic instability and, as a result, have difficulties in anchoring inflation expectations.

The relationship between monetary stability and central bank independence: The case of Azerbaijan

The independence of the central bank is one of the most important factors for effective monetary policy. Central bank independence is closely related to monetary stability, which is an important part of monetary policy. In this study, the purpose of the analysis is to understand whether monetary stability functions effectively for central bank independence in Azerbaijan using the vector autoregression method. In addition, the Granger Causality test was conducted to empirically investigate how central bank independence affects the provision of monetary stability in the economy of Azerbaijan over the data period from 1996 to 2022. In this framework, indices or variables are the exchange rate stability index (ERS) in 1996–2022, the level of monetary independence index (MI) in 1996–2020, taken from the “trilemma indexes”, which are defined as the consumer price index (CPI) in 1996–2022, and the broad money supply (M2) in 1996–2022. The findings of the study show that the independence of the central bank has a positive effect on the monetary stability of the Azerbaijani economy.

2008 Krizi Sonrasında Para Politikası Bağımsızlığı Çerçevesinde İmkânsız Üçleme ve İkilem Hipotezine İlişkin Tartışmalar

Based on the findings of empirical studies examining the trilemma-dilemma debate, this study aims to offer a general overview of this debate and light the way for future studies. We note that although some studies investigating the validity of the trilemma hypothesis conclude that it is still valid, others have found evidence in support of the dilemma hypothesis. Furthermore, a limited number of studies report that both hypotheses are partially valid. Examining the findings of these empirical studies as a whole, we can say that although flexible exchange rates continue to provide peripheral countries with more monetary independence, the steady increase in financial integration is weakening the shock-absorbing role played by the exchange rate today.

The Mundell-Fleming Trilemma Combination on Middle-Income Countries

The Mundell-Fleming trilemma hypothesis stated that a country could not simultaneously achieve exchange rate stability, financial integration, and monetary independence. The fixed exchange rate policy, free capital mobility, and monetary independence are trade-offs and impossible to run simultaneously. This research aims to identify the combination of the Mundell-Fleming trilemma formed in middle-income countries. Using the panel ARDL model, we found that the Mundell-Fleming trilemma tends to converge in the short run. While on the long run, middle-income countries tend to choose monetary independence and financial integration, resulting in a less stable exchange rate, as mentioned in the hypothesis

Macroprudential policy, capital flow management and monetary policy independence

In the aftermath of the 2007-2009 global financial crisis, macroprudential policy and capital flow management emerge as two popular sets of policy tools which can help countries mitigate the impacts of financial crises. This paper investigates how the existence of both capital flow management and macroprudential policy can affect monetary policy independence. Using panel data covering 61 countries during the 2000-2017 period, this paper finds that (1) macroprudential policy does help home countries gain monetary independence, conditional on capital flow management. (2) Macroprudential policy has overlap effects with capital flow management but does not have a perfect substitutable relationship with capital flow management. The combination of macroprudential policy and capital flow management can better improve the home country's monetary independence. (3) Different macroprudential policies have heterogeneous effects on monetary independence.

Penguatan Literasi Ekonomi dan Keuangan Syariah dalam Rangka Kemandirian Ekonomi Masyarakat Petani Pasca Pandemi Covid-19

The Covid-19 pandemic has introduced a lesson in itself for the humans of Prancak Village, Pasongsongan District, Sumenep Regency. This occasion gave the impact of a turning factor in existence to attract towards the Creator, now no longer most effective for topics of hablumminallah however additionally hablumminannas, specifically withinside the monetary sector. The farming network in fashionable is aware about the significance of sharia monetary transactions, they experience this whilst monetary get entry to is tough or confined for the duration of a pandemic. Their hobby withinside the Islamic monetary device which objectives to get benefits from Allah SWT started to emerge. They consider this, specifically the various farming network if you want to deepen understanding of Islamic economics and finance. Not most effective for doing commercial enterprise, however in dealing with the every day financial system and budget in order that it's far greater green to create monetary independence. This count number does now no longer prevent there, as a way to foster a spirit of doing commercial enterprise or including fee to its products, specifically agricultural products. So the schooling and counseling application withinside the shape of Community Service (PKM) from FEBI IAIN Madura collaborated with village officers with a view to offer answers associated with sharia monetary and monetary understanding or literacy that the farming network without a doubt wanted. The schooling and counseling strategies introduced are face-to-face strategies, concerning strengthening Islamic monetary and monetary literacy withinside the context of monetary independence of farming groups after the Covid-19 pandemic. The outcomes of the evaluation of the information received display that the schooling members examine that the schooling fabric may be implemented of their commercial enterprise even in dealing with the every day own circle of relatives financial system, they experience satisfied and influenced and experience greater assured to create sharia-primarily based totally monetary independence as a way to wish for the blessing and benefits of Allah SWT.

The New Possible Trinity: Supranational Currency, Capital Mobility, and Monetary Independence

The New Possible Trinity: Supranational Currency, Capital Mobility, and Monetary Independence

Which Combination of Impossible Trinity Choices Ensures Output and Price Stabilities in India? A Sign‐Restricted Vector Autoregressive Analysis

India has faced the impossible trinity challenge after it opened up its capital account post‐1990s reforms. Accordingly, simultaneous achievement of three macroeconomic objectives, namely exchange Rate Stability, capital openness and monetary independence, is an impossible task and any combination of two objectives can be achieved by losing the third one. This attempt, therefore, validates the existence of impossible trinity in India and investigates its impact on the stability of both, economic growth and prices. The sign‐restricted vector autoregressive (VAR) methodology has been used to confirm the existence of impossible trinity and to identify the best trilemma policy combination for the Indian economy in order to achieve stable output growth with steady prices. A trinity combination of “capital openness” and “exchange rate stability” is found to be the best in achieving stability of macroeconomic indicators under evaluation. Furthermore, the absence of trinity in India is inferred to ensure macroeconomic stability. However, maintaining its absence for a substantial period is noticed to be a near‐impossible task.

Impact of Financial Development, Financial Liberalization and Economic Growth on Financial Instability: Evidence from Panel Data

Financial instability refers to the situation when financial system faces some disturbances and volatility. There are some important factors that can have a significant influence on the stability or instability of the financial sector. The main objective of this study is to examine the impact of financial sector development, financial liberalization, and GDP growth rate on financial instability. Using data from 53 countries from 2000 to 2016 and employing a battery of estimation techniques consisting of fixed effect, random effect, dynamic panel, and system GMM, the study finds that financial development and financial liberalization accentuate financial instability. The study also finds that economic growth dampens it. Furthermore, the relationship is robust to a variety of controls like monetary independence index, exchange rate stability, law and order, and government expenditure. The policy implication is straightforward that financial development and financial liberalization demand a caution.

The eurozone: What is to be done to maintain macro and financial stability?

The financial stability of the eurozone depends on its macroeconomic stability and vice versa. We construct a macro DSGE model of the eurozone and its two main regions, the North and the South, with the aim of matching the macro facts of these economies by indirect inference and using the resulting empirically-based model to assess possible new policy regimes that could maintain financial stability. The model we have found to fit the facts suggests that substantial gains in stability and consumer welfare are possible if the fiscal authority in each region is given the freedom to respond to its own economic situation. Further gains could come with the restoration of monetary independence to the two regions, in effect creating a second ‘southern euro’ bloc. Enhanced fiscal flexibility increases fluctuations in debt and deficit ratios to GDP while keeping average ratios stable, maintaining solvency. A reformed Stability and Growth Pact could be limited to monitoring solvency.

The role of international reserves on real exchange rate: a panel data analysis

This article analyzes whether the accumulation of international reserves affects real exchange rates for a set of 57 economies. Panel ARDL estimations, for annual data from 1994 to 2017, show that higher (lower) levels of international reserves cause appreciation (depreciation) of exchange rate and reduce (increase) its volatility, in the long run. As for the error-correction related to deviations from the long run, short run adjustments in exchange rate volatility occur at a much faster rate than corrections in the exchange rate level. The Balassa-Samuelson effect, inflation and inflation differential also play significant roles, whereas monetary independence is partially important.

Türkiye Ekonomisi için Ekonometrik Bir Model Çalışması- Mundell-Fleming Modeli Çerçevesinde Bir İnceleme

In economic theory there is some general belief that General Equilibrium model is based on stronger theoretical pillars, whereas Keynesian models are better in empirical predictions especially for the developing countries. The MFM has shaped analytical thinking becoming the basic template during the 1960-70s as an extension of the IS-LM analysis to the open economy. Recent research on the model highly concentrates on the Trilemma Hypothesis which suggests that it is not possible to have all three of the stable exchange rate, monetary independence and financial integration policy choices together. Studies on world economies from 1820 on provide strong evidence supporting the theory. Previously extended form of the MFM has been estimated in Baştav (2006) in seven equations by the Johansen test for 1990-2002. There are goods, money, foreign exchange, labor markets with demand-supply equations as well as wage indexation and price level specifications on the supply side. The model allows for price and wage adjustment and there are altogether four price variables with the interest and the exchange rates. Present study is an update of the model for the years 2003-2021 to test its validity for the new period. Results are quite explanatory for 1990s and 2000s in both studies with particular deviations in behavioral traits and coefficients naturally stemming from differences in policy choice during the two periods in question.

Fiscal stabilization in high-debt economies without monetary independence

Fiscal stabilization without monetary autonomy can be challenging, especially in high-debt economies. This paper studies the welfare outcomes of six fiscal stabilization rules in Greece, a highly indebted country in a monetary union. We introduce rich fiscal policy instruments into a small open economy dynamic stochastic general equilibrium model and estimate it using Bayesian methods. Four results emerge. First, the estimated fiscal policy rules show a lack of fiscal stabilization, which contributes to rising public debt. Second, productive spending-based policy rules dominate the tax-based rules in welfare terms. Welfare gains are mainly driven by agents’ expectations of the future fiscal policy stance. Third, the optimal stabilization policy features a simultaneous adjustment of all spending and taxes. In the case of negative productivity shocks, the optimal response is to expand public consumption and employment, raise the labor tax rate, and reduce public investment and tax rates on consumption and capital. Fourth, sizable distributional effects are found across savers and hand-to-mouth households, with savers’ welfare gains being quantitatively greater than those of hand-to-mouth agents.

The Impacts of International Reserves on Monetary Independence in Emerging Countries: An Asymmetric Analysis

The level of international reserves could influence the monetary independence of a country. Nonetheless, this relationship is usually estimated in a single structural equation. This article examines the dynamics from a shock in a partial sum of negative and positive changes in the international reserves on monetary independence in 17 emerging countries from 1991 to 2015 by applying the panel vector regressive estimation. The Granger causality analysis indicates that a decline in the international reserve has a unidirectional impact on monetary independence. The impulse response analysis shows that the monetary independence moves in the same direction immediately after a change in the international reserves. The impact reverses a year later before returning to its initial trend. Besides, the negative partial sum of international reserves has a more lingering effect on monetary independence. Otherwise, the variance decomposition analysis suggests that the monetary independence movement is partially explained by the shock in international reserves, albeit the magnitude is relatively small. The outputs imply that sterilization has played a critical role in moderating the negative effect of raising international reserves on monetary independence. In sum, hoarding of international reserves needs to be complemented with effective sterilization.

The Role of Monetary Policy Tools on Stability of Iraqi Economy: A Macroeconomic Analysis (2004-2018)

Monetary coordination and macroeconomic stability are increasingly critical for domestic and fiscal policy in the aftermath of the global financial crisis. This research investigates the impact of monetary policy on financial and economic stability following the COVID-19 pandemic's economic lockdown. This article utilized a V.A.R. (Vector Autoregressive Models) estimator for time series data models. Quarterly statistics are gathered from the first quarter of 2004 to the first quarter of 2018. Using a V.A.R. model, the study investigates the causal connections between monetary policy instruments and economic stability. The findings suggest that Iraq's monetary policy is most efficient at maintaining a target growth rate for the money supply while simultaneously controlling inflation through an equalization cap (1.8 percent). Due to the rentier structure of the Iraqi economy, the money supply had a negligible influence. Monetary authorities must monetize oil earnings in order to finance public spending. Finally, an appropriate framework for monetary management must be created that ensures monetary independence and supremacy remain unimpaired. The findings give a thorough knowledge of the links between national monetary policies and economic stability, which can eventually aid in developing nations' formulation of good monetary and fiscal policies.

How Economic, Political and Institutional Factors Influence the Choice of Exchange Rate Regimes? New Evidence from Selected Countries of the MENA Region

In this paper, we investigate how economic, political, and institutional factors affect the choice of exchange rate regimes using data on eight Middle East and North Africa (MENA) countries over the 1984-2016 period. Specifically, we run random-effects ordered probit regressions of the likelihood of exchange rate regimes on the potential determinants of exchange rate regimes. Three important findings emerge from the analysis. The first finding is that political and institutional factors play an important role in determining the exchange rate regime in MENA countries, where a democratic political regime and a low level of corruption increase the probability of opting for a fixed regime, while strong governments, political stability (such as less internal conflicts and more government stability), more law and order enforcement, and a left-wing government decrease the probability of opting for a fixed regime. The second finding is that bureaucracy, independent central banks, elections, terms of trade, and monetary independence have no effect on the choice of exchange rate regimes. The third finding is that financial development is not a robust determinant of the choice of exchange rate regimes. Our results still hold when considering alternative specifications, and they have important implications for policymakers in MENA countries

Signaling effect of fiscal reforms during political uncertainty: A game theory approach

This paper examines how rules and institutions and monetary-fiscal coordination setup impact welfare outcomes during political instability. Our theoretical model extends the analysis of Alesina and Tabellini (1987), Alesina and Gatti (1995), and Ferre and Manzano (2014) to examine the signaling content of the fiscal authority’s decision to engage in a fiscal reform when the policymaker’s preferences are private information. In a two-stage signaling game featuring a central banker, a government, and private agents, we examine the fiscal authority’s decision to engage in a fiscal reform under a Nash game, a cooperative setup, and a model of Stackelberg leadership. Three main results: 1) rules and commitments contribute to decreasing time inconsistency; 2) the more control the fiscal authority has over monetary policy, the more undesirable welfare outcomes, especially during political instability; 3) central bank independence signals fiscal discipline and produces relatively more desired outcomes during times of political uncertainty. Nevertheless, even with low degrees of central bank independence, proper fiscal “rules” produce close outcomes of an independent central bank even under the dominance of a centralized political authority and can secure close welfare gains in terms of inflation and fiscal outcomes. We propose these theoretical findings for empirical examination in emerging countries with prevailing schemes of fiscal dominance and more dependence on discretionary interventions to secure growth rates and financing gaps. Such setups are argued to contribute to lowering welfare outcomes that could be reduced if proper fiscal rules were used as a substitute for low monetary independence.

Growth Shocks under Alternative Macro Regimes in a Developing Economy

A key challenge facing most developing economies today is how to simultaneously maintain monetary independence, exchange rate stability, and financial integration, subject to the constraints imposed by the impossible trinity. In this paper, we contribute to the literature by examining and comparing alternative macroeconomic policy choices for a developing economy with growth shocks. To that end, we introduce a three-sector “almost small” open economy macroeconomic model, and calibrate this model to proxy the China in 2005 when it made the transition from being an economy that was bounded by the impossible trinity. We design two alternative macroeconomic policy regimes and apply the calibrated model to analyze both the short-run and the long-run responses to several domestic and external growth shocks, which appeared important for a developing economy like China during its economic reform period in the 2000s. The model simulation shows that most growth shocks cause an expansion in the real GDP level. Moreover, greater flexibility in the exchange rate allows the central bank to conduct independent monetary policy, the benefit from which increases as financial capital becomes more internationally mobile. Our findings draw policy implication for those developing countries considering alternative macroeconomic policy regimes to achieve sustainable economic growth.

Shadow of the colossus: Euro area spillovers and monetary policy in Central and Eastern Europe

Closer integration between Central and Eastern Europe (CEE) and the EU has opened up channels facilitating the propagation of economic shocks from the core to the eastern periphery. This paper examines the effects of such shocks to economic activity and monetary conditions originating in the Euro Area (EA) on output, prices, money, and interest rates in 10 CEE countries over the period 2005–2018 using a bilateral restricted VAR framework. In contrast to previous studies, we use Divisia monetary aggregates and compare the effects of EA spillovers to domestic shocks. The results indicate that EA shocks explain the majority of variation across all macroeconomic indicators, with money supply shocks playing the most prominent role. Despite some heterogeneity, the impulse response of monetary aggregates to domestic and EA monetary shocks is almost identical across countries. The impact of the EA shock increases over time and persists, while the domestic shock dies out relatively quickly. Accordingly, we find no meaningful monetary independence in the majority of CEE countries. This is likely to prove detrimental to the effectiveness of monetary policies in CEE.

How the European Central Bank and Other Independent Agencies Reveal a Gap in Constitutionalism: A Spectrum of Institutions for Commitment

AbstractToday’s central banks wield extraordinary powers, both monetary and regulatory, and with a capacity to substitute for elected governments tempted to pass the buck. Debates about central banking’s powers and legitimacy barely touch, however, on whether and how monetary independence fits with the values that drive constitutionalism. It turns out that, for modern economies using fiat money, independence is a corollary of the higher level separation of (fiscal) powers between the legislative and executive branches. Even though independence is necessary, it needs to be carefully constrained by a “money-credit constitution.” Those general arguments, applicable in liberal democracies, do not carry across cleanly to the euro area. A principled case can be made for the ECB’s mandate being specially tight, but that is in tension with its de facto role as the emergency economic actor for the euro area. Facing up to that will be necessary sooner or later.