Monetary Policy Indicators Research Articles

Liquidity management and monetary transmission: empirical analysis for India

PurposeA change in monetary operating procedures provides a natural experiment which is used to evaluate, first, whether Indian monetary policy transmission is better when durable liquidity is in surplus or when it is in deficit; second whether it is better with interest rates as the policy instrument or quantity of money or a mixture of the two.Design/methodology/approachThis study first shows that the period of analysis can be divided into two separate regimes one of liquidity surplus (2002–2010) and the other of deficit (2011–2019).This study then estimates separate structural vector auto-regressions (SVARs) for the financial and real sector, with relevant exogenous foreign, policy and other variables for each of the periods as well as SVARs for the whole period with alternative operating instruments.FindingsMonetary transmission from the repo rate was better during the period the liquidity adjustment facility (LAF) was in surplus with the central bank in absorption mode denoting excess durable liquidity. Pass through was faster and the repo rate had a greater influence on other variables. The impact of the rate on output gap exceeds that on inflation. The weighted average call money rate was found to outperform others as the operating target. Monetary policy has evolved so that policy rates are more effective in transmission compared to money supply, but best results are when durable liquidity is also in surplus.Originality/valueThe results contribute to ongoing debates on the Indian monetary policy framework and give useful inputs for policy in emerging markets where research is scarce. They suggest keeping the LAF in deficit mode over 2011–19 was not optimal.

Liquidity injection, bank lending, and security holdings: The asymmetric effects in Vietnam

The study examines how banks rebalance their lending and security holdings in response to the monetary policy adjustments by the central bank's liquidity injection. It is concerned that banks may not use the additional liquidity to loan out to the economy, but they instead get more involved in security holdings. Using a sample of Vietnamese banks during 2007–2018, we find an asymmetric portfolio expansion strategy indicating that banks increase the purchases of securities far more rapidly than they treat their loan portfolio. Further analyzing the compositions of security holdings, we document that banks favorite government and financial bonds, as opposed to corporate bonds. This pattern implies that some capital flows seem not to reach the borrowers in the real sectors. Most prominently, we corroborate banks' asymmetric reactions according to the level of financial soundness. Concretely, less (compared to more) stable banks take more risks amid the monetary policy easing in the sense that their loan portfolio grows faster while their security holdings spread slower. All of our findings are robust across (i) changes in econometric techniques of static and dynamic panels, (ii) alternative indicators of monetary policy, (iii) different measures for bank soundness by the Z-score index and credit risk by non-performing loans, and (iv) multiple modified sets of control factors. Consequently, the securities preference over credit in the sound time may worry the regulatory authorities. This study feeds into the hot debate in Vietnam and other emerging countries as well, on the restriction of security trading and credit growth, and the scale of the central bank's asset purchases to avoid excessive liquidity.

Exchange Rate Volatility, Currency Misalignment, and Risk of Recession in the Central and Eastern European Countries

This study is aimed at estimation of the exchange rate volatility and its impact on the business cycle fluctuations in four central and eastern European countries (the Czech Republic, Hungary, Poland, and Romania). Exchange rate volatility is estimated with the EGARCH(1,1) model. It is found that exchange rate volatility is affected by the components of the Index of Economic Freedom from the Heritage Foundation, besides inflation and crisis developments. The empirical results using GMM estimation technique and comprehensive robustness checks suggest that exchange rate volatility reduces the risk of recession in the Czech Republic while the opposite effect is found for Hungary and Romania, with a neutrality for Poland. These findings continue to hold after controlling for the fiscal and monetary policy indicators. There is evidence that the RER undervaluation prevents sliding into a recession on a credible basis in Poland only, with a neutral stance for other countries. Except in Romania, higher levels of economic freedom is associated with worsening of the cyclical position of output. Among other results, stabilization policies in the recession imply fiscal tightening for the Czech Republic and Romania, higher money supply for the Czech Republic and Poland, and lower central bank reference rate for Hungary.

Динамическое моделирование макроэкономических факторов потоков портфельных инвестиций в страны с формирующимися рынками

Introduction: the impact of pull or push factors on capital flows has become an especially relevant issue due to the increasing importance of emerging countries in the growth of world welfare. Objectives: to identify the impact of global and domestic economic factors on portfolio capital flows to emerging markets. Methods: the work is based on applied statistical and econometric methods of regression analysis. Panel regression estimation was carried out by two-step least squares methods (instrumental variables), generalized method of moments according to the methodology of Arellano–Bond and Arellano–Bover/Blundell– Bond. The study contains a total of 2,240 observations. Results: two hypotheses were put forward: (1) global indicators of USA monetary policy have a greater impact on the inflow of portfolio investments in developing countries in crisis years than domestic factors; (2) the difference between the receiving country’s interest rate and the US rate has the most significant effect on the inflow of portfolio investment to emerging market economies among the domestic factors. The impact of the factors on portfolio investment flows was assessed using macroeconomic data for 28 developing countries, based on quarterly observations for the period 2000–2019. Conclusions: there is empirical evidence that global factors are more important in times of crisis than specific country ones. The second hypothesis was not confirmed. It was revealed that the flows of portfolio capital are most influenced by the level of international reserves and domestic political stability in the country.

Disagreement in Consumer Inflation Expectations

We posit that consumers form expectations about inflation by combining two sources of information: their beliefs from shopping experience and news about inflation they learn from experts. Disagreement among consumers in our model comes from four sources: (i) consumers’ divergent prior beliefs, (ii) heterogeneity in their propensities to learn from experts, (iii) experts’ different views about future inflation, and (iv) difference in mean expectations between consumers and experts. By carefully matching the datasets from the Michigan Survey of Consumers with the Survey of Professional Forecasters, we find that inflation expectations between households and experts differ substantially and persistently from each other, and households pay close attention to salient price changes, while experts respond more to monetary policy and macro indicators. Our empirical estimates imply economically significant degrees of information rigidity and these estimates vary substantially across households. This significant heterogeneity poses a great challenge for the canonical sticky-information model that assumes a single rate of information acquisition and for noisy-information model in which all agents place the same weight on new information received.

Monetary policy and macro economic indicators: A review of a developing country’s perspectives 2002–2017

The purpose of the study was to examine the effect of monetary policy on key macroeconomic indicators in Ghana. The study used annual time series data from 2002 to 2017, which was sourced from the ...

Особливості прогнозування показників грошово-кредитного та фондового ринків за умови макроекономічних збурень у країнах, що розвиваються

The purpose of the article is to improve approaches to forecasting and analyzing the sensitivity of money-and-credit and stock markets to macroeconomic shocks in developing countries, which are characterized by a high level of socio-economic uncertainty and political risks. The article substantiates the advantages of expanding the standard forecasting methodology based on one-sided forecasts by analyzing the sensitivity of the indicators studied to macroeconomic perturbations, especially in the period of high uncertainty observed in recent years. An empirical analysis of the reaction of the main indicators of monetary policy and stock index in countries with a transformational economy in response to macroeconomic shocks during the short term was carried out, using impulse response functions. It was identified that in the markets of most countries there was a stabilization of the stock index and the short-term interest rates during the first 2-6 months after the start of macroeconomic shocks, which was accompanied by their moderate periodic fluctuations. In only three of the seven developing countries studied, stock indexes and/or interest rates could not reach equilibrium levels on their own during the short term and required active central bank stabilization measures. It can be assumed that the degree of reaction of the stock and money-and-credit markets is primarily associated with the individual characteristics of the country’s economic system and its ability to absorb macroeconomic shocks. The carried out analysis of sensitivity allowed to determine what shocks have a critical impact on the functioning of the financial and money-and-credit markets in each of the economies under research.

Macro-financial analysis of value-at-risk from banking stocks in an Indian scenario

Value-at-risk (VaR) of banking stocks can be affected both by the financial ratio and macroeconomic variables. A balanced panel data of 28 Indian banks from 2005-2018 was used for the analysis. The findings of the study reveal that return on assets, consumer price index, gross domestic product, unemployment, and total investment significantly affect VaR. These findings bear policy implications for the banking sector and other stakeholders. Inflation mitigation should continue as the cornerstone of Indian monetary policy. The positive relation of VaR with unemployment demands that targeted employment approaches at urban and rural levels should be undertaken on a war footing along with labour-intensive infrastructure development providing a long-term perspective to the issue. This would help generate higher credit off-take for small scale investments at economy-wide levels, consumer demand increases with banking liquidity being put to productive use, leading to less non-performing assets and dynamic banking behaviour.

Analysis of Monetary Policy and its Impact on Indian Economy

Monetary policy matters for growth both in the short-run and long-run. This study focuses on theevaluation of monetarypolicyandits impact on Indian economy. Via monitoring the level of money supply, the central bank strives to protect price stability. The study is done using various indicators and factors such as Gross domestic product as dependent variable and repo rate, reverse repo rate, unemployment, Foreign direct investment and inflation as independent variable. Using these variables, it was found out that the economy of a nation is totally dependent on these factors. The parameter of calculating GDP was different. The objective of the research is to know effectiveness of monetary policy in India and to analyze the impact of selected monetary instruments on Indian Economy.

Impact of Monetary Policy on the Level of Economic Inequality in the United States

Abstract: After the reform of the world monetary system in 1971, the competition between countries for the global market is taking place in completely new conditions. Monetary and fiscal authorities have accumulated vast experience in regulating the economy and strengthening country competitive advantages through complex mechanisms of quantitative easing, foreign exchange rates manipulation, increasing debts, etc. Overcoming the consequences of the financial crises of the 21st century every time forces monetary regulators to implement increasingly radical measures in order to save the economy by injecting enormous amounts of liquidity into the market to buy out bad corporate debts as well as government debt securities. At the same time, the questions of how monetary policy affects the level of economic inequality and who is its beneficiary are becoming more relevant.The article seeks to analyze the impact of changes in monetary policy parameters on wealth inequality in the United States. Given the cyclical nature of economic inequality, the main method of research was chosen as a graphical statistical analysis, since it allows to identify trends effectively and keep in focus more than 100-year picture of changes in the analyzed indicators. For a more holistic picture, the dynamics of economic wealth inequality level were compared not only with key indicators of monetary policy, but also with the dynamics of marginal tax rates in US.One conclusion of the research is that wealth inequality depends more on fiscal adjustment and marginal tax rates than on monetary factors. Inadequate marginal income and inheritance tax rates are factors of rising of wealth inequality in US. Changing of monetary system settings also influences on the level of wealth inequality, because it affects the valuation of financial assets, and therefore the wealth of the richest people in US. Another important conclusion is the idea that the new monetary policy, despite all fears that it is a source of growing economic inequality, is acceptable with marginal income and inheritance tax rates of about 60% and with effective macroprudential regulation of US economy.

Monetary policy, bank leverage and liquidity

PurposeThe study explores how banks design their financial structure and asset portfolio in response to monetary policy changes.Design/methodology/approachThe authors conduct the research design for the Vietnamese banking market during 2007–2018. To ensure robust findings, the authors employ two econometric models of static and dynamic panels, multiple monetary policy indicators and alternative measures of bank leverage and liquidity.FindingsBanks respond to monetary expansion by raising their financial leverage on the liability side and cutting their liquidity positions on the asset side. Further analysis suggests that larger banks' financial leverage is more responsive to monetary policy changes, while smaller banks strengthen the potency of monetary policy transmission toward bank liquidity. Additionally, the authors document that lower interest rates induce a beneficial effect on the net stable funding ratio (NSFR) under Basel III guidelines, implying that banks appear to modify the composition of liabilities to improve the stability of funding sources.Originality/valueThe study is the first attempt to simultaneously examine the impacts of monetary policy on both sides of bank balance sheets, across various banks of different sizes under a multiple-tool monetary regime. Besides, understanding how banks organize their stable funding sources and illiquid assets amid monetary shocks is an innovation of this study.

Unemployment and monetary policy: Evidence from Sub‐Saharan Africa

In Sub‐Sahara Africa, few studies have been conducted on how unemployment affects monetary policy in each country. Even an aggregate study of the phenomenon in Sub‐Sahara Africa is near absent despite a high level of unemployment in the region. To investigate the empirical link between unemployment and monetary policy, the study employs a sample of 37 countries in Sub‐Sahara Africa for the period 2011–2017. Data were obtained from the World Bank and International Monetary Fund database. Using the difference Generalized Method of Moments model, the study determines how monetary policy (using the lending rate as proxy) responds to unemployment, employer's condition and total labour force in Sub‐Sahara Africa. We found that monetary policy indirectly responds to employer's condition, but the positive effect of the total labour force on monetary policy is relatively higher than total unemployment as a percentage of the labour force in the region. The study concludes that a linkage exists between monetary policy and employment indicators in Sub‐Sahara Africa and therefore, made some policy recommendations.

The Impact of Interest Rate Movement on Consumption and Output

Interest rate is considered one of the most important tools of monetary policy in Egypt, and it is the most used to maintain price stability and tackle inflation, here we study its effect on consumption and income in an econometric technique. This research is concerned with the study of the impact of interest rate shocks as an indicator of monetary policy on household consumption and Income in Egypt during the period from 1980 to 2018. The research applies the quantitative analysis approach and uses the econometric model to deduce results and uses a Small Structural Vector Autoregressive Model (SVAR). The research concludes that one standard deviation shock in interest rate shrinks consumption, but this very small and fast decrease is almost insignificant, while income initially increases in response to this positive shock. On the other hand, a negative shock in consumption causes a reduction in interest rate. the research also indicated a mutual relationship between consumption and income

The Effectiveness of Bank Credit Channel in Turkey

Parasal otoritenin yürütmüş olduğu para politikası, reel ekonomiyi; geleneksel faiz kanalı, varlık fiyatları kanalı, döviz kuru kanalı, kredi kanalı ve beklenti kanalı olmak üzere parasal aktarım kanalları aracılığıyla etkilemektedir. Bu çalışmanın esas konusunu oluşturan kredi kanalı, banka kredileri kanalı ve bilanço kanalı olarak iki alt kanala ayrılmaktadır. Bu çalışmanın amacı, 2003Ç1-2018Ç4 döneminde Türkiye’de banka kredi kanalının etkinliğinin VAR modeli kullanılarak araştırılmasıdır. Analizde para politikası göstergesi olarak kısa vadeli faiz oranları kullanılmış ve faiz oranındaki değişikliklerin özel sektörün (finansal olmayan) kredi hacmine olan etkileri araştırılmıştır. Etki-tepki fonksiyonlarının sonuçları Türkiye’de banka kredi kanalı mekanizmasının çalıştığını göstermiştir.

Monetary Policy and the Real Economy: A Structural VAR Approach for Kazakhstan

This paper shows monetary policy indicator which better explains Kazakhstani transmission mechanism. The study also discusses how foreign monetary policy or oil prices affect domestic macroeconomic variables. We use a seven variable by utilizing quarterly time series data from Kazakhstan covering the period from January 2005 to December 2017. They are: interest rate, exchange rate, output, reserve money, consumer price index, then, World oil price index and Federal Funds rate.

Examining the differential impact of monetary policy in India: a policy simulation approach

PurposeThough an accumulating body of study has analysed monetary policy transmission in India, there are few studies examining the differential impact of monetary policy action. Against this backdrop, this study aims to analyse the differential impact of monetary policy on aggregate demand, aggregate supply and their components along with the general price level in India.Design/methodology/approachThe study develops a structural macroeconometric model, which is primarily aggregate and eclectic in nature. The generalized method of movements is used for estimation of behavioural equations, while a Gauss–Seidel algorithm is used for model simulation purposes.FindingsThe paper presents the results of two policy simulations from the estimated model that highlight the differential impact of monetary policy. The first one, hike in the policy rate by 5% and second is a reduction in bank credit to the commercial sector by 10%. The results from the first policy simulation experiment reveal that interest hike has a significant negative impact on aggregate demand, aggregate supply and general price level. However, the maximum impact is borne by investment demand and imports followed by private consumption. While as among the components of aggregate supply maximum impact is born by infrastructure output followed by the manufacturing and services sector with the agriculture sector found to be insensitive in nature. The results from the second policy simulation experiment revealed that pure monetary shocks have a significant negative impact on aggregate demand, aggregate supply and general price level. However, the maximum impact is born by private consumption and imports followed by investment demand. While as among components of aggregate supply maximum impact is borne by infrastructure followed by the manufacturing and services sector with the agriculture sector found to be insensitive in nature. From both policy simulation experiments, the study highlighted the relative importance of the income absorption approach as opposed to the expenditure switching effect.Practical implicationsThe results obtained in this study provides a strong framework for design the monetary policy framework. The results are in a view of the differential impact of monetary policy action among the components of both aggregate demand and aggregate supply. This reflection of differential impact has immense significance for the macroeconomic stabilization as the central bank will have to weigh the varying repercussion of its actions on different sectors. For instance, the decline in output after monetary tightening might be conceived as mild from an overall perspective, but it can be appreciable for some sectors. This differential influence will have an implication for policy design to care for distributional aspects, which otherwise could be neglected/disregarded. Similarly, the output decline may be as a result of either consumption postponement or a temporary slowdown in investment. However, the one emanating due to investment decline will have lasting growth implications compared to a decline in consumer demand. In addition, the relative strength of expenditure changing or expenditure switching policies of trade balance stabilization may have varying consequences in the aftermath of monetary policy shock. Accordingly information on the relative sensitiveness/insensitiveness of different sectors/ components of aggregate demand towards monetary policy actions furnish valuable insights to monetary authorities in framing appropriate policy.Originality/valueThe work carried out in the present paper is motivated by the fact that although a number of studies have examined the monetary transmission mechanism in India, a very few studies examining the differential impact of monetary policy action. However, to the best of the knowledge, there is no such studies, which have examined the differential impact of monetary policy in the structural macro-econometric framework. The paper will enrich the existing literature by providing a detailed account of the differential impact of monetary policy among the components of both aggregate demand and aggregate supply in response to an interest rate hike, as well as a decrease in the money supply.

Optimization of Investment Portfolios Taking into Account the Behavioral Perception of Monetary Policy

The paper presents an adaptation of modern behavioral economic theory to portfolio investment in the Russian stock market. The author analyzes the possibility of optimizing the investment portfolio for a private investor using portfolio correction based on changes in monetary policy indicators available in media sources. The behavioral model of portfolio selection is used, based on the value of shares on Moscow Exchange and taking into account a reference point in the theory of prospects in the form of indicators regulated by the Bank of Russia. The key rate and the standard of required reserves, inflation, the average rate on bank deposits, and the exchange rate of the US dollar to the ruble are used as monetary policy indicators. The behavioral model is a modified theory of average variance, in which the calculation of profitability and risk is carried out according to the main behavioral theories, namely the cumulative prospect and mental accounting theory. The author considers various options for forming a portfolio in accordance with the level of risk aversion. As a result of comparing the models of optimization of the average variance portfolio and the models based on the modified theory of average variance using behavioral factors, higher risk-return ratios of the modified models were revealed in the forecast period, while for the analyzed period all models were located on the line of Markowitz efficient portfolio. As a further development of the portfolio behavioral theory, the possibilities of adapting the model are proposed not only depending on the points of reference, but also depending on changes in risk acceptance coefficients and probability estimates.

The effectiveness of monetary policy and output fluctuations: An asymmetric analysis

AbstractPrevious studies have investigated asymmetries in the effects of monetary policy on the real economic activity by using either vector autoregressive (VAR)‐based regime‐switching models with smooth transition technique or Gaussian functions to parameterise the dynamic effects of structural shocks on the economy. These kinds of VAR models assume asymmetry as a short‐run relationship between the series since the long‐run neutrality hypothesis of money states that monetary policy can only affect productive capacity of the economy in the short run, but not in the long run. The recent theoretical literature shows that this hypothesis is not quite right. Thus, this paper examines the extent to which monetary policy has a long‐run asymmetric effect on output in a number of Organisation for Economic Co‐operation and Development countries by using a nonlinear hidden cointegration analysis within a likelihood‐based panel framework. The findings indicate that there is a long‐run relationship between the real interest rate as an indicator of monetary policy and the growth rate of real output in five countries out of nine under review. This gives support for the view that output has responded asymmetrically to the real interest rate changes. The economic implication of our results is that monetary policy affects positive and negative output fluctuations differently.

An Evaluation of the Predictive Capabilities of the Yield Curve in India

This paper proposes an evaluative study of the predictive capabilities of the yield spread on economic performance in India. While literature on the subject is vast, studies so far have centered primarily on the U.S. and other developed European economies. In line with previous literature, we choose the spread between the 3-month and 10-year treasury bonds to conduct our analysis, using data from the beginning of 1995 till the end of 2019. We use the probit model to check whether curve inversions predict recessions within the country, finding the spread to be a significant determinant either immediately or 2-quarters ahead. However, in terms of predicting economic performance, the spread shows much weaker capabilities, containing minimal information on changes in real GDP, inflation rates or industrial production. With the yield curve being an easy to track monetary policy indicator, proving its forecasting potential should prove an aid to policymakers and sheds light on the importance of monetary policy for developing countries, establishing the need for further academic research on the subject in the developing and underdeveloped countries of the global east.

A Divisia Measure of the Money Supply for Mexico

Currently, Banco de Mexico measures money as a simple sum of the different monetary assets included at four levels of aggregation: M1, M2, M3, and M4. Seminal work by Barnett (1980) and many who followed since have amply demonstrated simple-sum aggregation is highly problematic. A wealth of monetary literature has shown Divisia indices of monetary aggregates are both theoretically and empirically superior to their simple-sum counterparts. While Divisia indices are available for the U.S., the U.K, the Euro area and a few other developed economies, no similar measure currently exists for Mexico. This paper produces the first measure of Divisia money for the Mexican economy under the Banco de Mexico’s Methodological Redefinition of 2018 of its monetary aggregates. Under standard and time-varying constructs of well-accepted structural VAR identifications, we find that Divisia M4 as an indicator of monetary policy yields responses of industrial production and prices that are in every case at least as sensible as (and often an improvement over) their counterpart specifications with a short-term offer rate as the indicator. Importantly, we find the resolution of the price puzzle in our Divisia specifications do not require expanding the information set of the VAR with commodity prices. We reach similar conclusions for Mexico to those Keating et al. (2019) arrive at for the U.S. economy.