Loose Monetary Policy Research Articles

Argumenty przeciw „pieniądzom z helikoptera”

Since the outbreak of the latest financial crisis central banks in several countries have decided to apply non-conventional monetary policy measures. Other monetary authorities behaved more conventionally but conducted a very loose monetary policy anyway. The goal of the paper is to discuss threats and possible consequences of treating the money instrumentally (monetary easing, government financing by the central bank). The authorities tend to arbitrary reinforce just one function of money, a medium of exchange, in order to artificially increase the sales and production of goods and services while neglecting other major function: a store of value. Fast growing money aggregates, awareness that there is no limit for money creation, and ideas such as “helicopter money” stimulate the attempts to storage the wealth in different form, e.g. cryptocurrency. The remarks were formulated from the conventional and Islamic finance perspective. Statistical data come from the euro area, Poland, and Iran, where banking system is fully Islamic.

Monetary Policy, Bank Competitiveness and Bank Risk-taking: Empirical Evidence from Vietnam

This study assesses the impact(s) of monetary policy and further influence of competitiveness on bank risk-taking of the Vietnamese commercial banks over the period of 2007–2016, an unstable period of the domestic monetary policy. The monetary policy is captured by a set of different variables including money supply, refinancing interest rate and treasury bill interest rate. Using the GMM methodology, the study finds that the monetary policy of Vietnam has a significant impact on bank risk-taking level, as measured by Z-score index. The empirical findings also indicate that bank risk-taking increases in the context of a loose monetary policy. In addition, the competitiveness of banks, presented by the Lerner index, is found as a determinant of bank risk-taking levels. By using interacting variables, the findings indicate that the impact of the competitiveness of banks outweighs that of monetary policy on bank risk-taking behaviour. It implies that the banks with high market power demonstrate less risk-taking behaviour even in a loose monetary policy environment. Besides that, liquidity, credit level and cost inefficiency could increase risk-taking behaviour of banks while bank size poses restrictions on bank risk-taking.

What Do Monetary Contractions Do? Evidence From An Algorithmic Identification Procedure

As the “Volcker shock” is believed to have generated useful information on the effects of monetary policy, this paper develops a simple procedure to identify other unanticipated monetary contractions. The approach is applied to a panel data set spanning 162 countries (over the period 1970-2017), in which it identifies 147 large monetary contractions. The procedure selects episodes where a protracted period of loose monetary policy was suddenly followed by sizeable nominal interest rate increases. Focusing on contractions of significant size increases the signal-to-noise ratio, while they are unlikely to be accompanied by confounding “information effects” (markets interpreting a rate hike as the Central Bank being optimistic about the real side of the economy). A subsequent panel VAR analysis suggests that a 100-basis point rate hike reduces real GDP by 0.5 percent. This reduction in output seems to be persistent, pointing to a certain degree of hysteresis. The price level falls by 1.5 percent, indicating that the medium-/long-run impact of contractionary monetary shocks is not characterized by a neo-Fisherian response. Advanced economies appear to display more price stickiness than emerging/developing countries, as the former combine a more muted price response with a larger effect on output.

What Do Monetary Contractions Do? Evidence from an Algorithmic Identification Procedure

As the “Volcker shock” is believed to have generated useful information on the effects of monetary policy, this paper develops a simple procedure to identify other unanticipated monetary contractions. The approach is applied to a panel data set spanning 162 countries (over the period 1970-2017), in which it identifies 147 large monetary contractions. The procedure selects episodes where a protracted period of loose monetary policy was suddenly followed by sizeable nominal interest rate increases. Focusing on contractions of significant size increases the signal-to-noise ratio, while they are unlikely to be accompanied by confounding “information effects” (markets interpreting a rate hike as the Central Bank being optimistic about the real side of the economy). A subsequent panel VAR analysis suggests that a 100-basis point rate hike reduces real GDP by 0.5 percent. This reduction in output seems to be persistent, pointing to a certain degree of hysteresis. The price level falls by 1.5 percent, indicating that the medium-/long-run impact of contractionary monetary shocks is not characterized by a neo-Fisherian response. Advanced economies appear to display more price stickiness than emerging/developing countries, as the former combine a more muted price response with a larger effect on output.

Monetary Policy and Long-Run Systemic Risk-Taking

As an extension to the literature on the risk-taking channel of monetary policy, this paper studies the existence of a systemic risk-taking channel (SRTC) in the Eurozone, through an original macroeconomic perspective based on causality measures. Because the SRTC is effective after an “incubation period”, we make a distinction between short and long-term causality, following the methodology proposed by Dufour and Taamouti (2010). We find that causality from monetary policy to systemic risk, while not significant in the very short term, robustly represents 75 to 100% of the total dependence between the two variables in the long run. Reverse causality is rejected: systemic risk did not influence the policy of the European Central Bank before the global financial crisis. However, central banks must be aware that a too loose monetary policy stance may be conducive to a build-up of systemic risk.

Powell's Perilous Situation

In February 2018, Jay Powell replaced Janet Yellen as chair of the Board of Governors of the US Federal Reserve (the Fed). Powell, a board member at the Fed since May 2012, knew that his job was to normalize US monetary policy, which had been exceptionally expansionary for a full decade. He also knew that short rates had been too low for too long—the federal funds rate had been near 0% for seven years and even now was at a historically low level of just 1.25%—perhaps sowing the seeds for future financial crises. Powell faced at least three pressing questions: How, after the Fed's balance sheet had expanded fourfold in a few short years, should the Fed guide the public through the eventual unwinding of its $4.4 trillion balance sheet? Relatedly, when should it begin to sell some of its $2.46 trillion in Treasury holdings? Could the US economy—and, indeed, the global economy—weather a substantial tightening phase, or would the US economy falter and force the Fed to reverse course? The focus of this case is on factors affecting the current and prospective levels of US long-term interest rates. The case also presents a brief history of Fed policy and asks the reader to consider the best course of action for the Fed to take. This case was written as an updated version of “Janet Yellen: Navigating Uncharted Waters” (GEM-0134), and may be used in its place. It is used at Darden in the second-year elective, “Global Financial Markets.” It would also be suitable for any macro or international macroeconomics course. Excerpt UVA-GEM-0156 Rev. Jan. 25, 2019 Powell's Perilous Situation We shouldn't underestimate how perilous the situation is. You have massive tax cuts and [a] potentially very large increase in federal spending coming; when the unemployment rate is already very low and inflation is already rising—which is a largely unprecedented situation…This point in the cycle is the most difficult for monetary policymakers to manage. —Seth Carpenter, UBS Chief US Economist In January 2019, Jay Powell, one year into his term as chair of the Board of Governors of the USFederal Reserve (the Fed), must have felt he was dealt a bad hand. Powell followed Janet Yellen, a highly successful Fed chair who, during her four-year reign, started to tighten the Fed's extraordinarily loose monetary policy (a remnant of the global financial crisis, or GFC) and got closer to the Fed's 2% inflation target as nine million Americans became employed, the unemployment rate fell to a historically low 4%, and economic growth was poised to perform better than any year since 2005. And during Yellen's regime, the stock market increased by 70% and the 10-year Treasury yield—arguably the most important price in the global economy—was no higher than when her term began (Figure 1). . . .

Monetary policy and long-run systemic risk-taking

As an extension to the literature on the risk-taking channel of monetary policy, this paper studies the existence of a systemic risk-taking channel (SRTC) in the Eurozone, through an original macroeconomic perspective based on causality measures. Because the SRTC is effective after an “incubation period”, we make a distinction between short and long-term causality, following the methodology proposed by Dufour and Taamouti (2010). We find that causality from monetary policy to systemic risk, while not significant in the very short term, robustly represents 75 to 100% of the total dependence between the two variables in the long run. Reverse causality is rejected: systemic risk did not influence the policy of the European Central Bank before the global financial crisis. However, central banks must be aware that a too loose monetary policy stance may be conducive to a build-up of systemic risk.

Economic Déjà vu

The recent recession that swept through this and many countries worldwide had many causes, one of which was low interest rates in the United States. Loose monetary policy pursued by former Chairman of the Federal Reserve Alan Greenspan was a major component of the housing crash and following recession. Furthermore, the Fed’s current monetary policy is extremely similar to policy pursued before the 2008 recession. The current system of monetary policy implemented in the U.S., necessitating that credit and debt expand forever, is a dangerous and potentially disastrous policy to be pursuing. Unless a change takes place, the American economy could experience another — and possibly worse — recession in the near future.

When Is It Rational to Learn the Wrong Lessons? Technocratic Authority, Social Learning, and Euro Fragility

Why do bad policy ideas persist over time? We trace the development of the euro’s governing ideas over fiscal and monetary policy in the face of mounting evidence that continued adherence to those ideas was economically deleterious. We argue that a specific form of social learning, framed by a retrospective recoding in 2010–2012 of Europe’s experience with fiscal rules in 2003–2005, drove European elites to pursue policies that were economically irrational but politically rational. As a result, the Eurozone’s medium-term resilience has been made possible by the European Central Bank’s unconventional and loose monetary policies, which operate in direct opposition to the tight fiscal policies of its member states’ governments. We maintain that this self-defeating macroeconomic policy mix will continue as long as the lessons learned by policymakers are driven by the need to win what we term an authority contest, rather than provide better macroeconomic outcomes.

After neoliberalisation? Monetary indiscipline, crisis and the state

Across the advanced capitalist states, the post‐crisis conjuncture has been characterised by both marked continuity and profound change. While regressive distributional trends in place before the 2008 crisis have intensified, a number of highly unorthodox policy interventions have also emerged. In particular, a new regime of “loose” monetary policy has crystallised, exemplified by record low interest rates and sustained programmes of quantitative easing. Existing approaches within economic geography are, we contend, ill‐equipped to deal with these transformations. Engaging with the “variegated neoliberalisation approach” – associated with Jamie Peck and his collaborators – the article argues that existing conceptualisations of neoliberalisation understate the key significance that central state institutions play in securing advanced capitalist development. They therefore miss the key role that monetary indiscipline has played in sustaining capitalist development since 2008. This argument is substantiated empirically through a case study of state intervention in the UK housing market in the post‐crisis conjuncture. Focusing on the Help to Buy Scheme and the buy‐to‐let market, the article argues that the UK's loose monetary policy regime has produced novel patterns of spatial divergence across the UK regions while simultaneously consolidating the UK's dysfunctional financialised model of capitalism.

What Marx Means Today

Marx made significant contributions to macroeconomics, laying the grounds for both Keynes's theory of aggregate demand and Schumpeter's theory of creative destruction. His law of the tendency of the rate of profit to fall parallels Alvin Hansen's theory of secular stagnation which has recently received much attention among scholars studying the financial crises in Japan, the US and the Eurozone. This article argues that part of the new stagnation does not result from a natural exhaustion of investment possibilities, but from an overly loose central bank monetary policy that keeps zombie banks and their zombie clients alive and blocks the emergence of new start-up firms.

Capital inflows, monetary policy, and financial imbalances

Ahead of the global financial crisis, financial imbalances built up across advanced economies as credit grew and was increasingly funded in wholesale financial markets. This paper investigates empirically three potential drivers of the build-up of these financial imbalances: rising global imbalances (capital flows); loose monetary policy; and inadequate supervision and regulation. We perform panel data regressions for OECD countries from 1999 to 2007 to explore the relative importance of these factors. We find that differences in the build-up of wholesale-funded credit were driven by the strength of capital inflows. Moreover, we document an interaction effect, whereby the effect of inflows on the build-up was amplified where the supervisory and regulatory environment was relatively weak. In contrast, differences in monetary policy did not significantly affect differences across countries in the build-up of these financial imbalances ahead of the crisis.

Foreign direct investment, exports and economic growth: ADRL and causality analysis for South Africa

The article empirically investigated economic growth as a function of foreign direct investment and exports in South Africa. The article applied the autoregressive distributed lag model, known as the ARDL bounds testing approach to cointegration for the long run relationship between economic growth, foreign direct investment and exports. The error correction model was used to examine the short run dynamics; and the VECM Granger causality approach was used to investigate the direction of causality. The article confirmed cointegration between economic growth, foreign direct investment and exports. The article indicates that both foreign direct investment and exports spur economic growth contrary to some studies, which found that FDI does not cause economic growth. The VECM Granger causality analysis found unidirectional causality between economic growth and foreign direct investment running from foreign direct investment to economic growth, unidirectional causality between foreign direct investment and exports running from foreign direct investment to exports and bidirectional causality between economic growth and exports. The article confirms the FDI-led growth hypothesis for South Africa. On the policy front, the government could stimulate foreign direct investment through incentives to investors, creation of a good macroeconomic environment and a careful utilisation of loose monetary policy to grow the economy.

Identifying the Risk-Taking Channel of Monetary Transmission and the Connection to Economic Activity

I use loan-level data from the syndicated loan market in the U.S. to investigate how monetary policy affects banks' sensitivity to risk. Using loan-level data and banks' sensitivity to risk enables me to identify the risk-taking channel and disentangle it from other monetary channels. I show that banks change their behavior toward risk following changes in monetary policy where loose monetary policy reduces banks' sensitivity to risk. I then provide evidence for the significant contribution of risk-taking shocks and changes in banks' risk-taking behavior to economic outcomes and business cycle fluctuations. The paper's primary contribution is in providing new loan-level evidence for the existence of the risk-taking channel in the U.S., as well as a first possible link between the risk-taking channel and business cycle fluctuations.

Housing market stability, mortgage market structure, and monetary policy: Evidence from the euro area

This paper investigates how monetary policy stance and mortgage market structure affect non-fundamental house price movements in eleven Euro area countries. Based on a three-stage approach, our empirical evidence suggests that a one-time monetary-easing shock can significantly trigger house price booms in Euro area countries with liberal mortgage markets. Such shocks can explain over 20% of the forecasting error variance of non-fundamental house price runups in Ireland and Spain. We find that, in countries with more regulated mortgage markets, monetary policy stance does not significantly affect non-fundamental house prices. Policymakers may wish to focus on limiting mortgage equity withdrawals and on monitoring loan-to-value ratios and tax policies in order to minimize the side effects of accommodative monetary policies on housing market stability for Euro area countries. We posit that this is especially true for peripheral countries, which are more likely to be subjected to overly loose monetary policy stances.

Net Neutrality Reloaded

How does net neutrality fit within today's neoliberal politics? In short, it doesn't! Here we use neoliberalism to denote an uncritical vision of unregulated markets, privatization of public assets and resources, and antipathy to public support of social programs that's affiliated with crony rather than laissez-faire capitalism. Under this definition, government largely serves the interests of the power elite and military industrial complex-through corporate welfare (government subsidies/subsidy economics), procorporate tax policies (for example, foreign investment credits), loose monetary policy (for example, quantitative easing), deficit spending, and pro-monopolistic practices-and its legitimacy is measured by its potential contribution to corporate profit. To be sure, this use of the term has what Boas and Gans-Morse call a negative normative valence, as it's also associated with authoritarianism, corporatism, and statism.

Long-Run Commodity Prices, Economic Growth, and Interest Rates: 17th Century to the Present Day

A significant proportion of the trade basket of many developing countries is comprised of primary commodities. This implies relative price movements in commodities may have important consequences for economic growth and poverty reduction. Taking a long-run perspective, we examine the historical relation between a new aggregate index of commodity prices, economic activity and interest rates. Initial empirical tests show that commodity prices present a downward trend with breaks over the entire industrial age, providing clear support for the Prebisch-Singer hypothesis. It would also appear that this trend has declined at a faster rate since the 1870s. Conversely, several GDP series such as World, Chile, China, UK and US, trend upwards with breaks. Such trending behaviour in both commodity prices and economic activity suggests a latent common factor like technological innovation. To assess the relationships between economic series, we apply a stationary VAR (Vector Autoregression) to model movements around trends. Strikingly, there is evidence that commodity prices Granger cause income and interest rates, whilst interest rates Granger cause commodity prices. From these results and the related impulse response function analysis, the historical perspective provides some useful information for contemporary policy makers. For example, loose monetary policy has tended to support higher commodity prices. More-over, commodity price movements have an asymmetric country effect on economic activity; periods of falling commodity prices will support GDP growth for com-modity importers like the US but depress growth for commodity exporters such as Chile.

The Regime Shift Associated with the 2004-2008 US Housing Market Bubble.

The Subprime Bubble preceding the Subprime Crisis of 2008 was fueled by risky lending practices, manifesting in the form of a large abrupt increase in the proportion of subprime mortgages issued in the US. This event also coincided with critical slowing down signals associated with instability, which served as evidence of a regime shift or phase transition in the US housing market. Here, we show that the US housing market underwent a regime shift between alternate stable states consistent with the observed critical slowing down signals. We modeled this regime shift on a universal transition path and validated the model by estimating when the bubble burst. Additionally, this model reveals loose monetary policy to be a plausible cause of the phase transition, implying that the bubble might have been deflatable by a timely tightening of monetary policy.

Indeterminacy and learning: An analysis of monetary policy in the Great Inflation

The Great Inflation of the 1970s can be understood as the result of equilibrium indeterminacy in which loose monetary policy engendered excess volatility in macroeconomic aggregates and prices. The Federal Reserve inadvertently pursued policies that were not anti-inflationary enough because it did not fully understand the economic environment it was operating in. Specifically, it had imperfect knowledge about the structure of the economy and was subject to data misperceptions. The combination of learning about the economy and the use of mis-measured data resulted in policies, which the Federal Reserve believed to be optimal, but when implemented led to equilibrium indeterminacy.

Research on the transmission mechanism between the money market interest rates and the capital market interest rates

Purpose – The purpose of this paper is to empirically analyze the transmission mechanism between benchmark interest rate of financial market, money market interest rate and capital market yields in order to reveal the dynamic evolution characters and core influential structure between different market interest rates. Design/methodology/approach – Using Dirichlet-VAR (DVAR) model, this study analyze the relationship between markets rates according to the equilibrium model in money market and capital market. Findings – Empirical results show that the interest rate transmission mechanism functions smoothly between interest rates of different levels. Interest rate of bills issued by the central bank can effectively reflect changes in monetary policy and guide the fluidity of market, playing the anchor role in interest rate pricing. There exists a closed loop feedback between interest rate of bills issued by the central bank, and money market interest rate, as well as between money market interest rate and bond market interest rate. The former is a loop by administrative means while the latter is the one mainly affected by market-oriented means. The response by money market and bond market toward the change of benchmark interest rate is unsymmetrical as money market is more sensitive to a loose monetary policy while bond market is more sensitive to a tight monetary policy. Stock market is strongly affected by uncertainty of benchmark interest rate. Originality/value – DVAR model is the extension of research on instable data and multiple variable causality test, which expands the causality analysis between two variables to multiple variables causality impact analysis which contains non-stable and structurally instable economic data.