Monetary Policymakers Research Articles

Oil price shocks in real time

Oil prices contain information on global shocks of key relevance for monetary policy decisions. We propose a novel approach to identify these shocks at the daily frequency in a Structural Vector Autoregression (SVAR). Our method is devised to be used in real time to interpret the developments in the oil market and their implications for the macroeconomy, circumventing the problem of publication lags that plagues monthly data used in workhorse SVAR models. It proves particularly valuable for monetary policymakers at times when macroeconomic conditions evolve rapidly, like during the COVID-19 pandemic or the invasion of Ukraine by Russia.

Optimal monetary policy under digital technology shock

This study investigates how digital technology shocks can transform monetary policy. Using macroeconomic data from China from 2005 to 2022, this study empirically tests the time-varying dynamic correlation between digitalization, money supply, and output using the TVP-VAR model. The results show that the stimulating effect of loose monetary policy on output has gradually weakened in recent years. In contrast, digital technology has gradually become a new driving force for economic growth. Furthermore, this study incorporates a digital technology R&D department into the standard DSGE model and internalizes digital technology within the economic cycle to analyze the macroeconomic effects of digital technology shocks. Numerical simulations show digital technology shocks can effectively stimulate output and suppress inflation. Moreover, the central bank's welfare utility is maximized under a price-based, quantity-assisted monetary policy. Finally, this study begins with the price stickiness perspective to explain how digital technology weakens the effectiveness of monetary policy. This study enriches the literature on monetary policy regulation and provides insights for monetary policymakers to address the challenges the digital economy poses.

Do Financial Markets Allow the Independence of Central Banks?

Abstract The research work presented below addresses the possible concern of central bank independence through the development and application of econometric models. The complexity of the modelling has allowed a step further in corroborating that financial independence is not only linked to the appointments and pressures of the states regarding their economic policy but also the role that financial markets play by acting as a force that dictates and contaminates decisions of central banks. In this sense, the paper proposes a theoretical basis for recommendations on the application of the new monetary policy in a more complex environment, both due to the pandemic that was sweeping the world and the bulky debt that countries are carrying. The paper concludes with a series of measures and suggestions that could be addressed by monetary policymakers given the necessary but not easy normalization of monetary policy required at the global level.

Akumulacija deviznih rezervi u funkciji sprečavanja valutnih kriza

The purpose of the paper is to explain the importance of foreign exchange reserves (FER) for the protection of the country from potential currency vulnerability. FER are controlled by the central monetary institution of the country - the central bank. We have witnessed many currency, financial and economic crises that have hit various parts of the world in the past three decades. If there is no appropriate and timely reaction of the central bank in crisis conditions or there is a bad choice of the exchange rate regime (ERR), it can lead to unforeseeable consequences for the economy and the entire society of the country. The paper will benefit monetary policy makers in order to review the optimality of FER and the sustainability of the current ERR.

Monetary Policy and Inflation in Nigeria: Unraveling the Threshold Puzzle

In this study, we investigated the threshold effects of monetary policy on inflation using two policy tools (monetary policy rate and money supply) for Nigeria from 1980 to 2021. Country specific data on inflation and monetary policy variables controlled with literature specified variables were analyzed using threshold autoregression (TAR). We found a threshold level of 13.69 units and 11.19 units respectively for monetary policy rate and money supply growth capable of making monetary policy management behave differently in inflation control. As an instance, we found that within the periods when policies are below and above the threshold levels (Monetary policy rate, exchange rate and Money supply), only monetary policy rate and money supply growth will be statistically efficient in curtailing inflation in Nigeria. Exchange rate management is only effective in periods of low policy rate regimes. We recommend, among other things, that monetary policy management strive to keep inflation in the economy in line with policy threshold strength for effective price stability.

The Symmetric and Asymmetric Nexus Between Monetary Policy Interest Rate and Core Inflation in Jordan

Objectives: This study investigates monetary policy's symmetric and asymmetric impacts on core inflation in Jordan. It employs linear and nonlinear autoregressive distributed lag (NARDL) models. The research also seeks to assess the relationship between the overnight deposit rate, money supply growth, and real GDP growth on core inflation and to explore potential linear or nonlinear effects. Methods: The study applies ARDL and NARDL models to estimate the relationships above. It utilizes data from the first quarter of 1998 to the first quarter of 2023. Tests for Granger causality are conducted, and the Brock-Dechert-Scheinkman (BDS) test is employed to ascertain the presence of nonlinear paths within the study variable. Robustness checks are conducted to ensure parameter stability. Results: The analysis provides compelling empirical evidence supporting a long-term relationship between the overnight deposit rate and core inflation. The Brock-Dechert-Scheinkman (BDS) test confirms the existence of nonlinear dynamics. The ARDL model reveals a linear relationship: a 1% interest rate increase leads to a 0.26% reduction in core inflation in the long run. In contrast, the Nonlinear Autoregressive Distributed Lag (NARDL) analysis unveils an asymmetric effect: a 1% increase in the overnight deposit rate decreases core inflation by 0.43%, while a 1% reduction increases it by 0.37%. Conclusions: These findings have critical implications for monetary policymakers. They underscore the importance of judiciously considering interest rate adjustments to manage inflation dynamics, acknowledging the nonlinear and asymmetric effects inherent in the relationship between the overnight deposit rate and core inflation. When crafting monetary policy strategies, policymakers must consider these nuanced dynamics to address inflation concerns effectively.

Assessing the influence of fiscal and monetary policies on carbon dioxide emissions

This paper examines the impact of fiscal and monetary policies on carbon dioxide emissions in Trinidad and Tobago, using data from 1970 to 2020. We use a fiscal policy index based on government revenue and expenditure, a monetary policy index based on interest rates and reserve requirement data, and a Non-linear Autoregressive Distributed Lag technique. Our results show that expansionary fiscal policy raises emissions, while contractionary fiscal policy reduces emissions. Intriguingly, expansionary monetary policy increases emissions, while contractionary monetary policy lowers them. These findings hold significance for fiscal and monetary policymakers working on climate change mitigation strategies.

AN ASSESSMENT ON THE MONETARY BUSINESS CYCLE THEORY

In recent years, considerable attention has given to analyzing the business cycle in terms of money. Many researchers have developed dynamic stochastic general equilibrium models that generate business cycle facts and guide for making monetary policy decisions. The aim of this study is to investigate how the persistence of total factor productivity (TFP) and money growth shocks drive the business cycles within an economy. To achieve this aim, we employ a monetary business cycle model with a cash-in-advance constraint, as in Cooley and Hansen (1995). Our results indicate that the volatility of macroeconomic variables is higher when the persistence of TFP shocks is greater compared to that of money growth shocks. Furthermore, TFP shocks seem to have a more significant role in driving variability within the models compared to money growth shocks. This is demonstrated by the higher percentage of variance decomposition attributed to TFP shocks, except in the case of consumption variability.

The Third SNB-FRB-BIS High-Level Conference on Global Risk, Uncertainty, and Volatility: Monetary Policy and Banking Regulation under Elevated Uncertainty

The Swiss National Bank (SNB), the Division of International Finance of the Federal Reserve Board (FRB), and the Bank for International Settlements (BIS) jointly organized the third High-Level Conference on Global Risk, Uncertainty, and Volatility on November 14 and 15 of 2023. The conference brought academics and policymakers together to discuss the many sources of risk and uncertainty under which monetary policymakers and bank regulators operate, recent advances in measuring the multi-faceted nature of uncertainty, and how policymakers respond to these challenges.

Losing traction? The real effects of monetary policy when interest rates are low

Based on a panel of 18 advanced countries starting in 1985, we find that monetary transmission to economic activity is substantially weaker when interest rates are low. The results hold when controlling for potential confounding non-linearities associated with debt levels and the business cycle as well as for the trend decline in equilibrium interest rates. These findings suggest that the observed flattening of the Phillips curve has gone hand in hand with a steepening of the IS curve as interest rates remained persistently low, making monetary policy trade-offs more challenging.

Multi-faceted US uncertainty connectedness with domestic and global geopolitical risk

PurposeThis paper aims to explore the spillover impacts that domestic or global aspects of geopolitical risk generate on uncertainty. The latter is derived from a spectrum of different sources in the USA (economic policy, monetary policy, fiscal policy, national security, government spending, taxation) from 1985 up to November 2022.Design/methodology/approachVector autoregressive schemes are used to detect causality and reverse causality between each aspect of geopolitical risk and each source of US uncertainty.FindingsNotably, national security generates higher geopolitical risk by almost 8% in the first month but decreases GPR by 2% in the third month after the shock. USA is found to constitute a cornerstone as regards global peace and that the overall economic or monetary conditions or war status in the USA are remarkably more influential toward domestic and global geopolitical uncertainty than separate strands of fiscal policymaking. Reverse causality displays sizably weaker effects overall.Originality/valueThis study sheds light on the determinants of geopolitical risk and domestic instability by an international perspective and provides a compass for better decision-making for fiscal and monetary policymakers and market participants.

OIL PRICES SHOCKS AND INFLATION RATE PERSISTENCE FOR ALGERIA: A FRACTIONAL COINTEGRATION RELATIONSHIP

This study aims to analyse the relationship between oil prices and inflation rates in Algeria to determine the extent of inflation persistence in face to oil price shocks from January1998 to March 2023 using the recently developed Fractional Cointegration Model, which allows residuals to be fractionally integrated rather than stationary, with the classical cointegration approach based on I(0) stationarity or I(1) cointegrating relationships. This topic was chosen due to its significance for monetary policymakers, investors, financial analysts and academics in understanding the dynamics of inflation persistence in Algeria and studying the impact of some price shocks on it, such as oil price shocks. Our results also showed that Algeria has a co-integration relationship between oil prices and the inflation rate, with an estimated persistence of 0.883, which is greater than 0.5 and less than 1. This indicates that the impact of oil price shocks is still present for a long time on the inflation rate persistence in Algeria, in other words the inflation rate in Algeria will persistence for a longer period due to the shock of oil prices before eventually fading away, and with the adoption of a monetary policy targeting inflation in Algeria, it will contribute to reducing the inflation rates persistence.

Communicating financial stability in monetary policy reports: a text-mining experiment in postcommunist countries

PurposeFinancial stability has become a focal point for central banks since the global financial crisis. However, the optimal mix between monetary and financial stability policies remains unclear. In this study, the “soft” approach to such policy mix was tested – how often monetary policy (in inflation reports) analyses financial stability issues. This paper aims to discuss the aforementioned objective.Design/methodology/approachA total of 648 inflation reports published by 11 central banks from post-communist countries in 1998-2019 were reviewed using a text-mining method.FindingsResults show that financial stability topics (mainly cyclical aspects of systemic risk) on average account for only 2%of inflation reports’ content. Although this share has grown somewhat since the global financial crisis (in CZ, HU and PL), it still remains at a low level. Thus, not enough evidence was found on the use of a “soft” policy mix in post-communist countries.Practical implicationsGiven the strong interactions between price and financial stability, this paper emphasizes the need to increase the attention of monetary policymakers to financial stability issues.Originality/valueThe study combines two research areas, i.e. monetary policy and modern text mining techniques on a sample of post-communist countries, something which to the best of the authors’ knowledge has not been sufficiently explored in the literature before.

Nominal and Real Shocks in the EURALL Exchange Rate. (A SVAR Guide)

Exchange rates are one of the most important topics in the economic and financial sectors. Considering the exchange rate as the price between currencies, financial theories aim to understand the behavior of exchange rates from a more rational viewpoint. Domestic and foreign inflation has a direct impact on the real interest rates and the exchange rates. This paper aims to analyze the nominal and real shocks of the exchange rate between the Euro and Albanian lek [EURALL]. As the most important foreign currency used in the Republic of Albania, the euro is becoming more and more a stable determinant of prices and asset values in the Albanian economy. The vast majority of import and export is dependent on the EURALL trend. That is one of the main reasons why it is so important to study the shocks in the EURALL exchange rate. The Structural Vector Autoregressive (SVAR) models can be used to understand the effects of imposing some long-run restrictions. In addition, some short-run shocks play a major role and continue to have effects even in the long run. This paper takes into consideration the monthly data of exchange rates and inflation of Albania and the Eurozone from 2016 – 2022 (the last 7 years). As one of the most important models, SVAR models can be used in both fiscal and monetary policymaking. Studying nominal and real exchange rates means studying inflation in the eurozone and Albania. Real shocks have a significant impact on both nominal and real exchange rates. Meanwhile, there is no evidence that the nominal shocks (such as institutional interventions or central bank operations) have an important impact on the nominal and real exchange rates. Referring to that, we can conclude that policymaking institutions should be cautious about the real exchange rate.

ROBERT TRIFFIN, JAPAN, AND THE QUEST FOR ASIAN MONETARY UNION

Especially with the Asian financial crisis of 1997–98, Asian countries have advocated a profound reform of the international financial architecture. Their proposals focused on two main axes: a reform of the global financial system, and stronger regional monetary integration in Asia. There are here significant parallels with the ideas of Robert Triffin (1911–1993). Triffin became famous with trenchant analyses of the vulnerabilities of the international monetary system. The Triffin dilemma is still present among international monetary policy-makers, also in Asia. Triffin put forward several proposals for reforming the global monetary system, but he also developed proposals for regional monetary integration. These were very much based on his experience with the European Payments Union, and focused on the creation of a (European) reserve fund and a (European) currency unit. In this paper we focus on Triffin’s proposals for an Asian payments union in the late 1960s, giving special attention to Japan (in Triffin’s time, the biggest Asian economy; moreover, Triffin had an important Japanese network).

THE IMPACT OF MONETARY SHOCKS ON INFLATION IN SELECTED WEST ASIAN COUNTRIES

The impact of monetary policies on inflation has always been one of the goals of monetary policymakers. To what extent a monetary shock can be effective on inflation, or that both positive and negative monetary shocks can be effective in aggravating or controlling inflation are among the important issues in monetary economics, which scientific research is aimed at It is very necessary to answer them. Therefore, in this research, the impact of positive and negative shocks on the inflation rate in selected West Asian countries has been investigated. In this research, panel data has been used in the period of 2000-2020 for the countries of the West Asian region, including Iran, Armenia, Jordan, Azerbaijan, Pakistan, Oman, Saudi Arabia, Kyrgyzstan, Kazakhstan, Qatar, Kuwait and Georgia. GLS method is used to estimate the model. The results showed that the impact of monetary shocks on the general level of prices are different from each other in the countries of the West Asian region, both in terms of the level of significance and in terms of the level of influence. In the countries of Iran, Pakistan, Kyrgyzstan, Kuwait and Georgia, monetary shocks had a symmetrical effect on the general level of prices, and in the countries of Jordan, Azerbaijan and Qatar, the effect of monetary shocks was asymmetric. Of course, in the countries of Saudi Arabia, Oman and Kazakhstan, only negative shocks have an effect on the general level of prices, as a result, the impact of monetary shocks on the general level of prices is asymmetric in these countries as well. Also, the results showed that in all the studied countries, the impact of negative shocks on prices is greater than positive shocks.

Bank Governance, Asset Quality, and Risk. Do Macro-Prudential Policy and Macroeconomic Factors Matter? Evidence from Nigeria’s Banking Sector

Purpose: This study examines the nexus between bank governance, asset quality, and banking risk measured by the distance to default (DTD) and their interactions with prudential policy and macroeconomic factors. Theoretical framework: This study uses the Resource Based View (RBV) lens to examine how banks use their unique resources, asset, competencies, and governance framework to mitigate the adverse impact of risks and navigate regulatory policies and macroeconomic variables. The RBV provides context on banks’ unique resources to optimise their long-term objectives in a complex economic landscape. Design/Methodology/Approach: The study analyses panel data from 12 listed banks on the Nigeria Stock Exchanges (NGX) from 2008 to 2021. This study tests autocorrelation, heteroskedasticity, and cross-sectional dependence to validate the study’s analysis. Based on various diagnostic tests, the Feasible Generalised Least Squares (FGLS) are suitable for hypothesis testing. Findings: The findings revealed that bank governance interaction with asset quality has a negative and insignificant impact on bank risk. And liquidity, interest rate, inflation and gross domestic product are significant determinants of banking risk. Research, practical & social implications: Maintaining effective bank risk management requires adherence by all stakeholders to macro-prudential policies by monetary policymakers and macroeconomic factors from the fiscal policymakers. Originality/Value: This study empirically examines bank governance, asset quality, and banking risk in a developing country, incorporates macro-prudential policies and macroeconomic factors, and uses the DTD metric for risk assessment rarely used in related studies in developing countries.

Unobserved effects of monetary policy in the Peru’s departments output and unemployment

This is the first article in a series of two. A NAIRU-Keynesian model is developed for Peru’s departments (regions) to analyse whether there is a stable relationship between inflation and unemployment, and inflation and the output gap as documented in the Peruvian literature. I applied GLS for model estimation. My results document a positive relationship between future inflation rates and the gap in departmental unemployment rates concerning national unemployment rates, I evidence the Phillips curve flattening at the departmental level when estimating with the output gap, which is consistent with the national aggregate models, but there is a more elastic relationship when estimating with departmental unemployment rates. This represents unobserved effects for the monetary policy maker and requires further research.

Predicting inflation expectations: A habit-based explanation under hedging

One of the main challenges monetary policymakers face is predicting the trajectory of short-term inflation, especially considering the consistently flat Phillips curve observed in recent years. A promising approach to tackling this challenge involves modifying the hybrid New Keynesian Phillips curve (HNKPC) by incorporating a hedging factor. This factor accounts for the efforts risk-averse economic agents make to safeguard their spending decisions against uncertainties arising from inflation. Our study provides evidence that the hedging factor plays a crucial role and is a statistically significant predictor of the upcoming year's inflation rate. Specifically, a one-standard-deviation increase in the hedging factor predicts a positive rise in short-term inflation. Furthermore, we demonstrate that the hedging factor significantly determines the common component found in both well-known survey-based and model-based inflation expectation indicators.

Unconventional monetary policy and debt sustainability in Japan

We adapt to the Japanese case a model of stochastic debt sustainability within a monetary policymaking framework. The model incorporates the effects of unconventional monetary policy and its potential unwinding on sovereign debt dynamics. A scenario tree represents stochastic and correlated macroeconomic and fiscal variables, and a coherent risk measure allows to draw probabilistic inferences on sustainability. We calibrate the model to the Quantitative and Qualitative Easing (QQE) that Bank of Japan launched in 2013. Using a retrospective analysis, we find a large favourable effect of the QQE on sovereign debt dynamics. Forward-looking simulations under different exit strategies show that the termination and unwinding of the QQE could raise debt sustainability concerns. A sharp tightening of global financial conditions could have a similar negative impact on debt dynamics, requiring a fiscal adjustment to keep debt sustainable.