Monetary Authorities Research Articles

Oil prices and exchange rates causality: New evidences from decomposed oil prices shocks and parametric in quantile analysis

In this paper, the researchers reassess the causality between oil prices and exchange rates by applying the parametric quantile analysis to decomposed oil prices shocks and exchange rates returns data of both low income, emerging and developed oil exporting countries from 1993.11 to 2021.10. Unlike the existing researches using the causality in quantile analysis, our study outcomes support the causal relationship from exchange rates to oil prices shocks at upper and lower quantiles in developed oil exporting countries; this is also true regarding the bidirectional causality observed in low income and emerging oil exporting countries .These findings imply that, important positive and negative oil shocks cause extremes changes in the exchange rate returns of low income and emerging oil exporting countries and reciprocally. However only extreme fluctuations of exchange rate returns of developed oil exporting countries such as Norway and Canada can cause oil prices variations. The results of non-causality at middle quantiles also suggest that the monetary authorities in both developing and developed oil exporting countries resist the exchange rates adjustments when oil prices fluctuations are significant. From these results we recommend sound policies in order to mitigate internal and external shocks during crisis, structural reforms that support diversification of energy production by developing other energy sources and reduce crude oil dependence, as well as the whole economy diversification mostly for developing countries and finally, multiple exchange rates to diversify portfolio and hedge the risks associated to oil prices fluctuations for investors. Keywords: Exchange Rates, Oil Prices Shocks, Quantile Causality.

Identifying policy determinants of bank default risk during the COVID-19 pandemic: empirical evidence from the U.S. and Canada

ABSTRACT This study examines the policy determinants of bank default risk, proxied by credit default swap (CDS) spreads, using quarterly data from the U.S. and Canada for the period 2020 to 2022. The analysis considers four determinant groups: the COVID-19 pandemic shock, aggressive monetary and fiscal policy responses, macroprudential-related bank financial fundamentals, and macroeconomic and market conditions. Utilizing General Least Squares (GLS) and dynamic panel models with system General Method of Moments (GMM), the findings reveal that rising COVID-19 deaths significantly widen CDS spreads. Expansionary monetary policies reduce bank default risk, though the effectiveness under conventional monetary policy is reduced by increasing COVID-19 deaths. In contrast, expansionary fiscal policies and inflation broaden CDS spreads. The combined analysis highlights policy stances as dominant factors, with macroprudential-related fundamentals having minimal impact. The findings are robust using both 5-year and 10-year CDS measures. This study has significant policy implications during health and economic crises. For financial stability, policymakers should prioritize reducing pandemic-related deaths, utilize expansionary monetary policies with health support strategies, balance fiscal support to avoid excessive government spending, and implement measures to control inflation. It is essential to enhance coordination between healthcare, fiscal, and monetary authorities for effective policy implementation.

A VAR Framework of Exchange Rates, Interest Rates, and Inflation Through COVID-19 in Turkey: Empirical Evidence From Linear Cointegration and Causality Analysis

In this study, we investigate the impact of exchange rates and interest rates on inflation in Turkey using monthly data from January 2004 to July 2020 obtained from the Turkish Statistical Institute. Our vector autoregressive (VAR) model showed an evidence of stochastic behaviour among the series. The autoregressive distributed lag (ARDL) results showed a short-run and long-run covariate between exchange rates, interest rates and inflation. Specifically, the findings showed a short-run and long-run relationship between inflation, producer price index (PPI), and Turkish interbank offer rates (TIBOR). However, there was no connection between inflation and dollar exchange rates (DSR) and commercial banks’ interest rates (CBIR). The VAR Granger causality results revealed the variables to be exogenous except DSR, which displayed endogenous to other variables. Nevertheless, the results revealed unidirectional causality from the producer price index (PPI) to DSR and unidirectional causation from TIBOR to CBIR. It means an increase in production costs through raw materials importation led to devaluation of the Turkish lira. Similarly, TIBOR rates drive CBIR high, making domestic lending more expensive, which will inhibit loan provisions to the private sectors, which will result in an economic contraction and eventually high inflation. Our unit roots breakpoint results pointed to breaks in the dataset were between 2016-2019, reflecting the effects of the Fetullah Terrorist Organization (FETO) failed coup, the 2018 U.S. embargo, and an assumed fiscal dominance as the major and direct causes of economic instability and inflation. However, Covid-19 may have acted as a contributing factor since then. Thus, we recommend that the monetary authorities articulate policy to avoid the assumed fiscal dominance.

The Dynamic Post COVID-19 World and Inflation: is Nigeria’s Monetary Policy Effective?

Nigeria had relative success in tackling the Covid-19 and its attendant economic consequences. A complementary mix of superior monetary and fiscal policy interventions saw support for the real sector, as well as growth and strengthening for the financial sector. The monetary authorities used several mediums to inject funds into the economy, while the financial sector was the channel through which huge sums were injected into the economy. These interventions however came with their fair share of woes, as they were carried out against the backdrop of rising inflation and unemployment levels. The unique nature of the Nigerian economy saw policy interventions targeted at stabilizing the economy, yield less than satisfactory outcomes. Currently, Nigeria faces the lagged impact of monetary and fiscal Covid-19 interventions in persistent high double digit inflation rates. The fall in global oil supply and world food prices necessitated by the Ukraine-Russian war have not helped the situation. These global events have had far reaching impacts on the Nigeria economy via the shortfall in supply of Premium Motor Spirit (PMS) products, food shortages, and resultant exchange rate pressures. The domestic economy has not been without its fair share of events that have resulted in a spike in inflation rates. The persistent security issues in the north and other parts of Nigeria, did not serve as an obstacle to people mobilization and the high spending during the 2023 elections. Declining government revenues, the rising public debt and its servicing, while inimical in their own stead, have catalyzed the pressure on the exchange rate. Against these backdrop, the monetary authority’s decision to institute a currency redesign and cashless policy has left people confused as to what actually is their short- and long-term goals/objectives, the effectiveness of policy to achieve said goals, as well as their readiness to tailor policy to changing global events/trends. The study will seek to examine monetary authority responses to curb inflation and achieve economic stability.

Parameter instabilities and monetary policy in a small open economy: Evidence from an estimated model for the UK

This paper reconsiders whether monetary policy in small open economies responds to exchange rates by studying possible parameter instabilities in a Dynamic Stochastic General Equilibrium model. The main focus of the paper is to revisit preceding evidence on the response to exchange rate movements by the Bank of England and determine if its reaction function has remained constant throughout the sample. To this end, I estimate a small open economy general equilibrium model using Bayesian econometric techniques over rolling windows. I find overwhelming evidence of shifts in several parameters, including those related to the policy rule. Furthermore, posterior odds tests reveal a time-varying response to exchange-rate fluctuations by the monetary authorities. The results favor the model with the nominal exchange rate embedded in the policy rule for the initial subsamples. However, the evidence steadily evolves across windows and ultimately changes to prefer the model specification with no exchange rate. The paper also documents evident variations in the model dynamics derived from the instability of parameters via rolling-window impulse response functions and variance decomposition analysis.

Is monetary and fiscal policy conflict that dire?

Theory predicts that inflation can become unstable when policymakers are in conflict about their post-recession recovery strategies, with the fiscal authority actively borrowing and spending to stimulate economic growth while the monetary authority raises interest rates to tame inflation. Such policy conflict can generate a debt-inflation spiral when agents are forward-looking. We show that the dire effects of policy conflict are less concerning when agents form backward-looking expectations. We then test this prediction in a learning-to-forecast experiment. Our results suggest that policy conflict does not necessarily lead to worse economic outcomes. This finding is driven by the fact that agents rely mostly on recent macroeconomic trends to formulate their expectations and do not meaningfully factor the government debt level or future regime shifts into their expectations.

Household Durable Goods Spending in Urban Areas: A New Keynesian Micro Perspective

In the New Keynesian model, durable goods are typically assumed to be more responsive to monetary policy than non-durable goods. While this assumption is generally based on macroeconomic policy studies, this research aims to identify whether monetary authorities need to consider household microeconomic aspects such as dependents and long-term saving behavior when formulating policies to stimulate durable goods spending. The study employs two inverse semilogarithmic equations with micro data on urban households. Research findings confirm the existing assumption of the New Keynesian model. Durable goods spending remains sensitive to macroeconomic policies, particularly interest rate adjustments by monetary authorities. Furthermore, the research provides evidence supporting the life-cycle hypothesis for durable goods consumption among urban households. Therefore, this study underscores the pivotal role of durable goods expenditures in ensuring sustainable economic stability.

The true position of the Russian financial market

Subject. The article addresses the true position of the Russian financial market. Objectives. The purpose is to reveal the true position of the Russian financial market in the context of sanctions. Methods. The study rests on the application of general scientific methods, primarily, the analysis and synthesis of data, and special economic and mathematical methods, like correlation and regression analysis. Results. The paper established that the true position of the Russian financial market under sanctions is associated with a focus on capital withdrawal to a greater extent by non-financial organizations, at the expense of domestic borrowings through debt securities, and shifting debt to households. Conclusions. The revealed characteristics of the Russian financial market, describing its true position under the sanctions, enable the expert community to correctly determine its parameters, and the monetary authorities to choose the optimal financial instruments.

Cashless policy and socio-economic development in Aba City Nigeria

The study examined impact of cashless policy on socio-economic development in Aba City. Specifically, the study sought to: examine the impact of automated teller machine (ATM) transaction on living condition in Aba City and determine the impact of Point of sales transaction (POS) transaction on employment generation in Aba City. The research design was descriptive survey research design. Study Area was Aba City, Nigeria. The sample size of 400 respondents was drawn from population of 2.534 million (estimated population 2016) indigenes of Aba City. The sample size of 400 respondents was drawn with Taro Yamane sampling technique. Research questions of the study were answered using mean score and standard deviation. The hypotheses stated were tested using regression analysis. The empirical result of the study showed that automated teller machine (ATM) transaction has significant impact on living condition in Aba City (t-statistic = 6.446; P-value (0.000) < Sig-value (0.05) and Point of sales transaction (POS) transaction has significant impact on employment generation in Aba City (t-statistic = 7.238; P-value (0.000) < Sig-value (0.05). The study recommended that monetary authority of Nigeria (Central Bank of Nigeria) should provide public enlighten education and awareness on the benefits of automated teller machine, point of sales, and internet banking as enhancers of cashless policy in Nigeria.

Asymmetric effects of life and non-life insurance on economic growth in Saudi Arabia: A nonlinear analysis

This paper explores the asymmetric effects of life and non-life insurance on economic growth in Saudi Arabia. Quarterly data on insurance penetration rates and GDP growth from 2009 to 2022, obtained from the Global Economy, Saudi Arabian Monetary Authority, and World Bank databases, are utilized. A nonlinear autoregressive distributed lag (NARDL) model is employed to examine the relationships between insurance and growth. The results reveal a significant and asymmetric relationship between life insurance penetration and GDP growth. Specifically, a 1% increase in life insurance penetration is associated with a 0.3% increase in GDP growth in the long run, while a 1% decrease shows no significant effect. For non-life insurance, both increases and decreases demonstrate significant but asymmetric impacts on growth. A 1% increase in non-life insurance penetration corresponds to a 0.2% increase in GDP growth, whereas a 1% decrease is linked to a 0.15% decrease in GDP growth. These findings support the ‘supply-leading’ hypothesis, suggesting that the insurance sector can play a leading role in promoting economic growth. The results provide new quantitative insights into the relationship between insurance and economic growth in Saudi Arabia, offering valuable implications for policymakers. It is suggested that the insurance industry can be leveraged to foster economic growth by promoting life insurance and managing the asymmetric impacts of non-life insurance.

Interaction of Climate Change and Green Stocks on Economic Growth in ASEAN-5

Research Originality: This study presents a new interaction of climate change in moderating the effect of green stocks, exchange rates, and net exports on economic growth in ASEAN-5 countries. Research Objectives: This study aims to analyze the interaction of climate change on green stocks, exchange rates, and net exports on economic growth in ASEAN-5 countries. Research Methods: This study used quarterly panel data from ASEAN-5 countries, 2016-2022, and selected a fixed effects model as the best model. The moderated regression analysis (MRA) approach supports this research.Empirical Results: The results showed that green stocks, exchange rates, and net exports positively affect economic growth in ASEAN-5 countries. The interaction of climate change on green stocks and exchange rates has a negative effect on economic growth. However, the interaction of climate change on net exports positively affects economic growth in ASEAN-5 countries. It represents that climate change can weaken the effect of green stocks and exchange rates on economic growth. Meanwhile, climate change can strengthen the effect of net exports on economic growth in ASEAN-5 countries. Implications: This study implies that the government needs to increase investment in green stocks to support financing that can mitigate climate change and develop net exports to increase economic growth toward a green economy. Similarly, the ASEAN-5 central banks, as monetary authorities, can maintain exchange rate fluctuations to achieve stable economic growth.JEL Classification: F31, F43, G11, Q54, Q56

Asymmetric impact of climate change on banking system stability in selected sub-Saharan economies

This study is an empirical examination of the asymmetric impact of climate change on banking system stability in selected sub-Saharan economies. The study leverages a quantitative research approach through a panel non-linear ARDL framework and data from 29 selected economies, which spans 1996-2017. Findings from the study reveal that in the long term, partial sums of temperature have an insignificant relationship with banking system stability. Further, partial sums of precipitation are negatively related to banking system stability in the long term. The finding indicates that both positive and negative precipitation do harm banking system stability in the selected sub-Saharan economies. Moreover, we find that partial sums of greenhouse gas emissions had an insignificant relationship with banking system stability. In addition, we conclude that greenhouse gases (positive and negative) do not impair banking system stability in selected sub-Saharan economies in the long term. We surmise from the findings that both positive and negative climate change indexes are harmful to banking system stability. On the short-term asymmetric impact, we discover that partial sums of temperature, precipitation, and climate change index do not harm banking system stability. However, negative greenhouse gas emissions are pernicious to the banking system’s stability in the short term. Conversely, positive greenhouse gas levels were statistically insignificant. The study recommends that central banks and monetary authorities in Sub-Saharan Africa design green banking policies to push the climate change agenda in the banking sector.

Exchange Rate Pass-Through on Prices in Nigeria—A Threshold Analysis

Persistent exchange rate depreciation and its debilitating effects on rising inflation have remained a concern in Nigeria. This article explores the effects of exchange rate pass-through on producer prices, consumer prices, export prices, import prices and the Taylor rule from 2000 to 2023, using quarterly data and adopting threshold autoregression and self-exciting smooth threshold regression methods. The findings suggest that there are non-linearities in the way that exchange rate depreciation affects prices in Nigeria. Furthermore, the findings suggest a threshold of 5 percent depreciation. Two sub-sample analyses corroborate the main findings, showing that a threshold of 5 percent is the optimum benchmark if demand and supply are not to be weakened. At this level or below, the effects of exchange rate depreciation on inflation are much lower, even though prices will rise. However, above this benchmark, the effects of depreciation on inflation are much larger, weakening consumer demand for both imported and domestic goods as well as producer supply of both exported and domestic goods and services in the economy. This result implies that an average exchange rate depreciation not higher than 5 percent within a quarter is reasonable if the Nigerian economy is to remain competitive both domestically and globally. Finally, the results suggest that the exchange rate pass-through to prices is considerably higher in Nigeria below the threshold, while it overshoots for producer prices, export prices, and import prices above the threshold. To keep inflation in check, this paper suggests that the monetary authorities should try to keep exchange rate depreciation below the established thresholds, while also considering adjusting the policy rate to take into account the exchange rate depreciation thresholds in order to keep domestic prices stable.

Investigating the dynamic nexus between fiscal deficit and inflation: empirical evidence from BRICS economies

PurposeThe debate surrounding whether fiscal actions are responsible for inflation has been a central focus in macro-public finance. In this regard, the present study makes a novel attempt to assess the nexus between fiscal deficit and inflation in the presence of output growth, trade openness and money supply using a balanced panel dataset from Brazil, Russia, India, China, and South Africa (BRICS) economies.Design/methodology/approachIn conducting the empirical analysis, the study initially addresses the issues of cross-section dependency, heterogeneous slope coefficients and nonstationarity. The assessment of long-run cointegration was carried out by using novel third-generation cointegration tests introduced by Westerlund and Edgerton (2008) and Banerjee and Carrion-i-Silvestre (2017). The authors utilise the advanced and latest estimation technique, the cross-section augmented autoregressive-distributed lag (CS-ARDL) model, for long-run and short-run analyses. Finally, to investigate the causal relationship between fiscal deficit and inflation within a panel framework, this study employs the novel test (JKS) introduced by Juodis et al. (2021).FindingsUsing recent econometric tests, the study validates the existence of cross-sectional dependency and slope heterogeneity. The results of the third-generation cointegration test by Westerlund and Edgerton (2008) and Banerjee and Carrion-i-Silvestre (2017) show that the variables are cointegrated in the long run. The CS-ARDL model revealed a positive relationship between inflation and fiscal deficit. The implication of this finding suggests that the fiscal deficit plays an inflationary role in BRICS economies. Finally, the JKS causality test results found a bi-directional causal association between fiscal deficit and inflation.Practical implicationsThe findings suggest several significant policy recommendations. It is recommended that a well-executed fiscal consolidation strategy be adopted to attain sound fiscal health and lower inflation. A disciplined fiscal approach is not only vital for effective monetary policy but also essential for maintaining macroeconomic stability. Monetary authorities must establish credible practices to effectively manage the macroeconomic system, and policy stances should align with the specific needs of the economy. The bidirectional causality between fiscal deficit and inflation suggests that relying solely on fiscal measures is inadequate for managing inflationary pressures or stabilising fiscal balances. Thus, a more comprehensive approach is required, including measures such as sustaining economic growth, reducing import dependency, diversifying exports and ensuring exchange rate stability.Originality/valueNumerous empirical studies have explored the link between fiscal deficit and inflation. However, most research studies within BRICS economies have focused on individual countries rather than considering the group as a whole. This limited scope may fail to capture the unique characteristics and interactions within these economies. To the best of the author’s knowledge, the present study is the first attempt to examine the issue from a panel perspective across BRICS economies. The methodological novelty of the present study is that it represents the first attempt, at least within emerging market economies, to investigate the nexus between fiscal deficit and inflation using second- and third-generation econometric models. From a policy perspective, the authors highlight that BRICS economies must prioritise fiscal discipline through measures such as reducing unproductive expenditure and improving tax collection. Close coordination between fiscal and monetary authorities is essential to ensuring that monetary policy supports fiscal consolidation efforts while maintaining price stability.

Monetary Policy and The Financial Performance of Listed Consumer Goods Firms in Nigeria

This study assesses the impact of monetary policy on the financial performance of the listed consumer goods firms in Nigeria. The study uses the purposive sampling technique and elimination method to determine the considered listed consumer goods firms in Nigeria from 2012 to 2023 and analyzed the impact of monetary policy variables of interest rates and inflation rate on the financial performance of these firms, measured by earnings per share as the indicator. Regression analysis was used to analyze the data. The results specifically show that changes in interest rate have a positive significant influence on the financial performance of listed consumer goods firms while changes in inflation rate have no significant influence on the financial performance of listed consumer goods firms. The study recommends the implementation of interest rate policies by the monetary authority that will balance stability and economic growth knowing the positive impact on the financial performance of the consumer goods firms.

Digital currencies of central banks: nature and purpose

This paper examines the concept of central bank digital currencies (CBDC) and its evolution as the interest of monetary authorities and regulators in the phenomenon of digital currencies increases. The purpose of the article is to identify the nature and purpose of central bank digital currencies and their underlying qualities through a comparative analysis of the definitions given to them by researchers and monetary authorities developing them, as well as a quantitative analysis of data on the stages of development of digital currencies by central banks around the world. Drawing on the results of the study, we may conclude that with central banks digital currency projects the concept of digital currency, which previously denoted private electronic currency, as well as the classification of money, has become more complicated; regulators of large economies developing digital currencies of central banks view it primarily as a digital form of national currency, close to the characteristics and purpose of cash, and also that the use of distributed ledger technology is an optional, but quite a common attribute of central bank digital currencies.

Parallel Currencies under Free Floating Exchange Rates: A Model Setting Out the Conditions for Stable Currency Competition

We use a theoretical model to set up the conditions for a country to attain monetary stability by allowing for two freely tradable currencies to circulate in parallel. For this parallel system to function properly, confidence in the good behavior of the monetary authorities in charge of the two currencies is key. Our model shows how a floating exchange rate between the two can keep the issuers of the local currency in check. The results from our model show the conditions under which a parallel currency system disciplines the issuers of the currencies and thus maintains their purchasing power. In non-volatile economies, it also discourages governments (or private issuers) from inflating one of the currencies as a means to raise seigniorage, as this policy results in the displacement of the currency from the market. When foreign payments shortfall—such as in Greece and Cyprus during the ‘euro crisis’ in the mid-2010s, or intractable hyperinflation—leave the country without a medium of exchange, our model shows how currency choice can restore monetary circulation and offer a path to achieving and maintaining monetary stability.

Forecasting Foreign Exchange Rate with Machine Learning Techniques Chinese Yuan to US Dollar Using XGboost and LSTM Model

Predicting exchange rates is important because it affects all major markets and plays a big part in the economy. The goal of this study is to forecast future values of the Chinese Yuan (CNY) to US dollar exchange rate. One of the most crucial aspects of the economy is the rate of exchange of currencies. The currency exchange rate is required in commercial terms, such as profit and investment evaluation. The purpose of CNY rate prediction is to determine the future value of the Chinese Yuan (CNY) relative to the US dollar, which can be taken into account while making decisions and lower the chance of losing money. As a result, we require a technique that can assist in accurately assisting in business selections regarding when to execute the appropriate deals. For this research study three-year dataset is used from 25 April 2020 to 26 May 2023. For this research we used two different machine learning models and comparison between the LSTM and Xgboost models first one is Long Short-Term Memory (LSTM) and second is Extreme Gradient Boosting (XGboost). The empirical results showed that the LSTM model provided better results than XGboost. Therefore, this study suggest that the LSTM model will helpful for the government monetary policymaker, economists and other stakeholders to identify and forecast the future trend of the exchange rate and make their policies accordingly.

Unconventional Monetary Policy Response to Covid-19 and Its Impact on Inflation in Morocco

This study explores the impact of unconventional monetary policy on Morocco’s economy during the Covid-19 pandemic. We used a hybrid model combining a financial dynamic stochastic general equilibrium (DSGE) model with a standard epidemiology model, enabling us to consider both economic and epidemiological factors. Our results indicate that unconventional monetary policy cannot fully mitigate the adverse effects of a pandemic, except for an exogenous increase in Central Bank claims. We also found that Morocco’s high inflation is partly due to Bank Al-Maghrib’s unconventional monetary measures in response to the pandemic. Our research underscores the importance of monetary authorities balancing the benefits and risks of unconventional monetary policy. While it can stimulate the economy during crises, it should be used judiciously to avoid long-term negative effects. Incorporating epidemiological factors into macroeconomic models is crucial for understanding the intricate interplay between the economy and public health crises.

Kangaroo Market Phenomenon: Identification and Impact on Indonesia’s Economic Growth

The stock market holds a crucial role in a country's economy, including Indonesia. As an indicator, the Jakarta Composite Index (JCI) experiences volatility alongside changes in the Indonesian economy. The presence of a kangaroo market in JCI returns can pose a risk of future economic slowdown, making it crucial for monetary authorities to intervene to stabilize the stock market. Therefore, this study identifies the kangaroo market phenomenon, structural economic changes, and the impact of the kangaroo market phenomenon on Indonesia's economic growth. The study focuses on many variables, including JCI returns, kangaroo market, and economic growth from Q3 1995 to Q4 2023. By using the Hodrick-Prescott Filter to define a kangaroo market as JCI returns that lack a deterministic trend, have high volatility, and deviate by one standard deviation from their volatility trend, the results show that most kangaroo phenomena occur during undervaluation. Following the kangaroo market phenomenon, Indonesia's economy underwent five structural changes based on the multiple breakpoint test. Using dynamic linear regression, the overvaluation kangaroo phenomenon negatively affects Indonesia's economic growth, while the undervaluation kangaroo phenomenon has no impact but shows a positive direction.