Monetary Authorities Research Articles

Foreign Price Shocks and Inflation Targeting: Effects on Income and Inflation Inequality

ABSTRACT Foreign price shocks have significant effects on functional income distribution and on inflation inequality. By increasing prices in domestic currency that are linked to foreign prices, they increase the profit share in some sectors and reduce real wages, in particular of workers whose consumption basket is more sensitive to the price of certain goods (e.g., food prices for low-wage workers). We propose a new extension to the conflicting-claims inflation model by incorporating workers heterogeneity (in terms of nominal income and consumption patterns) in an open economy model following an inflation-targeting regime. Then, we investigate the impacts of foreign price shocks on income and inflation inequality by increasing the foreign inflation rate and analyze how monetary policy influences these outcomes. Our simulation results indicate that a positive foreign price shock increases the profit share and the within-workers inequality (in real terms), since low-wage workers are more affected by these shocks. Yet, such effects are mediated by the strength of the monetary policy's transmission channels (domestic economic activity or nominal exchange rate), indicating that the monetary authority response may exacerbate or attenuate these distributive effects.

Financial inclusion and monetary policy effectiveness in a monetary union: Heterogenous panel approach

AbstractWe examine the nexus between financial inclusion and inflation targeting monetary policy effectiveness in West African Economic and Monetary Union countries by employing a heterogenous panel approach that enables us to delineate the responses to policy innovations related to idiosyncratic country‐specific shocks, common shocks, and composite shocks. We find that these shocks significantly affect inflation and financial inclusion but with varying magnitudes, signs, time of responses, and persistence. We further demonstrate that inflation targeting monetary policy is differently associated with the various dimensions and indicators of financial inclusion. Overall financial inclusion shocks temporarily increase inflation; deposit shocks reduce inflation; and credit shocks increase inflation. Central bank policy rate differently responds across time horizon to overall financial inclusion shocks; and it increases due to credit shocks highlighting that the monetary authority responds to credit shocks by implementing contractionary monetary policy. Our results highlight that monetary policy aimed at promoting inclusive financial services and responses of monetary policy to financial inclusion should be specific to the dimensions of financial inclusion.

Threshold effects of inflation on the FDI – growth nexus: evidence from inflation-targeting countries in sub-Saharan Africa

The purpose of this study is to examine the threshold effect of inflation on the foreign direct investment (FDI) – economic growth nexus in sub-Saharan Africa using panel samples of countries that have adopted an inflation-targeting regime. The study sourced data from the World Bank’s World Development Indicators over a period of 1982–2020 and adopted the fixed-effect panel threshold model approach for its analysis. The findings reveal two separate thresholds of inflation in the FDI – growth nexus. The growth-enhancing effect of FDI is largely realized when inflation is below the optimal threshold level of 7.26%. Beyond the second threshold level of 16.49%, the beneficial effect of FDI on growth is seen to diminish in terms of effect-size. This study provides new insights into the growth effect of FDI and the role of inflation levels in this nexus. The thresholds of inflation and the attendant size-effect of FDI on growth can be benchmarks for Africa and other developing and emerging economies in assessing their situations. As African monetary authorities choose which inflation targets to set for their monetary policies, the findings raise significant implications for them.

Impactos dos sentimentos racionais e irracionais dos investidores no mercado brasileiro

Abstract This article aimed to determine how rational and irrational investor sentiments impact the return and volatility of the Brazilian market. The role of sentiment in financial markets is still a recent, controversial and limited subject, and this study explores this relationship in the Brazilian market. The evidence from this research adds to the limited number of studies on investor sentiment in emerging markets and extends the evidence already documented in Brazil. Our results are expected to have an impact on investors, policymakers and monetary authorities. Investors must be aware of economic fundamentals when formulating their investment strategies and also when choosing the stocks that will make up their portfolios. Policymakers and monetary authorities should take sentiment into account when formulating political, economic and monetary strategies, as economic changes can affect investor psychology and be reflected in their stock market trading. Consumer and business confidence indexes were used as proxies for investor sentiment and were regressed against a set of economic fundamentals to isolate their rational and irrational components. Then, autoregressive vector models were estimated and impulse response functions and variance decompositions were generated to verify the impact of sentiment on the return and volatility of the Ibovespa. There are three main results. First, investor sentiment impacts both returns and volatility in the Brazilian market. Second, economic fundamentals were important determinants of returns and volatility in the Brazilian market, indicating that fundamental trading induced by rational sentiment had a greater effect than trading induced by irrational sentiment. Third, in terms of magnitude, consumer-based sentiment had a greater impact than business-based sentiment.

Capital flight from BRICS nations: Does every cloud have a silver lining?

This study investigates the potential determinants of capital flight from BRICS countries. We use the residual method to estimate capital flight and employ GMM testing approach. We find a surge in the volume of capital flight from BRICS especially in the aftermath of global financial crisis. The empirical results suggest that, past values of the capital flight, real GDP growth rates, exchange rate depreciation, unemployment rate, business confidence index and financial stability indicator as significant factors causing resident capital outflows from BRICS nations. These findings call for an effective policy framework by the fiscal and monetary authorities.

Monetary Policy in an Oil-Exporting Emerging Economy with Fuel Subsidies

This paper develops a DSGE model for an emerging oil-exporting economy with a fuel subsidy regime to analyse the stabilising role of alternative monetary policy rules under different subsidy arrangements. The model is estimated via Bayesian methods using data for Nigeria from 2000Q2 to 2019Q4. This paper (i) estimates a domestic fuel pricing rule for an oil-exporting emerging economy of Nigeria with fuel subsidies, (ii) characterizes monetary policy behaviour under such an estimated fuel pricing rule, and (iii) evaluates the appropriateness of alternative monetary policy rules under different assumptions regarding the fuel subsidy regime. The results show that approximately 45 per cent of changes to the global oil price are transmitted to the retail price of fuel. Also, it was found that the behaviour of monetary policy in Nigeria has been characterised by the headline inflation monetary rule. However, the monetary authority is able to reduce policy loss by approximately 11 per cent if it targets core inflation rather than a measure of inflation that includes energy prices. Under a zero-subsidy regime, the core inflation monetary rule outperforms its competitors in achieving overall macroeconomic stability, provided the share of oil in total consumption is relatively low.

Growth volatility in the inflation-targeting regime: Evidence from Indonesia

<abstract> <p>Low and stable inflation and exchange rates are the main objectives of inflation-targeting monetary policy. The internal and external stabilities are prerequisites for promoting economic growth. Using a two-stage GARCH, we investigated the effect of inflation instability and exchange rate unpredictability on the economic growth uncertainty in the case of Indonesia over the period 2000(1)– 2022(12). It was evident that both inflation instability and exchange rate unpredictability hurt output growth. The impact of inflation instability was higher than that of exchange rate unpredictability. While the output growth was higher in the post inflation-targeting regime adoption, the effect of real exchange rate instability was greater than that of nominal exchange rate unpredictability. Those findings suggested that the monetary authority should strengthen their commitment to achieve the inflation target range. The sharper focus on the inflation stability might avoid the monetary authority conducting twofold targets of inflation and exchange rate stability to stimulate economic growth.</p> </abstract>

Exchange Rate Management and Sectorial Export-Financing in Nigeria

The monetary authorities in Nigeria adopted the flexible exchange rate system to stabilise the foreign exchange rate market and enable banks to finance the real sector of the economy. The impact of exchange rate management on export financing in the form of agricultural, manufacturing, and solid mineral sector loans was analysed to ascertain if exchange rate management influences the availability of loans to exporters in the agro-sector, manufacturing, and solid mineral sectors. The study used the Augmented Dickey-Fuller (ADF) test for stationarity of the time series, the Bound Test for Co-integration to check the long-term relationship, and the Autoregressive Distributed Lag model to test the relationship among the variables. The result showed that changes in the exchange rate have a short-run negative significant impact on export loans to the three sectors and a long-run positive significant impact on the agro sector. The study recommended that policymakers introduce monetary policies that encourage investors, reduce interest and inflation rates, and stabilise exchange rates.

Effect of Interest Rate on Savings Mobilization in Nigeria

The study examines the extent at which interest rate affects savings mobilization in Nigeria. The study is hinged on the modified variant of McKinnon and Shaw hypothesis that accounts for the link between savings mobilization and interest rate. ARDL model was used in the study to test for co-integration for the long run and the unrestricted error correction model for the short run contemporaneous dynamics. Data gotten from CBN annual report and World Economic Outlook covers the period; 1986-2022 was used for the study. Accordingly, the study finds out that savings mobilization is significant but have negative responsive to changes in nominal interest rate both in the short run and long run. Also, the study further finds out that the effect of prime lending rate on savings mobilization is significant but has positive response in long run as against its significant negative effect in the short run. Thirdly, it was observed that maximum leading rate had significant positive effect on savings mobilization in the short run while inflation rate exerted significant negative effect on savings mobilization contrary to the latter significant positive response to changes in M2-GDP ratio in the short run. The study recommended the need for government to consider a reduction from the current double digit to single digit particularly in nominal interest rate and prime lending rate in order to stimulate savings through investment in Nigeria. Finally, monetary authorities may consider a moderation rise in price level thereby encouraging people to save.

ПРОБЛЕМИ КООРДИНАЦІЇ МОНЕТАРНОЇ ТА БЮДЖЕТНОЇ ПОЛІТИКИ В СУЧАСНИХ УМОВАХ

The escalation of economic and political instability necessitates that governments and central banks seek determines the need to find new approaches to ensure the stability of the functioning of financial markets and public finances, as well as to support economic growth in the context of the implementation of their economic, financial and monetary strategies. Addressing these challenges involves enhancing the coordination of monetary and fiscal policies through the utilization of both formal institutions and informal practices, given the considerable need for updating traditional approaches proposed by economic theory. Based on the theoretical analysis of existing scientific concepts and approaches, this study discerns the principal trends in establishing methodological frameworks for orchestrating the interaction between monetary and fiscal authorities in formulating and implementing monetary and fiscal policies. By means of a comparative analysis of the activities of central banks and governments of the leading countries of the world and domestic practice, the interrelationships between monetary and fiscal policy have been determined and characterized, the main institutional, operational and instrumental factors that restrain the processes of effective interaction of monetary and fiscal authorities have been identified. Empirical analysis reveals that central banks in most countries exhibit a high degree of operational and managerial independence, although disparities in political and financial autonomy are apparent, potentially engendering contradictions in the collaboration between monetary and fiscal authorities. It is substantiated that successful coordination of monetary and fiscal policies necessitates the presence and efficient functioning of formal institutions in conjunction with the utilization of informal practices that complement and reinforce each other. The need to clarify the institutional foundations, functions and spheres of interaction of fiscal and monetary authorities, taking into account the features of the modern stage of economic development, is substantiated. The key principles are defined, the main goals are formulated and the objects of coordination are characterized. A system of measures is proposed that should contribute to the improvement of monetary and fiscal policy coordination processes by strengthening formal and informal cooperation of authorities. The practical implementation of the developed approaches and recommendations will enhance the effectiveness of the collaboration between the government and the National Bank of Ukraine in coordinating monetary and fiscal policies to ensure financial stability and promote economic and social development.

Inflation and Small and Medium-Scale Enterprises (SMES) Growth in Nigeria

Small Medium Enterprises (SMEs) are important to the economy because they help achieve macroeconomic goals. This has led monetary authorities to adopt policies that foster SMEs’ development and success. This has made the study focus on Inflation and Small and Medium-Scale Enterprises (SMEs) Growth in Nigeria. The objectives of the study are to examine how inflation rates, interest rates and exchange rates have affected SMEs growth in Nigeria, secondary data that spanned from 2001 to 2022 used for the study analysis were sourced from Central Bank of Nigeria (CBN) and the Federal Office of Statistics (FOS). The variables’ stationarity was tested using unit root tests to test the time series data. Cointegration, Ordinary Least Square (OLS) and Error Correction Model (ECM) were used for analysis. Many diagnostic tests were performed on the study residuals. The interest rate positively and statistically significantly affects Nigerian SMEs’ funding. In contrast, inflation has a negative impact on Nigerian SMEs’ funding. The exchange rate had no effect on SMEs funding, according to the research. The study recommended that the monetary authorities should implement policies to reduce inflation and prioritize SMEs growth in Nigeria by establishing dedicated channels via different financial institutions to provide them with low-interest loans. This will boost their growth and help reduce inflation.

Monetary Regimes and Real Exchange Rates: Long-Run Evidence at the Product Level

Monetary Regimes and Real Exchange Rates: Long-Run Evidence at the Product Level

Technology, Customer Satisfaction and Commercial Banks in Oman with Reference to Bank Dhofar

The Central Bank of Oman (CBO) was established on 1stDecember 1974 under the Banking Law No. 7/74 (amended by Royal Decree No. 114/2000) as a natural result of the development of the monetary and financial system in the Sultanate. In 1970, when His Majesty Sultan Qaboos bin Said ascended to the throne, there was no national authority responsible for supervising the Omani banking system. There were only three banks, and the banking activities were limited. The Central Bank of Oman (CBO) has already established two official bodies, the Monetary Authority of Muscat, which was established in 1970 and the Omani Monetary Council, which was established in 1972. Although they did not have full banking powers, they set the stage for the emergence of the Central Bank of Oman.

Environmental factors of sustainable development in China and Hong Kong

This article discusses China has become the second largest issuer of green bonds in the world after the United States. The authors carried out an analysis The Green Bond Index shows relatively good results due to its long–term outlook and high creditworthiness, as well as related industry factors. In recent years, China’s green bond market has developed rapidly and has now become the second largest green bond market in the world after the United States. Understanding the reasons that contributed to the growth and excellent market performance can help investors determine whether to include Chinese green bonds in their investment portfolios and how. The Hong Kong government has announced the successful placement of tokenized “green” bonds in the amount of HK$ 800 million (about $101.7 million). A press release from the Hong Kong Monetary Authority (HKMA) states that this is the world's first tokenized “green” bond issued by the government. "Green" bonds are debt securities that are issued to attract investment in projects related to improving the environmental situation. The issue of tokens was made by HSBC bank on a private blockchain. Subsequent payments of coupon income, settlements on transactions on the secondary market and redemption of bonds will also be carried out in digital form. For the tokenization of bonds, the Goldman Sachs GS DAP bank platform was used, and settlements on bonds are carried out by the Central Clearing System for Debt Instruments (CMU) HKMA. Tokenization of “green” bonds with a yield of 4.05% and a maturity of 1 year is one of the pilot projects announced by the Hong Kong government as part of the virtual asset market development plan.

Динамика финансовой хрупкости компаний нефинансового частного сектора Гонконга во взаимосвязи с ходом делового цикла

This article examines the financial instability hypothesis in Hong Kong's contemporary economy, investigating whether the proportion of financially fragile firms rises during cyclical upswings as economic crises approach. Two criteria developed by Mulligan and Nishi were used to assess financial fragility in the private sector from 2006 to 2022. The Mulligan criterion was applied to 94 leading firms by capitalization, while the Nishi criterion was applied to the top 99 firms. Findings indicate that, prior to the Great Recession, the share of financially fragile firms—characterized by speculative or Ponzi financing—increased, peaking just before the crisis and again during the COVID-19 pandemic. While the financial instability hypothesis is partially supported, the high proportion of financially fragile firms in 2016–2017 contradicts this hypothesis. Overall, our analysis shows that hedge financing regimes predominated among Hong Kong’s private companies. The relatively low share of financially fragile firms compared to those in Southern European countries can be attributed to the absence of austerity measures in Hong Kong, as local authorities did not attempt to address budget deficits due to their minimal levels. Additionally, the Hong Kong Monetary Authority’s policy to curb excessive bank lending during economic expansions contributed to the dominance of hedge firms. The tourism and transport sectors are the most financially fragile industries.

Inflation targeting, exchange rate and output gap in Central and Eastern European countries

This paper aims at empirical assessment of monetary policy relationships in Central and Eastern European countries (Czechia, Hungary, Poland, Romania), which practise the monetary regime of inflation targeting. Using quarterly data for the period of 2004-2019, the authors examined the relationship between the output gap, nominal and real exchange rate misalignment, consumer price inflation and the central bank policy rate, using the panel vector autoregression (PVAR) model. According to estimates, the central banks of the CEE-4 countries react with an increase of their policy rate to the output gap and inflation, as implied by the Taylor rule. At the same time, a monetary reaction to nominal (real) exchange rate misalignment is lost in the estimates for the post-crisis period of 2010-2019. An increase of the central bank rates does not seem to have unfavourable output effects, while the nominal exchange rate is likely to depreciate with three to five quarter lags. However, there is evidence of the price puzzle when monetary tightening is followed by a counterintuitive increase in the inflation rate. In full accordance with the New Keynesian framework, inflation depends on the output gap, while being expansionary in the real sector. Evidence of the exchange rate pass-through (ERPT) to inflation is mixed. This article provides insights into the average monetary policy reaction function and its macroeconomic effects in the CEE-4 countries, with the value added in that following the Taylor rule does not guarantee effectiveness in tackling inflation in the presence of the price puzzle. Based on the estimated exchange rate effects on the output gap and inflation, deliberate currency appreciation resulting from the central bank foreign exchange interventions and/or fiscal austerity measures can be helpful for such a disinflation that minimises output losses.

Achieving Sustainable National Economic Development Using Government Monetary Policy

Achieving Sustainable National Economic Development Using Government Monetary Policy

The Role of Monetary Authorities and Banking Regulators in Supporting Sharia Bank Liquidity

This study aims to analyze the influence of the role of monetary authorities and banking regulators on the liquidity of Islamic banks in Indonesia. This research uses a qualitative approach with panel data analysis method. The sample of this study is 27 Islamic banks operating in Indonesia during the period 2019-2022. The data used are secondary data obtained from Islamic bank financial statements, Islamic banking statistics, and publications of relevant authorities. The results of this study show that the role of monetary authorities and banking regulators has a positive and significant influence on the liquidity of Islamic banks in Indonesia. This shows that the role of monetary authorities and banking regulators is very important in influencing the performance, growth, and stability of Islamic banking in Indonesia. This research provides theoretical and practical contributions for academics, practitioners, and policy makers with an interest in the liquidity management of Islamic banks. This research also provides input and advice for monetary authorities and banking regulators in increasing their role in supporting Islamic bank liquidity in Indonesia.

Genişletilmiş Taylor Kuralı’nın enflasyon hedeflemesi çerçevesinde uygulanabilirliğinin değerlendirilmesi: Türkiye'den ampirik kanıtlar

Taylor suggests that central banks should modify their short-term lending rates based on the disparities between the current and potential gross domestic product, as well as the differences between current and target inflation rates. This strategy, known as the Taylor Rule, aims to establish uniformity in the actions of central banks, safeguarding economic establishments against the burdens of uncertainty. While intricate policy regulations crafted by monetary authorities might be theoretically optimal, they tend to be burdensome for economic agents to adhere to. Conversely, the straightforward Taylor Rule is more comprehensible and implementable. Unlike the original version proposed in 1993, this approach has been expanded to encompass the influence of exchange rates. In conclusion, this research investigates the practicality of the extended Taylor Rule in the context of Türkiye, utilizing diverse datasets that contribute to the extended model. The study explores the viability of applying the extended Taylor Rule to Türkiye using annual data spanning from 1990 to 2022. To achieve this, tests for stationarity, cointegration, and long-run coefficients were conducted, with considerations for potential structural breaks. The results of the tests reveal that the policy interest rates in Türkiye do not align with the expectations outlined in the extended Taylor Rule.

Pengaruh FDI Dan Kontribusi Sektor Jasa Terhadap Penerimaan Pajak Dengan Pemoderasi Kualitas Peraturan

According to several reports from the international monetary authority, countries belonging to Sub-Saharan Africa still maintain their tax ratio below the threshold of 15%. In fact, the structure of tax revenues in many of these countries has improved in several periods. The slow growth of domestic revenue mobilization, the increase in the debt-to-GDP ratio and the occurrence of a budget deficit are clear manifestations that the tax policy needs to be reformed. This study focuses on analyzing the relationship between Foreign Direct Investment (FDI), the contribution of the Service Sector and the ratio of tax revenues in 33 countries in Sub Saharan Africa during the 2002-2019 period. Through a quantitative approach, this study uses multiple linear regression methods on panel data with the Fixed Effect Model estimation. The research results strongly state that all dependent variables can be explained by the independent variable by 89.19%. As independent variables, FDI and the contribution of the service sector are moderated by the regulatory quality variable. The conclusion stated FDI has a significant positive effect on tax revenues. However, the contribution of the service sector has a negative coefficient values but does not have a significant effect on tax revenues. This study also uses government effectiveness and the industrial sector's contribution to GDP as control variables.