Monetary Policy Research Articles

Revisiting ECB’s Technocratic Legitimacy: No Longer Fit‐for‐Purpose?

This article revisits the technocratic model of legitimacy that the European Central Bank (ECB) has enjoyed since its early period, by exploring the Monetary Policy Strategy statements that constitute the “comprehensive framework” guiding the Bank’s operational decisions. We examine whether the operational framework and the interpretation of the ECB’s legal mandate, which are included in these statements, are aligned with this model. We find that the ECB’s early monetary policy statements (1998 and 2003) appear to be aligned with this model, due to the presence of strictly defined performance criteria and an interpretation of the ECB’s mandate that was limited to pursuing price stability as a single objective. Our analysis of the ECB’s 2021 monetary policy strategy highlights its incompatibility with the technocratic model as a result of significant changes that enabled wide policy discretion and a re-interpretation of the ECB’s mandate, which revealed a largely vague and broad mandate. We argue that the ECB’s model of technocratic legitimacy is untenable in a democratic polity, given the extent and type of choices that the Governing Council is required to make in the current policy setting. Finally, we suggest that only a strengthening of the (hitherto diminished) input dimension of the ECB’s legitimacy could address this legitimacy gap.

Addressing concerns of access and distribution of health workforce: a discrete choice experiment to develop rural attraction and retention strategies in southwestern Ethiopia

BackgroundThere is a shortage of health workers in Ethiopia, with an uneven distribution between urban and rural areas. To formulate effective policy interventions aimed at attracting and retaining health workers in rural regions, this study examined the stated preferences of health workers when selecting health jobs.MethodsA discrete choice experiment was conducted among health workers in the Aari and South Omo zones of the South Ethiopia region, from September to November 2022 to gather insights into their job preferences. The design of the discrete choice experiment was informed by literature review, focus group discussions, and in-depth interviews. Through these qualitative studies, key job attributes influencing health workers’ preferences were identified, including salary, education, housing, location, timeliness of payment, medicine and equipment, management culture, and infrastructure. We employed a mixed logit model, allowing for full correlation between utility coefficients, to assess the relative importance of these attributes and account for heterogeneity in preferences and scales. We also conducted a willingness-to-pay analysis and assessed the probability of job uptake for both single and combined incentives.ResultsAll eight attributes exhibited statistically significant effects, with the expected signs, and indicating preference heterogeneity. Education opportunity, salary, and housing emerged as the most influential attributes shaping health workers’ decisions when considering a rural posting as a future workplace. Notably, health workers were willing to trade off a significant portion of their salary for improvements in other aspects of the job. Subgroup analysis revealed that health workers without a rural background were willing to pay more to work at the relatively more urban zone center compared to those with rural experience. Offering educational opportunities after one year of service at the base salary increased the probability of choosing a rural job posting by 79.8%. In addition, we find that packages of incentives are usually preferred over a single incentive.ConclusionHealth workers express a willingness to relocate to or continue serving in rural areas contingent upon improved working conditions. Both monetary and non-monetary policy interventions should be considered by policymakers to attract and retain health workers at rural locations in southwestern Ethiopia.

Looking up the sky: unidentified aerial phenomena and macroeconomic attention

Attention to information plays a key role in recent macroeconomic analysis, yet measuring it is a challenging endeavor, most notably in terms of covering varying geographical levels and time frequencies. We propose a novel, unconventional measure of public attention, which addresses these limitations, based on individuals’ reports of Unidentified Aerial Phenomena (UAP). We document a surprising link between UAP sightings and macroeconomic conditions at the U.S.-county, state, and national levels. Controlling for weather conditions, and external influences, UAP sightings are more common in wealthier regions, but within regions the pattern is counter-cyclical. Thus, variations in attention to exceptional phenomena in the skies implicitly point at more general patterns of variations in the public attention. We further support this interpretation by a quasi-experimental design that utilizes plausibly exogenous regional variations in COVID-19 restrictions and find evidence for a causal effect on public attention. We further show that the UAP sightings measure is highly correlated with conventional measures of attention that are based on expectations data. We then apply our measure in the context of monetary policy transmission. We find that it can account for sizable regional heterogeneity in the response to monetary shocks. Higher levels of attention across U.S. regions, as well as within regions over the business cycle, substantially mitigate the effect of monetary policy.

Monetary‐Fiscal Interactions and the Problem of Outdated Commitments: Eurozone Crisis Versus Covid‐19

Post-crisis accounts of economic governance in Europe have often analysed the monetary policy decisions of the supranational European Central Bank and the fiscal policy coordination of the intergovernmental Council and Eurogroup separately. This is unfortunate since both policy fields are closely linked and increasingly interdependent. We put forward a theory of monetary-fiscal interactions in the Economic and Monetary Union based on the notion of de-commitment and re-commitment. In juxtaposition to the grand theories of neo-functionalism and liberal intergovernmentalism, we argue that EU institutions serve not only to tie the member states to policy commitments but also to untie them from previous policy commitments that have become outdated and harmful. The European Central Bank’s main contribution to safeguarding the Eurozone in 2012 and 2020 has not been to enforce but to relax the monetary financing prohibition of the Treaty, and the Council’s main contribution in 2020 was not to double down on the no bail-out clause but to re-commit to risk-sharing and burden-sharing through the NextGenerationEU programme. We argue and show that economic governance in Europe has progressed through three stages of commitment. Whereas monetary-fiscal interactions followed a commitment logic during the first decade of the Economic and Monetary Union (the “old normal”), the defining feature of the second decade has been de-commitment (the “new normal”). In the Covid-19 crisis, economic governance finally entered a phase of re-commitment (taking the Economic and Monetary Union “back to the future”). The analysis has implications for our understanding of the purpose and power of supranational institutions in overcoming the problem of outdated commitments post-crisis.

An Event Study on Impact of Russia-Ukraine War on Indian Banking Sector Stock

Aim: To study the impact of the Russia-Ukraine event on the performance of banking sector stocks. Study Designs: The descriptive statistical analysis has been done for six selected banks and is based on the Russia-Ukraine war. Study employs event analysis method for analysis. Place and Duration of Study: The secondary data has been downloaded from the NSE site, and the study duration is pre- and post-90 days from the event day and 120 days for the event window and 210 days for the estimation window has been considered. Methodology: The event analysis method has been used in which a paired t-test has been employed. We have checked significant at a p-value of 0.10 (10% level). Significant at p-value of 0.05 (5% level) Significant at p-value of 0.01 (1% level). Results: By examining a wide range of degrees of relationship between the two variables, we have tried to analyze how financial markets respond to changes in the warlike situation and how conditions impact asset prices. The results show the impact of the event before and after the event date. This analysis fills the gap in understanding event-specific impacts on financial institutions. Conclusion: The study provides insights into whether market behavior remained stable (null hypothesis accepted) or displayed volatility (alternate hypothesis accepted) across 90 days for global crises like the Russia-Ukraine war. The findings of the research have implications for the banking sector of India, policymakers, investors, and researchers. The research provides numerical and non-numerical information that other researchers can employ for cross-study analysis or for verifying theories. Lingering questions from the investors, including those in search of portfolio diversification strategies and the right time to invest. The discovery empowers the firms to have better policies inside and better relations outside, with customers and other stakeholders, such as during the change in monetary policy or in external shocks.

Analysis of Nominal and Real Exchange Rates in the Iraqi Economy (1970-2013)

his research paper investigates the distinction between the nominal exchange rate and the real exchange rate, highlighting their insinuations for economic policies and export dynamics in Iraqi economy. The nominal exchange rate measures the relative price between two different currencies, defined as the number of domestic currency units required to purchase one unit of a foreign currency. While the real exchange rate is considered as a relative price of non-tradeable goods against tradable goods. The research paper also analyses numerous indices for evaluating the real exchange rate, recognizing the most appropriate method for the Iraqi economy. Moreover, the key roles of money supply and oil revenues in determining the exchange rate dynamics are considered. Given the dominance of oil sector in the Iraqi economy, its far-reaching effect on macroeconomic circumstance, including the exchange rate, is thoroughly tested. This study delivers a comprehensive outline for empathetic the interaction between exchange rates, money supply, government expenditure and monetary policies in a resource-dependent economy.

Informativeness of the federal reserve chair communication’s sentiment on the monetary policy uncertainty

Informativeness of the federal reserve chair communication’s sentiment on the monetary policy uncertainty

FX Comovements and Their Economic Determinants

Abstract This article models high- and low-frequency dynamic components of FX excess return correlations and examines their relationship with economic fundamentals. A factor pricing model with time-varying betas is used to characterize these correlations. From the low-frequency components, an aggregate comovement measure is derived. This component is countercyclical relative to the U.S., as it is negatively related to economic growth and positively related to both inflation volatility and economic policy uncertainty. Idiosyncratic volatilities also drive currency comovements. I examine their cross-sectional variation and find significant impacts of inflation levels, monetary policy variables, real output growth, trade, and capital flows.

Re‐Investigating the UIP Hypothesis: Recent Evidence From BRICS Economies

ABSTRACTThe study re‐investigates the existence of the Uncovered interest parity (UIP) hypothesis and substantially adds to the literature by offering the most recent evidence during the period from 2000 to 2022 from developing and emerging economies. The study further augments the literature by extending the standard UIP hypothesis to account for the monetary policy stance and risk premium. The estimates of nonlinear autoregressive distributed lag (NARDL) and component generalised autoregressive conditional heteroscedasticity (C‐GARCH) show that the UIP hypothesis does not exist in any of the BRICS economies. Nevertheless, after accounting for the risk premium and monetary policy stance using inflation levels, the interest rate differential significantly and positively influences the expected changes in the spot exchange rates. This indicates three important aspects: first, the necessity of risk premium to make up for the higher risk that comes with holding the foreign bond for the benefit of domestic investors. Second that the UIP puzzle does not hold, such that higher interest differential depreciates the domestic currency. Third, the analysis underscores the substantial and direct impact of US inflation level, particularly for Brazil, Russia and India, in determining the changes in the spot exchange rate. These insights hold crucial implications for policymakers and regulators.

Informational Differences, Adaptive Learning, and Inflation Forecast Bias

ABSTRACTThis work highlights a previously overlooked factor that contributes to bias in private inflation forecasts—ignorance of confidential monetary rules. Additionally, it examines how this ignorance indirectly affects policy rate settings. The model proposed reconciles biases in two key forecast sources: the inflation expectations from the Survey of Professional Forecasters and the Federal Reserve's Greenbook forecasts for the output gap. Moreover, the model investigates the impact of informational differences on monetary policy transmission and identifies clear conditions under which inflation rises following a contractionary monetary policy shock.

Peran Sukuk dalam Stabilitas Moneter di Indonesia

Sukuk as an Islamic financial instrument plays a strategic role in supporting monetary stability in Indonesia. This study explores the relationship between sukuk and monetary policy variables, such as inflation, exchange rate, and economic growth. Sukuk has proven to be a stable instrument that supports sustainable development by mitigating external debt risks. Through the analysis of the monetary policy transmission mechanism, this study identifies the role of sukuk in asset price and exchange rate channels. The results show that sukuk has a positive impact on monetary stability and long-term economic growth.

The Natural Rate of Interest in Brazil

This work focused on estimating the Natural Rate of Interest for Brazil, employing three different state-space modelling approaches with several combinations of input variables. Results obtained reiterate the downward trend frequently mentioned in the literature before the pandemic shock, after which the NRI started to rise once again: ranged from 1.6% to 4.5% in 2019 and between 3.6% and 5.75% in 2023. Based on the results, the monetary policy stance in Brazil is summarized into five periods: 2000-2006, predominantly contractionary - an adaptation period after the Plano Real; 1Q-2007 to 1Q-2014, a period with noticeably loose monetary policy; 2Q-2014 to 2Q-2019, when the stance was predominantly contrationist; 3Q-2019 to 2Q-2022, when the stance went from neutral to expansionist, specially in the aftermath of the Covid-19 shock; 3Q-2022 to 4Q-2023, with a worldwide contractionary phase to cope with inflationary pressures.

Analyzing The Effect of Monetary Policies and Financial Stability Measures Across Global Markets amid Covid-19 Pandemics

This study investigates causal relationships among financial stability measures and monetary policies implemented in US, EU and Turkey. Selected variables from stock markets, money markets, and bond markets are tested. The set of macrofinancial process covers S&P500 stock market, BIST-100 stock market; Volatility index; German, US and Turkey 10-year treasury bond interest data, European Union 27 average CPI, US CPI, Turkey CPI, ECB policy rate, FED policy rate, CBRT policy rate data. The Granger causality analysis is applied for first; each dataset of US, EU and the Turkish economy, separately. Second, mutual impact of stock markets, money markets and bond markets are examined. Finally CBOE Volatility index (VIX) is taken into account. It is aimed to observe spillover effects from developed economies to emerging markets amid pandemics. The dataset covers the monthly period of 2019M1 to 2023M6.

The Spillover Effect of US Monetary Policy: A Literature Review

In an era of globalization, the interconnectedness of financial markets means that monetary policy decisions in one country, particularly the United States, can have significant global repercussions. This interconnectedness necessitates a deeper understanding of how US monetary policy influences economic conditions worldwide. This paper reviews the impact of US monetary policy through various channels on advanced and emerging countries differently. The research finds that US monetary policy involves an element of uncertainty. In advanced countries, this uncertainty primarily influences the term premium component of yields, whereas in emerging countries, it affects the expected component of yields. Furthermore, the impact of US monetary policy shocks varies with the business cycle, having a larger effect when growth is weak outside the US. Different channels of spillover include interest rate differentials, exchange rate movements, capital flows, financial market reactions, and changes in risk perception and sentiment. For advanced countries, significant impacts are seen in interest rate spillovers, exchange rate dynamics, financial market volatility, and global trade and economic growth. In emerging countries, the effects are pronounced in exchange rate channels, capital flows, financial stability, term premium, risk perception, and local monetary conditions. Solutions include strengthening financial regulation, diversifying economic structures, building foreign exchange reserves, managing capital flows, improving monetary policy frameworks, fostering regional cooperation, promoting long-term investment, and enhancing data transparency.

Analysis of the Impact of Government Policies on Supply and Demand in China's Real Estate Markets in First-tier and Second-tier Cities

Due to changes in demographics, urbanization, and economic development, the Chinese real estate market has intrigued many analysts in the last three decades. To begin with, it is necessary to know more about the nature of this market since it plays an essential role in the country's economic development and in improving the standard of living of its population. The importance of the real estate industry cannot be overemphasized in the context of China, specifically in terms of the financial structure, urbanization, and social welfare. Hence, evaluating government policies in this regard is crucial to understand further, how and why they work or fail, along with the impact on the growth of cities. Thus, this paper aims to provide an overview and qualitative analysis of the Chinese real estate market's government policies between first- and second-tier cities, focusing on supply and demand. The actual policies include purchase restrictions, availability of land, and monetary policies, and the effects of actual policies are discussed for various tiers of cities. The study establishes that first-tier cities are highly priced and competitive due to high supply and demand, while second-tier cities are variably priced and could be oversupplied. These issues need more profound and local policy suggestions to understand specific heterogeneities of various Chinese urban property markets and strive for the mutual and relatively balanced growth of different city clusters.

The Impact of Monetary Policy on Healthcare Affordability: A Case Study of China's Urban and Rural Basic Medical Insurance

Longer life expectancy and improved health are key indicators of economic growth. As such, strategies to bolster the medical security system are priorities in government budgeting. The government is dedicating all available resources to better healthcare in rural and underdeveloped areas, narrowing the urban-rural healthcare gap, and achieving equitable healthcare resource distribution. This study examines the effect of monetary policy on healthcare affordability, focusing on China's Urban and Rural Basic Medical Insurance (URRBMI). It investigates how macroeconomic policies, such as interest rates and inflation control, affect healthcare costs and shape URRBMI's financial protection. Using an integrated methodology, including a literature review, theoretical framework, and econometric analysis, the research uncovers how monetary policy impacts healthcare costs and URRBMI's effectiveness. The findings highlight the importance of monetary policy in healthcare affordability. The study recommends collaboration between monetary authorities and healthcare policymakers to improve China's healthcare system's sustainability and effectiveness. Furthermore, these insights are crucial for refining URRBMI and provide new understandings of optimizing macroeconomic policy interactions with social welfare programs.

Macroeconomic determinants of housing demand in Saudi Arabia: an autoregressive distributed lag approach

Purpose This study aims to investigate the macroeconomic factors influencing housing demand in Saudi Arabia using quarterly data for the period 2010 Q1–2024 Q2. Design/methodology/approach The autoregressive distributed lag bounds test and vector error correction model are used to determine the dynamic relationship between the macroeconomic factors. Findings The results reveal that the F-statistic value of 4.2043 is higher than the upper bound of the critical values at 5% level of significance, indicating long-run association among the series. While there is a negative and significant influence of interest and inflation rates on housing demand, income per capita and population have a positive and significant influence on housing demand. Similar result is found for the short run analysis except income per capita which has positive but insignificant impact. Moreso, the population seems to be very crucial to housing demand in both short-run and long-run periods. Social implications The outcome of the study has important policy implications by enjoining the policymakers in Saudi Arabia to consider a decisive management of monetary and fiscal policies to ensure that inflation and interest rates for housing are kept at a low level to encourage housing demand. Also, adequate policies should be put in place to ensure housing/property affordability that matches the increasing population due to tourism, urbanisation and growing birth rate. Originality/value Studies on the macroeconomic determinants of housing demand are less explored as most studies dwell more on social and demographic factors despite the importance of macroeconomic factors towards house ownerships. There is a dearth of related studies in Saudi Arabia.

Do reserve requirements restrict bank behavior?

AbstractThis study aims to examine whether a reserve requirement system constrains bank behavior. In Japan, a system is applied to certain regional banks where required reserve ratios are imposed based on the amount of their deposits. Using a natural experiment, we perform a bunching estimation to examine whether this reserve requirement system decreases bank deposits. To the best of our knowledge, this study is the first to examine the effects of reserve requirement systems through bunching estimation. Our results demonstrate that the reserve deposit system depresses bank deposits, resulting in a decline in total deposits. However, this phenomenon is not observed during periods of unconventional monetary policies. This study highlights an important consideration when discussing changes in the reserve requirement system.

Bubble in the Real Estate Market and Its Risks to Macroeconomy: A Case Study of the United States

The real estate market in the United States is renowned for its cycles of rapid growth and subsequent decline, which have profound implications for the broader economy. This paper delves into the nature of real estate bubbles, investigating their formation, development, and the associated risks to the macroeconomy, with a particular focus on the U.S. market. Through a comprehensive analysis of historical data, key economic indicators, and case studies of significant real estate bubbles, including the infamous 2008 financial crisis, the paper elucidates how these bubbles emerge and the mechanisms through which they impact economic stability. Real estate bubbles are characterized by unsustainable increases in property prices driven by speculative investment, excessive credit expansion, and optimistic market sentiments. The study examines the underlying causes of these bubbles, such as lax lending practices and regulatory failures, and their subsequent bursting, which often leads to severe economic repercussions. The paper further explores how the collapse of a real estate bubble can trigger widespread financial instability, impacting the banking sector, leading to a credit crunch, and resulting in reduced consumer spending and economic growth. Additionally, the paper discusses the role of policy responses in mitigating the risks associated with real estate bubbles. Effective measures include monetary policy adjustments to control credit conditions, enhanced regulatory oversight to prevent lax lending practices, and macroprudential policies designed to address systemic risks. By providing a detailed analysis of these elements, the paper aims to offer insights into managing and preventing the adverse effects of real estate market fluctuations on the macroeconomy.

The Macroeconomic Effects of Monetary Policy and Government Expenses in Response to Covid-19: Evidence from Saudi Arabia

The purpose of this paper is to test the effectiveness of the interaction between monetary and budgetary policies during the Covid-19 crisis in Saudi Arabia. To this end, we use the Markov regimes technique to take into account change in regimes of the two policies. We adopt the SVAR modelling of sign restrictions to test the joint effect of a stagnation in tax revenues and a 1% increase in government spending over a time horizon of four periods identified as tax shocks during the Covid-19 period. The results of impulse response tests show that this shock did not lead to an improvement in industrial production. The results show tax dominance by financing state resources to compensate for the burden of government expenditure. If the central bank has raised the interest rate to anchor inflationary expectations, it will in turn have negative effects on economic activity as measured by the industrial production index. This scenario coincides with the second regime of the monetary rule, where the central bank acts in response to expected inflation.