Monetary Policy Research Articles

Can monetary and fiscal policy reduce CO2 emissions? Analysis of regional country groups

PurposeThis study examines the impact of monetary and fiscal policy on carbon dioxide (CO2) emissions from fossil fuel energy consumption. The study extends the literature by linking monetary and fiscal policy to climate action for achieving the net zero emissions goal.Design/methodology/approachIn the empirical analysis, the monetary policy indicator is the lending interest rate, the fiscal policy indicator is the tax revenue to GDP ratio while CO2 emissions from fossil fuel energy consumption is the CO2 emissions indicator.FindingsContractionary monetary and fiscal policy jointly reduce CO2 emissions in the regions of the Americas and Africa. Contractionary monetary and fiscal policy combined with higher renewable energy consumption jointly reduce CO2 emissions in the regions of the Americas, Asia and Europe. Also, contractionary monetary and fiscal policy combined with higher institutional quality jointly reduce CO2 emissions in African countries. Higher renewable energy consumption reduces CO2 emissions in Africa, Asia, Europe and Americas regions while strong institutional quality consistently reduce CO2 emissions in Europe and the Americas.Practical implicationsMonetary and fiscal authorities should strengthen existing institutions, increase renewable energy consumption, and increase interest rate and taxes on the fossil fuel economy in a coordinated manner to reduce CO2 emissions from fossil fuel energy consumption.Originality/valueThere are calls for monetary and fiscal authorities to use policy tools to support ongoing efforts to achieve the net zero emissions goal. However, limited attention has been paid to the regional differences in the relationship between monetary-fiscal policy and CO2 emissions.

The Efficacy of Monetary and Fiscal Policies on Economic Growth: Evidence from Thailand

This study empirically explores the dynamic effect of MP and FP on the economic growth of Thailand from Q1:2003 to Q2:2024. In this study, data analysis was conducted using an advanced sequence of the econometric modeling approach to guarantee that the estimated results were more consistent and reliable. First, we used Bayesian additive regression trees (BART) and Bayesian variable selection (BASAD) methods to determine macro factors with the highest probabilities influencing growth, in addition to monetary and fiscal policy tools during the studied periods. Second, we used the time-varying coefficients seemingly unrelated equation (TVSURE) model to examine the economic impact of MP and FP. Last, we also employed the Markov switching regression (MSR) model not only to support the findings from the TVSURE model but also to propose policy recommendations based on regime durations and transitions tempted by MP and FP. The main results from both TVSURE and MSR reveal the following: (1) MP is more consistent with expected growth outcomes while FP is stronger when localized, (2) MP is more effective in sustaining long periods of high growth, (3) FP is significantly stronger in recovering from recessions, and (4) the coordination of MP and FP has a similar performance to MP alone but with shorter transition periods. This study makes an empirical contribution to the ongoing debate on the effectiveness of MP and FP in boosting growth and aiding in the recovery from recessions in the case of Thailand. In addition, this study not only acknowledged certain limitations but also recommended policies to sustain the Thai economy.

The Impact of Domestic Monetary Policy and External Liquidity Shocks on Inequality in the Republic of Korea

The Impact of Domestic Monetary Policy and External Liquidity Shocks on Inequality in the Republic of Korea

Exploring the Impacts of Economic Policies, Policy Uncertainty, and Politics on Carbon Emissions

Abstract Addressing climate change challenges through managing and mitigating CO2 emissions has taken center stage in shaping economic policies. This paper analyzes the intricate interplay among economic policies, their uncertainty, political dynamics, and CO2 emissions by utilizing the U.S. data from 1973 to 2024. Our empirical results derived from the autoregressive distributed lag (ARDL) model with dummy variables indicate that expansionary monetary policies and higher corporate tax rates may increase CO2 emissions. Political factors, including economic policy uncertainty and the political climate, yield long-term impacts on CO2 emissions. The dominant party in the legislative branch, but not the presidency, emerges as a key determinant in carbon dioxide emission control, underscoring the significance of consensus-building in democratic processes, yet with variation in effects across different chambers. The robustness of these key findings is reaffirmed through different models. The findings suggest that party affiliation does not always dictate environmental policy outcomes, emphasizing the complexity of policy formulation and its representation within legislative bodies, providing insight to decision-makers when economic policies are considered.

Impact of Conventional and Unconventional Monetary Policy on Correlations Across Financial Markets: Evidence from an Emerging Economy

Impact of Conventional and Unconventional Monetary Policy on Correlations Across Financial Markets: Evidence from an Emerging Economy

US Monetary Policy and Indeterminacy

ABSTRACTIn this paper, I investigate the stance of the US monetary policy in the postwar period. To this end, I show that two features are key: a rich structural model and a parameterization of the indeterminate solution that ensures a sufficient exploration of the indeterminacy region during the estimation procedure. Therefore, I estimate a medium‐scale model on the US macroeconomic data using a novel solution method to allow for indeterminacy. The evidence of a passive monetary policy in the pre‐1979 period is pervasive and robust to the use of alternative model specifications and data. By contrast, the evidence of an active stance after 1979 is overturned if the period of the Volcker disinflation is excluded or if the model is estimated including a time‐varying inflation target and data on inflation expectations.

The Impact of Inflation on the U.S. Stock Market After the COVID-19 Pandemic

Inflation remained quiescent for several decades and then surged in 2021 and 2022. Inflation subsequently fell in 2023 and 2024. This paper investigates how the rise and fall in inflation after 2019 affected the U.S. stock market. To do this, it estimates a fully specified multi-factor model that measures the exposure of 54 assets to inflation, monetary policy, and other macroeconomic variables over the 1994 to 2019 period. This paper then uses the inflation betas to investigate how investors’ perceptions of inflation changed between 2020 and 2024. The results indicate that concerns about inflation roiled the stock market over this period. The Fed’s anti-inflationary policies whipsawed markets even more. These findings highlight the dangers that arise when monetary policy allows inflation to accelerate.

Who Takes the Cake? The Heterogeneous Effect of European Central Bank Accommodative Monetary Policy across Income Classes

AbstractThis work provides evidence of the heterogeneous effects of the ECB's monetary policy across income classes. In particular, this investigation focuses on the labor market channel. Based on EU‐SILC data, we estimate country‐specific structural vector autoregressions (SVAR) models to analyze the impact of the expansionary monetary policy shocks over the 2006–2019 period. The results suggest that monetary easing helped decrease unemployment rates for lower‐ and middle‐income classes, to a larger extent for the former. This differential impact is accounted for a stronger improvement in job finding rates for classes located at the bottom of the income distribution. Conversely, the employment status of the upper class remained largely unaffected. The analysis identifies a positive impact of expansionary monetary policy on real labor income, which seems to have mostly benefitted the upper class. Overall, our results suggest that expansionary monetary policy helped decrease labor income inequality by exerting a stronger positive impact on lower‐income households.

Monetary Easing, Leveraged Payouts, and Lack of Investment

We study a model in which a low monetary policy rate lowers the cost of corporate debt, potentially spurring productive investment; low interest rates, however, also induce firms to lever up so as to increase payouts to equity. Whereas such leveraged payouts privately benefit shareholders, leverage comes at the social cost of distorting their incentives, thereby lowering productivity and discouraging investment. If leverage is unregulated (for example, because of the presence of a shadow banking system), then the optimal monetary policy seeks to contain such socially costly leveraged payouts by stimulating investment in response to adverse shocks only up to a level below the first best. The optimal monetary policy may even consist of leaning against the wind, that is, not stimulating the economy at all, in order to fully contain leveraged payouts and maintain productive efficiency. This paper was accepted by Tomasz Piskorski, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01440 .

The role of economic intelligence in enhancing the monetary capacity of the Central Bank of Iraq (Japan as a model)

Economic intelligence is an emerging, complex, and multidisciplinary field that has gained prominence in recent years, driven by the growing significance of the economy in shaping international relations. It has become a critical component in the operations of governments and central banks, with Japan’s experience serving as a notable example of its successful implementation. In Japan, monetary management has played a pivotal role not only in fostering financial and economic stability but also in benefiting society at large. This was achieved through strategic influence on interest rates and the stimulation of investments in both the public and private sectors. In stark contrast, the Iraqi economy has faced persistent financial and monetary instability, largely due to its heavy dependence on oil revenues as a source of foreign exchange. A key finding of this research highlights the importance of revitalizing monetary management by leveraging the exchange rate tool, which has historically been controlled through oil-derived foreign exchange revenues.

Distribution of Returns on Currency Exchange Rates and Bitcoin Transaction Values in G7 Countries

In this study, we evaluated the distribution of return on exchange rates of the currencies of G7 countries and also estimated the dynamic effect of Bitcoin transaction prices on currency return in the selected G7 countries. We transformed the daily trading and transaction values of Bitcoin in exchange for the US dollar and exchange rates into continuously compounded daily returns by taking the natural logarithm of today’s exchange rate over yesterday’s rate. We found that the appropriate distribution of returns was the skewed generalized error distribution (SGED). The study invalidates the hypothesis of a normal distribution of returns and rather implies that returns exhibit fat tails. Our study established a significant EGARCHskewed-GED model effect with substantial asymmetric responsiveness and persistence of conditional volatility of return on foreign exchange rates for the six G7 currencies researched in this study. Our findings show that Bitcoin trading values have considerable predictive power for returns on G7 currency rates. With the EGARCH-SGED model chosen as the best model, it indicates that the error distribution for return is beyond the normal distribution. Accordingly, there are extreme return values that are more common than what would be predicted by a normal distribution. The significance and large positive value of the shape parameter, otherwise called the tail coefficient, signifies heavier tails, while a lower value of the asymmetric coefficient λ signifies slower decay, allowing the distribution to capture extreme return series more effectively. We therefore recommend a downward adjustment of the monetary policy rate to curtail the impact of the negative shocks, namely, bad market news-that snowball volatility in returns. In general, there is a need for overall macroeconomic stabilization.

Doomed in din or synced with signal: a study of dissent within Indian monetary policy committee

ABSTRACT The paper investigates the effect of latent discord present amongst Indian Monetary Policy Committee members on the accuracy of inflation and growth forecasts. We use FinBERT, a deep learning model, to propose a refined measure of Implicit Dissent and use it to further investigate how such discord can affect the forecast accuracy. Our results show that lower levels of implicit dissent increase uncertainty and impair forecasters’ ability to make accurate predictions. In contrast, higher levels of implicit dissent mitigate uncertainty and help anchor forecasts. Our study concludes that heterogeneity in signals by central bankers increases the mean decision quality of forecasters.

What explains monetary policy rate uncertainty? Evidence from the Americas

ABSTRACT Using Consensus Forecasts for 8 American countries, we compute uncertainty regarding outcomes based on the sum of disagreement across forecasters and the error variance of the mean forecaster. Uncertainty for inflation and monetary policy tend to move together. This is consistent with economic forecasters using a Taylor rule to form their expectations and believing that central bankers put a high weight on inflation deviations. We find that monetary policy rate uncertainty in the short term (12 months ahead) is strongly associated with higher uncertainty regarding the inflation rate in the next year. The result is significant across all countries in the medium term. Inflation uncertainty is a much more powerful predictor of monetary policy uncertainty than GDP growth uncertainty in the medium term. Furthermore, the post-pandemic years are the first period in the twenty-first century in which uncertainty for monetary policy and inflation surged across all countries. The post-pandemic period saw a significant reduction in GDP growth uncertainty across all countries (except Argentina), but this was not enough to attenuate the increase in inflation and monetary policy uncertainty.

Monetary policy shocks and multi-scale positive and negative bubbles in an emerging country: the case of India

We employ the Multi-Scale Log-Periodic Power Law Singularity Confidence Indicator (MS-LPPLS-CI) approach to identify positive and negative bubbles in the short-, medium, and long-term for the Indian stock market, using weekly data from November 2003 to December 2020. We use a nonparametric causality-in-quantiles approach to analyze the predictive impact of monetary policy shocks on bubble indicators. We find, in general, strong evidence of predictability across the entire conditional distribution for the two monetary policy shock factors, with stronger impacts for negative bubbles. Our findings have critical implications for the Reserve Bank of India, academics, and investors.

Beyond Quantitative Easing Towards a New Monetary Theory

In his article Interest and Prices, originally published in 1898, Wicksell summarized the two goals of monetary policy that today constitute the corner­stones of monetary theory. The first goal is to prevent monetary shocks due to excessive/or insufficient credit in the system, resulting in a conserva­tive view of monetary policy. The second goal is to adequate the level of credit to changes in the real sector of the economy as reflected in changes in the real level of savings or investment. The first goal has been the main emphasis of the Quantitative Theory of Money which supports both Monetarism and Rational Expectations. The second goal was the route taken by Keynes who emphasized the volatility of investment as a main cause of economic instability. This article provides a third route that benefits from the two routes previously mentioned and proposes a new monetary theory.

The Wave Effect of Exchange Rates on the General Index of the Iraq Stock Exchange

The study of the wave effect of exchange rates on the general index of the Iraq Stock Exchange aims to examine the potential impact of monetary policy trends on stock market performance and the role of financial and banking reforms in enhancing the financial market. Additionally, it seeks to understand how exchange rates have influenced the stock market in Iraq. The study employed the Wavelet methodology to explore the correlation between the exchange rate variable and the general stock market index. Specifically, it used the wavelet or frequency methodology developed by Grinsted et al., (2004) to reveal the co-movement between the study variables. The findings indicate a bidirectional causality extending from the exchange rate to the general stock market index and vice versa across different time frequencies and periods. The arrows point to upward and downward movements within the white cone-shaped boundary. In the short term, the relationship was initially positive and then negative, as evidenced by the arrows pointing to the upper-right quadrant, indicating a positive relationship between the variables. The arrows moved rightward in 2006 and 2007, leftward in 2010, upward in 2017, and rightward again in 2020. The results demonstrate that the stock market index is influenced by exchange rates, with an unstable relationship between them.

Analysis on the Influencing Factors of the Effectiveness of Forward Guidance

Economic growth is confronting a downturn despite the low interest rate. Forward Guidance (FG) has been studied and applied to monetary policy for a long time within countries where interest rate is close to the Zero Lower Bound (ZLB). Central banks resorted to FG in practice and have been benefited from the exclusive advantage of it. The paper studies the FG during the period of the Global Financial Crisis (GFC), focusing on the factors that influence the effectiveness of FG and how these factors work in a market mechanism. The research on identified factors challenges the popular proposition that Delphic FG is better off than Odyssean FG. From the transmission channels to the contents of FG, this paper provides an overview of the factors and the mechanisms, as well as recommendations for central banks in terms of the evaluation on the effectiveness of FG. The policy makers are suggested to be more careful when apply FG. Besides, the responses of market agencies should be considered when formulating central bank communication.

How Economic and Monetary Policy Uncertainty Affect Climate Policy Uncertainty in the United States?

How Economic and Monetary Policy Uncertainty Affect Climate Policy Uncertainty in the United States?

Central Bank Digital Currencies: Much ado About Nothing?

ABSTRACT Central bank digital currencies (CBDCs) are increasingly becoming a subject matter for a variety of stakeholders in the economy as a whole. In this paper, we will first analyse the nature of CBDCs to show that it is essentially a digital liability of central banks, like today’s settlement balances that banks use in their own transactions. Such a ‘wholesale’ CBDC may exist along a ‘retail’ CBDC, which is the digital version of banknotes that, to date, any non-bank agents can use for their small-value payments. In this perspective, CBDCs are therefore ‘much ado about nothing’, as they just represent the most recent evolution of the form of money. However, in this paper we will also show that such an evolution could have some relevant consequences for monetary policy objectives like financial stability and banks’ solvency if ‘retail’ CBDCs replace banknotes in advanced economies, thereby providing an interesting alternative to bank deposits — particularly if these CBDCs are going to be remunerated by the issuing central banks. The last section will expand on this issue, focusing on the possible reaction of the banking sector, whose aim is and will remain the maximization of banks’ profits over the short run.

How to Coordinate the Roles of Fiscal Policy and Monetary Policy

Fiscal policy and monetary policy are two critical tools in macroeconomic management. Their coordination and synergy are essential for achieving economic stability, growth, and resilience against risks. This paper explores the fundamental characteristics and roles of fiscal and monetary policies, analyzes their interactions and common conflicts across different economic phases, and discusses pathways for coordination through consistent goal setting and robust implementation mechanisms. By examining domestic and international case studies, the paper identifies key factors for effective synergy and provides recommendations tailored to China’s economic context. These insights aim to offer both theoretical support and practical guidance for achieving more efficient macroeconomic governance.