Monetary Model Research Articles

Exchange Rate Dynamics and Monetary Fundamentals: Evidence from South Asian Countries

This paper examined the role of monetary fundamentals in determining nominal exchange rate changes in South Asian countries. The Vector Autoregressive (VAR) technique and Autoregressive Distribution Lag (ARDL) were used. Results from the VAR indicate that the exchange rate responds to shock originating from differences in money supply, inflation differential, interest rate, and real income differential and are consistent with the short-run predictions of the monetary model of the exchange rate. The results show that inflation and interest rate differentials are responsible for the majority of changes in exchange rates in the short run. The conclusion from the result is that, particularly in the short run, monetary fundamentals are the primary causes of exchange rate fluctuations in South Asian countries.

Forecasting the daily exchange rate of the UK pound sterling against the US dollar

This paper is the first to use an economic theory-based model—the monetary model of exchange rates within a rational expectations present value framework—to forecast the daily exchange rate of a major currency. Our out-of-sample forecast evaluation period, spanning from 1990 to 2024, is longer than that of any other exchange rate forecasting study. We find that our model's forecasts outperform the random walk across all forecasting horizons, ranging from one day to five years. Moreover, a trading strategy based on our model's forecasts yields economically and statistically significant excess returns, surpassing those of the carry trade strategy.

Corporate finance, collateralized borrowing, and monetary policy

We construct a monetary model in which entrepreneurs facing uncertainty in input costs and returns of projects may finance investment internally and with bank credit. Entrepreneurs using money as a down payment and bonds as collateral can reduce the default probability. Working through these key channels, lower nominal policy rates and open market sales can reduce the real lending rate. The central bank’s private asset purchases improve availability of credit and compress risk spreads. Our model identifies the risk-reducing channel of private asset purchases—the policy functions as if the government had supplied more bonds, and the increased collateralizable bonds are allocated more to corporate borrowings with a higher lending risk. Risk-retention requirements associated with asset purchases are essential to welfare. As uncertainty with respect to input costs and investment returns intensifies, the central bank should lower the optimal risk-retention rate to encourage lending and reduce business failures.

Inflation targeting and output stabilization in an estimated monetary model

This paper studies determinacy conditions in a monetary model with an interest rate rule. In addition to the inflation rate as an argument of the policy rule, we introduce a second argument: output, a case empirically relevant but overlooked in the existing literature on monetary models with flexible prices. Firstly, we estimate a model with money in utility and the production function. We find that an aggressive response to inflation does not necessarily guarantee determinacy anymore. Secondly, we compare monetary policy in the pre-Volcker era and the post-Volcker era. We find that, after the appointment of Paul Volcker, the Federal Reserve started to respond more aggressively to inflation and less aggressively to output. Indeterminacy is pervasive: the equilibrium is indeterminate in both sub-samples. Thirdly, we estimate the impulse response functions. We find that monetary shocks, sunspot inflation shocks, and productivity shocks have long-lasting effects on inflation, output, and interest rates.

Customer Segmentation Using the K-means Clustering Algorithm and Recency Frequency Monetary Model at Pharmaceutical Product Wholesaler

PT Kimia Farma Trading and Distribution (KFTD) is a company engaged in the distribution and trading services of Indonesian health products, on a national scale. In 2022, the company aims to increase sales to be awarded as one of the top 3 national pharmaceutical product distributors by 2024. Their current strategy is to provide customers with delayed payment permission and integrated complaint services. However, the offers and services are the same for all customers which does not consider customer track record hence it is not cost-effective. One way to increase sales is by enhancing customer satisfaction and loyalty by implementing Customer Relationship Management (CRM) strategies. Several strategies can be carried out, namely analysis of associations related to pharmaceutical products, and analysis of customer segmentation and clustering of products. The method used in this study was the K-means clustering algorithm combined with the Recency Frequency Monetary (RFM) model. Experiments showed that the optimal clustering results are 4 therefore they are categorized into 4 customer segments, namely Superstar, Golden, Typical, and Occasional Customers.

E-money, risk-sharing, and welfare

We develop a micro-founded monetary model to inquire the role of a privately provided e-money instrument for household consumption smoothing and welfare. Different from fiat money, e-money users pay electronic transaction fees, but in turn e-money reduces their spatial separation frictions and enables risk-sharing through remittance transfers. We characterize the profit maximizing e-money transaction fees charged by a monopolist technology provider and the optimality of price regulation. Calibrating the model for the context of Kenya’s e-money product M-Pesa shows that the introduction of M-Pesa through a monopolist increases aggregate welfare by 1.0%, while regulating e-money prices and fully eliminating the monopoly power of the technology provider raises the aggregate welfare only by 0.1% beyond what is achieved through the monopolist.

The case for nominal GDP level targeting

AbstractIn this paper, I make the case for a nominal GDP level target in the United States. I begin by arguing that the Federal Reserve's current flexible average inflation targeting regime is deficient. I then argue that since a competitive monetary equilibrium is optimal, monetary policy should seek to replicate the competitive monetary model. Doing so resembles nominal GDP targeting. I also offer the following practical reasons why policymakers might prefer a nominal GDP target. Nominal GDP targeting (a) does not require policymakers to determine whether current economic fluctuations are demand‐driven or supply‐driven nor does it require real‐time estimates of the output gap, (b) automatically prevents the central bank from exacerbating supply shocks, and (c) leads to greater financial stability. Finally, I make the case for targeting the level, rather than the growth rate, of nominal GDP. Doing so prevents the path of nominal GDP from deviating arbitrarily far from its intended growth path, which anchors expectations and aids in long‐run economic decision‐making.

Modelling a financial literacy strategy as a life project concept

Financial literacy as a key element of ensuring sustainability and stability of economic systems is becoming important in the process of economic development. Financial literacy contributes to improving the well-being of citizens and the efficiency of financial resource management at the macro level. Thus, the purpose of the present study was to develop models for evaluating the effectiveness of various financial literacy strategies and their impact on the formation of life projects. A complex of scientific methods, including the analysis of statistical data and modelling of financial behaviour, was used to create a strategic model of financial literacy as a concept of a life project. A methodological approach, encompassing the decomposition of the stages of a person’s life and the identification of the peculiarities, connected with the use of money at each of these stages, was implemented in the research. Approaches to financial literacy focused on various forms of interaction with financial resources were suggested, and effective strategies for improving financial literacy were identified. The concept of financial literacy was examined and specified through the lens of knowledge, skills, and confidence for making responsible financial decisions. The advantages and disadvantages of developing financial literacy in Ukraine were identified, and examples of successful strategies of leading countries were provided. The importance of financial education at different stages of a person’s life was substantiated; the key periods of a person’s life and development, when money can act as earnings, expenses, accumulation, preservation, and transfer, were specified. The assessment of the influence of financial literacy on economic behaviour was carried out, and a life project model that takes into account financial decisions and actions was developed. Monetary models of preservation and accumulation of parental income, pocket money, and earnings from employment were considered in detail. The results of this study can be applied in practice when creating a state strategy aimed at increasing the level of financial literacy of the population and ensuring economic security

The Monetary Model of Exchange Rate Determination for South Africa

The disconnect between the exchange rate and its macroeconomic fundamentals has been extensively discussed in the literature. It nonetheless continues to pose theoretical and empirical challenges in the literature. This study examines the relationship between the exchange rate and its fundamentals. This study used the monetary model of exchange rate determination developed in the 1970s. The study used the TAR to estimate the exchange change rate behaviour in response to variations in monetary variables. We found that the exchange rates respond to the interest rate differential, consistent with the predictions of the monetary model of exchange rate determination. Furthermore, in all the regimes, the sizes of coefficients are different, which shows that the exchange rate behaviour is non-linear (asymmetric). While the impact of the interest rate differential in regime 1 and 2 leads to exchange rates appreciating although in regime 2 the results are insignificant, this occurs when the exchange rates fluctuate below 0.87 percentage points. In regime 3, on average, a marginal increase in interest rate deferential leads to an exchange rate depreciation. In some instances, the exchange rates respond to the monetary variables’ changes in line with the predictions of the monetary theory of exchange rate determination. An increase in interest rates in some instances leads to an improvement in the value of the exchange rate. However, the conditions are not constant—they vary depending on the state of exchange rate fluctuation.

A unified approach to determinacy conditions with regime switching

The conditions that ensure the existence of a unique stable equilibrium — determinacy conditions — for rational expectations models with Markov switching depend on the stability concept, contrasting with standard linear rational expectations models. In this paper, we offer a unified framework for the two commonly used stability concepts: boundedness and mean-square stability. We derive determinacy conditions for both concepts based on simple metrics. Qualitatively, we show that mean-square stable solutions are always at least as many as bounded solutions. We then apply and discuss our results in two monetary models.

Inflation targeting, output stabilization, and real indeterminacy in monetary models with an interest rate rule

AbstractCentral banks set the nominal interest rate to target inflation and stabilize output. In monetary models, monetary policy affects output directly via the wealth effect. I show that in these models, the response of the central bank to fluctuations in output may induce real indeterminacy even if the Taylor principle is satisfied. I find that the determinacy conditions depend on the interest elasticity of output and generally, the Taylor principle is neither necessary nor sufficient for determinacy. This is in stark contrast with the New Keynesian model where a sufficiently strong policy response to inflation or output usually ensures determinacy.

Wealth dynamics in a multi-aggregate closed monetary system

In this work we examine the statistical properties of a closed monetary economy with multi-aggregates interactions. Building upon Yakovenko’s single-agent monetary model (Dragulescu and Yakovenko, 2000), we investigate the joint equilibrium distribution of aggregate size and wealth. By comparing theoretical and simulated data, we validate our findings and investigate the influence of both micro dynamics and macro characteristics of the system on the distribution. Additionally, we analyze the system’s convergence towards equilibrium under various conditions. Our laboratory model may offer valuable insights into macroeconomic phenomena allowing to reproduce typical wealth distribution features observed in real economy.

A monetary model of global peace and health

BackgroundThis study aims to expand on the concept of peace and health by drawing from Keynes' theory of the economic consequences of peace, in light of the global pandemic experienced in 2020 due to COVID_19.MethodsIn this paper, I will elaborate on the concept of ‘security’, as an indicator of peace in the time of biological shocks, in order to expand the definition of Keynesian precautionary motivation. This puts forth a new monetary policy model developed to make contributions to achieving global peace. In so doing, I will calculate the optimal growth rate of discount rate through utilizing the Global Peace Index (GPI), adjusted by the Case Fatality Risk (CFR) of COVID-19 in a dynamic shopping time monetary model. This analysis is comprised of the top 15 GDP countries as well as the 10 most and least peaceful countries in 2020.ResultsThe results indicate that households in more peaceful and healthy countries tend to hold less money compared to those in less peaceful and healthy countries. Besides, the discount rate needs to be reduced due to the outbreak of COVID-19 and the decrease in the level of peace in the economy.ConclusionInsofar as the imposition of fines through international legal circles on countries with an insignificant health and peace policy will increase the cost of liquidity, other alternative methods of financing will be affor dable for the countries.

Heterogeneous beliefs with information processing capacity constraints and asset pricing in a monetary economy

This paper proposes a monetary model to explore the influences of heterogeneous beliefs and information processing capacity constraints on the dynamics of asset prices. The capacity constraints not only influence the estimations of the capacity constrained investor, but also generate persistent disagreements among the investors. The model implies that reducing the levels of capacity constraints can alleviate the influences of heterogeneous beliefs and helps to stabilize financial markets. The model also reveals that introducing heterogeneous beliefs about both real and nominal sectors not only leads the stock with low monetary policy exposure to have significantly higher average return than the stock with high monetary policy exposure, but also can explain the mixed results about the relationship between the volatility and the risk premium of the aggregate stock market.

БИЗНЕС ЦИКЛЫ, АНТИКРИЗИСНАЯ ПОЛИТИКА И ИНФЛЯЦИЯ (СРАВНИТЕЛЬНЫЙ АНАЛИЗ)

The purpose of this article, within the framework of cyclical fluctuations in the global economic situation, is to consider the two largest crises of our time - the global crisis of 2007-2009 and the crisis of 2019- 2021. The comparative analysis of their depth and consequences was carried out Common features and their specifics were identified in various groups of countries based on the economic indicators of Russia, the USA and the European Union. Anti-crisis policy measures, the use of fiscal instruments and monetary regulation are considered, and their effectiveness is compared. An analysis of anti-crisis steps showed that, despite the commitment of the governments of some countries to the monetary model of regulation, the time has come when objective economic reasons force them to use the tools of the neo-Keynesian model. Signs of a change in political course towards strengthening state participation in the economy are considered to solve structural problems that are deepening crises, and to overcome the protracted stagnation.

A Monetary Model of Unit of Account

A Monetary Model of Unit of Account

Litigation risk assessment: a novel quantitative recency–frequency–monetary model

Litigation risk assessment: a novel quantitative recency–frequency–monetary model

Digital currency and privacy

We develop a monetary model in which a private company issues digital currency and uses payment data to estimate consumers' preferences. Sellers purchase preference information to produce goods that better match consumers' preferences. A monopoly arises in the digital currency industry, and digital currency is not issued if the inflation rate is sufficiently high. Due to reinforcing interactions between the value of preference information and trade volume, multiple equilibria (with and without digital currency) can exist, depending on market structures for monetary exchanges. When left to market forces alone, socially efficient uses of payment data may not occur.

Pengujian dan Pemilihan Model Neraca Pembayaran Indonesia Dengan Uji Non-Nested

This research has the purpose of analyzing the Indonesian Balance of Payments by tracing international reserves based on Keynesian and Monetary theory. This research uses using ECM data analysis technique to see short run and long-run relation of macroeconomic variables to international reserve changes and a nested test to see the causality inter variables. The result of data analysis using the ECM technique on Keynesian and Monetary models shows a significant ECT value. This value means that according to the Keynesian model, it will take around a quarter for the adjusting process to attain a new equilibrium on the international reserve, while according to the Monetary model, it will take around six quarters or one and a half years. Based on the non-nested test, it is found that the Monetary model is fitter than the Keynesian model in analyzing Indonesian Balance of Payments behavior

Design of Prediction Model using Data Mining for Segmentation and Classification Customer Churn in E-Commerce Mall in Mall

The classification of churn is driven by the potential risks e-commerce companies face, such as losing customers who discontinue their service usage or churn. Marketing specialists have shifted their efforts from acquiring new customers to retaining existing ones in order to mitigate customer churn. Predictive models are created using data mining techniques to identify customer churn patterns. This study proposes a data mining model aimed at predicting customer behavior, with the processed results utilized as suggestions for improvements and company strategies in customer retention through segmentation and classification. Segmentation and classification involve several variables: Session, Interaction with Application, Actions taken during the interaction, purchasing, claim, and discount. This study employs a clustering technique based on the Recency, Frequency, and Monetary (RFM) model, which considers factors such as the time since the last visit, the number of visits, and the total amount spent by the customer. The classification algorithm model was evaluated by comparing three classification algorithms: decision tree and Support Vector Machine (SVM). The decision tree algorithm had the highest accuracy, achieving an impressive 87% accuracy rate in customer classification. Factors influencing customer churn include purchasing behavior, session activity, claim feature utilization, adding products to cart, and discounts. Improving stock management is crucial to prevent stock shortages, likely to cause churn. Additional measures like sending emails/notifications and offering vouchers/loyalty points can be implemented for customers who added products to their carts but didn't complete the purchase, with a focus on popular products.