Monetary Policy Behavior Research Articles

Monetary policy in advanced and emerging economies

Abstract We are motivated by central bank responses to the rise in inflation in the aftermath of the coronavirus pandemic and investigate monetary policy behavior in advanced and emerging economies. We speak to the debate on whether the conduct of monetary policy in emerging economies is fundamentally different from that in advanced economies. We also address the issue of whether the common practice of using market rates (instead of policy rates) to proxy for the stance of monetary policy leads to different conclusions regarding the cyclicality of monetary policy in emerging economies. Using time series data for the G7 and EM7 countries, we show that the conventional wisdom that monetary policy in emerging economies is different from monetary policy in advanced economies still holds.

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.

Is the monetary policy behaviour of the South African Reserve Bank nonlinear

In spite of the apparent asymmetry in monetary policy behaviour, monetary policy rule exposition continues to be carried out in the linear context. The burgeoning literature on nonlinear monetary policy rules fail to capture nonlinearity appropriately, putting the precision and accuracy of such estimates in doubt for policy purposes. With the aid of sample splitting and threshold estimation technique, the current study considers the monetary policy behaviour and responses of the South African Reserve Bank (SARB) in the Taylor rule context. The chosen technique delivers a threshold estimate after 5,000 bootstrap replications with confidence intervals based on asymptotic theory devoid of nuisance parameters. The study finds nonlinear Taylor rule to adequately capture the policy behaviour of the SARB with threshold inflation of 5.2% and asymmetric responses below and above this threshold.

Is the monetary policy behaviour of the South African Reserve Bank nonlinear

In spite of the apparent asymmetry in monetary policy behaviour, monetary policy rule exposition continues to be carried out in the linear context. The burgeoning literature on nonlinear monetary policy rules fail to capture nonlinearity appropriately, putting the precision and accuracy of such estimates in doubt for policy purposes. With the aid of sample splitting and threshold estimation technique, the current study considers the monetary policy behaviour and responses of the South African Reserve Bank (SARB) in the Taylor rule context. The chosen technique delivers a threshold estimate after 5,000 bootstrap replications with confidence intervals based on asymptotic theory devoid of nuisance parameters. The study finds nonlinear Taylor rule to adequately capture the policy behaviour of the SARB with threshold inflation of 5.2% and asymmetric responses below and above this threshold.

Monetary policy in liberalized financial markets: the Mexican case*

The paper examines the behavior of monetary policy and the institutional organization of economic policy in Mexico during the years of financial liberalization and the outgrowth of the financial industry. It argues that these policies have favored monetary and financial stability at the cost of reducing investment and negatively affecting the strength of the productive structure and the international competitiveness of the economy. The paper argues that such negative results, with the passage of time, increase the odds that current monetary policy will become unable to pursue monetary and financial stability. Unlike other outstanding critical literature, the emphasis of our evaluation regarding current policy's negative consequences is on the reduction of public investment that the institutional organization of economic policy has produced, instead of the overvaluation of the real exchange rate. As a final point, the paper discusses how institutional organization can be reformed to avoid further weakening of the productive structure and international competitiveness of the Mexican economy.

Estimating bank of Ghana’s policy responses in the context of Taylor rule: Is the inflation target realistic?

Although literature acknowledges the nonlinearity in monetary policy behaviour of central banks, the appropriateness of the models used to capture the nonlinearity remains questionable. Moreover, t...

Inflation targeting and financial conditions: UK monetary policy during the great moderation and financial crisis

In this paper, we investigate the interest rate setting behaviour of the Bank of England (BoE) over the 16 year period covering both the Great Moderation and the 2008−9 Global Financial Crisis and Great Recession. We contribute to the literature by using the BoE’s own inflation projections in our estimations. Also, we develop a novel measure of the output gap to encapsulate the array of real variables that the Monetary Policy Committee of the BoE reviews. In order to assess the BoE’s responsiveness to financial markets, we estimate a new financial conditions index that covers a wide range of financial indicators that feature in the Inflation Report. Our study provides some new insights into the BoE’s monetary policy behaviour. We show that the BoE was concerned not only with price stability but also output, employment and financial conditions during the Great Moderation. In contrast to previous studies, we find that the BoE responds relatively less to financial conditions and relatively more to inflation projections when the 2008−9 Global Financial Crisis and Great Recession period is included.

Predicting Monetary Policy Using Artificial Neural Networks

This paper analyses the forecasting performance of monetary policy reaction functions using U.S. Federal Reserve's Greenbook real-time data. The results indicate that artificial neural networks are able to predict the nominal interest rate better than linear and nonlinear Taylor rule models as well as univariate processes. While in-sample measures usually imply a forward-looking behaviour of the central bank, using nowcasts of the explanatory variables seems to be better suited for forecasting purposes. Overall, evidence suggests that U.S. monetary policy behaviour between 1987-2012 is nonlinear.

Macro Monetary Policy and Micro Corporate Behavior

The process of monetary policy transmission can be understood as a “macro policy stimulus-microeconomic response-macro output” process, that is, from the process of macro monetary policy control affecting macro output, micro Economies (businesses, households, individuals, etc.) have played a decisive role in responding to monetary policy changes. As early as 1963, scholar Tobin pointed out that corporate asset allocation is a direct reflection of corporate behavior, so it is also of great significance to explore the role of corporate financial asset allocation in the impact of monetary policy on corporate performance. This article reviews the impact of monetary policy on corporate investment and financing behavior, and reviews past research to show the impact of monetary policy on corporate financial behavior.

Analysis of the Impact of China’s GDP Data Revision on Monetary Policy from the Perspective of Uncertainty

ABSTRACT Based on the uncertainty brought about by the revision of GDP data, this article calculates the revision effect of GDP data uncertainty from 2000 to 2017 in China, analyzes the implications of GDP revision on output gap estimation, and estimates the effect of this uncertainty on monetary policy. The main results show the following: (1) GDP data revision indeed leads to noticeable uncertainty in the measured GDP and its growth rate in China. (2) The effect of data revision on the output gap shows a downward trend, and the results of the QT filter are most robust among the methods. (3) Controlling the uncertainty of the output gap model to a certain extent, the synchronism and forward-looking Taylor rules can describe China’s monetary policy behavior, while considering the uncertainty of data, the synchronism Taylor rules perform best. The above conclusions have practical reference and policy implications.

Inflation Dynamics and Impact of Demand and Supply Shocks:Evidence from India

This present article tries to comprehend the dynamics of inflation with respect to both core and headline measures of inflation. To understand the dynamic movement in both the measures of inflation, first core inflation is calculated using the traditional exclusion measure (excluding food and energy), and statistical measure using the trimmed mean approach by considering monthly Combined Consumer Price Index (CPI) y-o-y cross-sectors headline distribution of data from January 2012 and December 2018. Next, a comparative study is attempted to know the reaction of both core and headline inflation measures to different demand and supply shocks by the Structural Vector Autoregressive Techniques. Based on empirical analysis, it is proved that 20 per cent trimming of the extremely volatile components from the headline inflation can be considered as a better proxy for core inflation series. Core inflation series by trimming 20 per cent has the better predictive ability for the underlying trend in the overall inflation. In addition, empirical findings further show that core inflation is more responsive to demand shocks, suggesting that core inflation is mostly affected by real economic activity whereas the fluctuation in headline inflation, on the other hand, is more explainable by supply side factors in India. It is much more volatile. Thus, considering headline inflation in the decision making process of the monetary policy in the determination of policy rates can contribute to biasness and hence affect the long term objective of inflation targeting. Variations in core inflation are more observed due to monetary policy behaviour and hence making it an important component in the policy decision making.

The impact of monetary and tax policy on income inequality in Japan

AbstractThis paper assesses the effects of the most recent monetary policy behaviour of the Bank of Japan (in particular, zero interest rate policy and negative interest rate policy) and Japanese tax policy on income inequality in this country during the period of 2002Q1 to 2017Q3. The vector error correction model (VECM) that develops in this research shows that increase in money stock (m1) through Quantitative Easing (QE) and Quantitative and Qualitative Easing (QQE) policies of theBOJsignificantly increases the income inequality. On the contrary, Japanese tax policy was effective in reducing the income inequality. Variance decomposition results show that increasing of income inequality by monetary policy is larger when comparing to decreasing effects of tax policy on income inequality. Cointegration andVECMresults show that monetary policy has both short‐run and long‐run impacts but for tax policy paper could not find any significant short‐run impact on income inequality. In addition, paper found that technological progress only in long‐run can reduce the income inequality by increasing the marginal productivity of labour with positive impacts on employment and wages.

Analysing the spillover of inflation in selected Euro-area countries

We examined the spillover of inflation in selected Euro-area countries using monthly consumer price index (CPI) based inflation data covering the period 1955M1 to 2017M4. To achieve our objective, we used two recently developed methods of spillover: a time-domain spillover method, Diebold–Yilmaz (hereafter referred as DY method) and a frequency-domain method, Barunik–Krehlik (hereafter referred as BK method). We analysed 1–4 months and more than 4 months spillovers. The study has importance because the co-movement in the international inflation rates, among others, may be produced by common shocks, similarities in central bank reaction functions, international trade and the operation of purchasing power parity theory. However, to assess the synchronisation of inflation fluctuations across countries or regions, it is critical to understand the inflation behaviour and formulation of correct monetary policy.

Fiscal and Monetary Policy: Coordination or Conflict?

ABSTRACTThis paper examines the interaction between monetary and fiscal policies. Using annual panel data covering the period from 1991 to 2016 for 42 countries, it characterizes the cyclical behavior of monetary and fiscal policy, distinguishing countries by institutional characteristics and policy frameworks. It also applies heterogeneous structural panel VAR methodology to quarterly data from a subset of these countries to assess the response to aggregate demand shocks. The main finding is that central bank independence and inflation targeting are associated with more countercyclical monetary and fiscal policies and an increased degree of coordination between the two.

Monetary Policy and Cyclical Systemic Risk - Friends or Foes?

We explore the procyclicality of monetary policy decisions towards the financial cycle in the 1995-2015 period on a sample of seven central banks. Using the real interest rate gap and the credit-to-GDP gap, we provide evidence that monetary policy procyclicality is a material issue occurring in more than 50% of observations in expansionary phase of financial cycle. It indicates that the central bank faces conflicting objectives of price and financial stability (as proxied by cyclical systemic risk). Nevertheless, taking into consideration all financial cycle phases, complementariness between price and financial stability is more frequent than cases with conflicting objectives in the UK, Euro Area and the US. The occurrence of potential procyclical behaviour of monetary policy (especially in the financial cycle expansion phases) underlines the need for proactive macroprudential policy.

Regional Effects Of Monetary Policy On Economic Growth Of Ecowas: An S-Var Approach

The debate on the nexus between monetary policy and economic growth has become an on-going and interesting one both in the academia and among policy makers. More importantly is the relationship based on regional or monetary union, which has not received much attention especially in sub-Saharan Africa as against the much developed economies. In this paper, the Structural-Vector Auto Regressive (S-VAR) model was employed to investigate the interactions between some selected economic variables and growth in the Economic Community of West Africa (ECOWAS) monetary union from 1980:Q1-2015:Q4. These variables are oil price and commodity price volatilities, net domestic credit, inflation rate, exchange rate, money supply, monetary policy and gross domestic product growth rate. To start with, the study tested for the presence of unit roots in order to ensure the stationarity of variables. This was followed by the confirmation of long run relationship among the variables, using the Panel ARDL model. The result of the eight S-VAR variables reveals that oil and commodity price volatilities constitute important exogenous disturbances to monetary policy. The medium through which this works is the exchange rate; and from exchange rate to money supply. Finally, this effect is passed on from money supply to the growth rate of the gross domestic product. In addition, the Impulse Response Analysis and Variance Decomposition outcomes show exchange rate to be playing dominant role in determining the behavior of monetary policy within the ECOWAS region. In this regard, the supply of money is the major transmitter of all the interactions to the growth rate of the gross domestic product as it dictates the behavior of the GDP growth rate more than other variables in the S-VAR model. One policy implication from the results of this study is that the recent monetary policy tightening in most of the ECOWAS countries to mitigate the rise in inflation rate may adversely affect economic growth of the region. This is because investment may be discouraged as a result of high lending rate. Not only that, any monetary shock especially in terms of the exchange rate could have adverse symmetric effect on the economies of the region.

Nonlinearities, smoothing and countercyclical monetary policy

Empirical analysis of the Fed’s monetary policy behavior suggests that the Fed smooths interest rates– that is, the Fed moves the federal funds rate target in several small steps instead of one large step with the same magnitude. We evaluate the effect of countercyclical policy by estimating a Vector Autoregression (VAR) with regime switching. Because the size of the policy shock is important in our model, we can evaluate the effect of smoothing the interest rate on the path of macro variables. Our model also allows for variation in transition probabilities across regimes, depending on the level of output growth. Thus, changes in the stance of monetary policy affect the macroeconomic variables in a nonlinear way, both directly and indirectly through the state of the economy. We also incorporate a factor summarizing overall sentiment into the VAR to determine if sentiment changes substantially around turning points and whether they are indeed important to understanding the effects of policy.

Uncovered Interest Rate Parity: The Turkish Evidence

AbstractThis paper presents an empirical investigation of the uncovered interest parity (UIP) between the Turkish Lira (TRY)/US Dollar (USD) and Turkish Lira/Euro (EUR). Our results do not provide evidence supporting the UIP hypothesis for either case. Moreover, the estimates imply causality from the TRY/USD exchange rate return to the interest rate differential. Accordingly, the Turkish Central Bank (CBRT) may respond by increasing the domestic interest rate to a depreciation of the TRY against the USD . By taking this type of action, it can be concluded that the CBRT tried to control capital movements. This result supports (McCallum, Bennett T. 1994. “A Reconsideration of the Uncovered Interest Parity Relationship.”Journal of Monetary Economics33 (1): 105–132.)’s argument, which advances the behavior of the monetary policy as a reason for the failure of the UIP condition.

Optimal monetary policy revisited: does considering US real-time data change things?

ABSTRACTThe primary goal of this article is to investigate whether properly modelling real-time data and optimal real-time decision-making of a monetary planner provides new insights into monetary policy behaviour and outcomes. This article extends a variant of the asymmetric preference model suggested by Ruge-Murcia to investigate the use of real-time data available to policymakers when making their decisions and revised data which more accurately measure economic performance, but is only available much later. In our extended model, the central banker targets a weighted average of revised and real-time inflation together with a weighted average of revised and real-time output. Moreover, we allow for an asymmetric central bank response to real-time data depending on whether the unemployment rate is high or low. Our model identifies several new potential sources of inflation bias due to data revisions. Our empirical results suggest that the Federal Reserve Bank focuses on targeting revised inflation during low unemployment periods, but it weighs heavily real-time inflation during high unemployment periods. The inflation bias due to data revisions is comparable in magnitude to the bias from asymmetric central banker preferences with the bias being somewhat larger during high unemployment.

Macroeconomic Switching Regimes and Monetary Policy in Canada

This study examines the behaviour of monetary policy in Canada over the last 40 years using a Markov-switching VAR model of the macroeconomy. The Markov-switching estimates capture three continuous regimes that are interpreted as the ‘surprise’ regime from 1972Q1 to 1982Q2, the ‘recovery’ regime from 1982Q3 to 1991Q3 and the ‘target’ regime from 1991Q4 to 2014Q4. Monetary policy multipliers for the output gap are greater than one for all three regimes, suggesting that the central bank does not accommodate any expected changes in inflation over the long-run due to the domestic relationship between the output gap and future inflation. The long-run multipliers for inflation are equal to one in the surprise and recovery regimes, indicating that monetary policy also responds to offset inflation shocks. Overall, the policy multipliers and impulse response functions indicate a proactive central bank that responds systematically to movements in the output gap in order to control expected future inflation and to inflation surprises in the three regimes. The regime-dependent behaviour of monetary policy indicates a central bank pursuing an implicit form of inflation targeting as a means of achieving a nominal anchor for policy. The implicit inflation tar­gets are consistent with historical episodes of inflation in Canada over the past 40 years.