Monetary Policy Coordination Research Articles

International monetary policy spillovers: Evidence from a time-varying parameter vector autoregression

This study examines the transmission of international monetary policy spillovers across developed economies based on a Bayesian time-varying parameter vector autoregressive (TVP-VAR) connectedness methodology. The analysis is based on daily shadow short rates over the period of January 2, 1995 to December 20, 2018. The empirical findings suggest that the magnitude of international monetary policy spillovers behaves heterogeneously over time, with unprecedented heights reached during the Great Recession of 2009, suggesting potential gains from unconventional monetary policy coordination. In addition, the results indicate that the dominant transmitters of international monetary policy spillovers are the Euro Area and the US, while Japan and the UK are the dominant receivers of spillovers. Our results are robust to alternative experimentations in terms of estimation and prior choices used to estimate the TVP-VAR.

Dominant-Currency Pricing and the Global Output Spillovers from U.S. Dollar Appreciation

Different export-pricing currency paradigms have different implications for a host of issues that are critical for policymakers such as business cycle co-movement, optimal monetary policy, optimum currency areas and international monetary policy coordination. Unfortunately, the literature has not reached a consensus on which pricing paradigm best describes the data. Against this background, we test for the empirical relevance of dominant-currency pricing (DCP). Specifically, we first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, producer-currency pricing (PCP) and local-currency pricing (LCP). In the model, under DCP the output spillovers from shocks that appreciate the U.S. dollar multilaterally decline with an economy's export-import U.S. dollar pricing share differential, i.e., the difference between the share of an economy's exports and imports that are priced in the dominant currency. Underlying this prediction is a change in an economy's net exports in response to multilateral changes in the U.S. dollar exchange rate that arises because of differences in the extent to which exports and imports are priced in the dominant currency. We then confront this prediction of DCP with the data in a sample of up to 46 advanced and emerging-market economies for the time period from 1995 to 2018. Specifically, controlling for other cross-border transmission channels, we document that consistent with the prediction from DCP the output spillovers from U.S. dollar appreciation correlate negatively with recipient economies' export-import U.S. dollar invoicing share differentials. We document that these findings are robust to considering U.S. demand, U.S. monetary policy and exogenous exchange rate shocks as a trigger of U.S. dollar appreciation, as well as to accounting for the role of commodity trade in U.S. dollar invoicing.

International Monetary Policy Coordination through Communication: Chasing the Loch Ness Monster

We empirically examine international monetary policy coordination. We use the Global Economy Meetings (GEMs) at the Bank for International Settlements (BIS) to design a novel empirical identification strategy. We find that communication between the central bank governors at the BIS GEMs promotes policy coordination.

Monetary and macroprudential policy coordination among multiple equilibria

The notion of a tradeoff between output and financial stabilization is based on monetary-macroprudential models with unique equilibria. Using a game theory setup, this paper shows that multiple equilibria lead to qualitatively different results. Monetary and macroprudential authorities have tools that impose externalities on each other’s objectives. One of the tools (macroprudential) is coarse, while the other (monetary policy) is unconstrained. We find that this asymmetry always leads to multiple equilibria, and show that under economically relevant conditions the authorities prefer different equilibria. Giving the unconstrained authority a weight on “helping” the constrained authority (“leaning against the wind”) now has unexpected effects. The relation between this weight and the difficulty of coordinating is hump-shaped, and therefore a small degree of leaning worsens outcomes on both authorities’ objectives.

The global factor in neutral policy rates: Some implications for exchange rates, monetary policy, and policy coordination

AbstractThis paper highlights some of the theoretical and practical implications for monetary policy and exchange rates that derive specifically from the presence of a global general equilibrium factor embedded in neutral real policy rates in open economies. Using a standard two‐country Dynamic Stochastic General Equilibrium (DSGE) model, we derive a structural decomposition in which the nominal exchange rate is a function of the expected present value of future neutral real interest rate differentials plus a business cycle factor and a purchasing power parity (PPP) factor. Country‐specific “r*” shocks in general require optimal monetary policy to pass these through to the policy rate, but such shocks will also have exchange rate implications, with an expected decline in the path of the real neutral policy rate reflected in a depreciation of the nominal exchange rate. We document a novel empirical regularity between the equilibrium error in the Vector Error Correction Model (VECM) representation of the empirical Holston, Laubach, and Williams (HLW) four‐country r* model and the value of the nominal trade weighted dollar. In fact, the correlation between the dollar and the 12‐quarter lag of the HLW equilibrium error is estimated to be 0.7. Global shocks to r* under optimal policy require no exchange rate adjustment because passing though r* shocks to policy rates “does all the work” of maintaining global equilibrium. We also study a richer model with international spillovers so that in theory there can be gains to international policy cooperation. In this richer model, we obtain a similar decomposition for the nominal exchange rate, but with the added feature that r* in each country is a function of global productivity and business cycle factors even if these factors are themselves independent across countries. We argue that in practice, there could well be significant costs to central bank communication and credibility under a regime of formal policy cooperation, but that gains to policy coordination could be substantial given that r*s are correlated across countries.

The Global Factor in Neutral Policy Rates: Some Implications for Exchange Rates, Monetary Policy, and Policy Coordination

This paper highlights some of the theoretical and practical implications for monetary policy and exchange rates that derive specifically from the presence of a global general equilibrium factor embedded in neutral real policy rates in open economies. Using a standard two country DSGE model, we derive a structural decomposition in which the nominal exchange rate is a function of the expected present value of future neutral real interest rate differentials plus a business cycle factor and a PPP factor. Country specific “r*” shocks in general require optimal monetary policy to pass these through to the policy rate, but such shocks will also have exchange rate implications, with an expected decline in the path of the real neutral policy rate reflected in a depreciation of the nominal exchange rate. We document a novel empirical regularity between the equilibrium error in the VECM representation of the empirical Holston Laubach Williams (2017) four country r* model and the value of the nominal trade weighted dollar. In fact, the correlation between the dollar and the 12 quarter lag of the HLW equilibrium error is estimated to be 0.7. Global shocks to r* under optimal policy require no exchange rate adjustment because passing though r* shocks to policy rates ‘does all the work’ of maintaining global equilibrium. We also study a richer model with international spill overs so that in theory there can be gains to international policy cooperation. In this richer model we obtain a similar decomposition for the nominal exchange rate, but with the added feature that r* in each country is a function global productivity and business cycle factors even if these factors are themselves independent across countries. We argue that in practice, there could well be significant costs to central bank communication and credibility under a regime of formal policy cooperation, but that gains to policy coordination could be substantial given that r*’s are unobserved but are correlated across countries.

Financial Stability and Sustainability under the Coordination of Monetary Policy and Macroprudential Policy: New Evidence from China

After the financial crisis, financial stability and sustainability became key to global economic and social development, and the coordination of monetary policy and macroprudential policy plays a crucial role in maintaining financial stability and sustainability. This paper provides a theoretical analysis and empirical evidence from China on the impact of monetary policy and macroprudential policy coordination on financial stability and sustainability. We collect data from 2003 to 2017; from the micro level, we use the System Generalized Method of Moments (System GMM) method to analyze the monetary policy and macroprudential policy coordination effect on 88 commercial banks’ risk-taking; from the macro level, we use the Structural Vector Autoregression (SVAR) method to analyze the two policies coordination effect on housing prices and stock price bubbles. The conclusions are as follows: firstly, for regulating bank risk-taking, monetary policy and macroprudential policy should conduct counter-cyclical regulation simultaneously; secondly, for regulating housing prices, tight monetary policy and tight macroprudential policy should be implemented alternately; thirdly, for regulating stock price bubbles, macroprudential policy should be the first line of defense and monetary policy should be the second one.

The Implementation Model of a Consensual Refnancing Rate for the BRICS Countries

The relevance of the research subject is due to the fact that countries look for adaptive approaches to the turbulence of the international monetary system (IMS). The approaches of the BRICS countries to the IMS transformation have been fully studied in the economic literature. However, there are no researches on foundation of an advanced central bank as an alternative supranational monetary institution in the new international fnancial architecture. The article objective is to develop a mechanism for setting up the refnancing rate for the BRICS countries in case of the integration hypothesis the currency union, and the lender of last resort and the general unit of accounts. A liberal pricing method has been used to create the model. There is a hypothesis that the refnancing rate should be set at a higher level than that of the People’s Bank of China’s and lower than that of Brazil, Russia, India and South Africa’s, since it has comparative advantages in crediting. The mechanism of the consensual rate of the BRICS countries is based on the assumption that the amount of money in circulation may vary by an amount that does not cause negative consequences for national economies. The fundamental difference between the results of this study is in optimization of the credit resources flow, which implies their distribution within certain limits and in several stages. The main provisions indicate that the optimal rate may provide a background for the coordination of monetary policies in the BRICS countries within the Central bank. The practical relevance of the model is that it can be used to establish the refnancing rate in the BRICS countries. The model suggests that the optimal crediting value in the BRICS countries should ft the GDP growth limits. To conclude, the optimal refnancing rate is a key issue in forming a monetary union and a common currency in the BRICS countries.

Sectoral inflationary dynamics: cross-country evidence on the open-economy New Keynesian Phillips Curve

This paper empirically evaluates the significance of domestic and external factors on two-digit sectoral inflation dynamics in a sample of OECD countries using open-economy New Keynesian Phillips Curve models. It focuses on the independent impacts of imported consumption goods and intermediate inputs on sectoral inflation dynamics to investigate whether there is a systematic relationship between the extent of production integration and estimated sensitivities. The study begins with a formal analysis to show in which channels consumption goods and intermediate inputs affect inflation in the open-economy NKPC models. Then it employs the Prais-Winsten regression heteroskedastic panels corrected standard errors (PCSE) approach, rather than the GMM, to overcome various covariation issues in the empirical analysis. The results suggest that both domestic and external factors play significant roles in inflation dynamics. Impacts vary across sectors depending on the degree of integration into the global value chains and the nature of trade matters in detecting the appropriate trade effects on inflation. These results are of interest to policymakers since the heterogeneity in price-setting behavior among sectors complicates the monetary policy transmission mechanism. The finding that inflation dynamics is jointly determined by domestic and external factors necessitates coordination of domestic monetary policy and trade, as well as industrial policies. Trade and industrial policies need to be sector-specific and designed to improve competition in domestic and international markets to enhance the effectiveness of monetary policies.

The Redistributive Effects of Monetary Policy: Evidence from a Century of Modern Economic History

This paper examines the distributional implications of monetary policy from a long-run perspective, with data spanning 100 years of modern economic history in 12 advanced economies. We employ a two-step approach, by estimating a Panel VAR and a single-equation model with local projections, to obtain the dynamic responses of the top 1% income share to a monetary policy shock. We exploit the implications of the macroeconomic policy trilemma, in order to identify exogenous variations in monetary conditions. This offers a genuine orthogonal perspective to capture fluctuations in short term interest rates unrelated to home economic conditions. The obtained results indicate that expansionary monetary policy strongly increases income inequality and vice-versa. These results have important implications for monetary policy coordination and the design of economic policies that aim to reduce income inequality.

The quest for global monetary policy coordination

Abstract This paper puts forward a proposal to help monetary policies confront the challenge of the “normalisation” of money creation and interest rates. The difficult unwinding of years of unorthodox policies put financial stability at risk in major monetary centres and in EMEs. The authors argue that global coordination is crucial to facing this challenge. They propose to convene appropriate official meetings to coordinate in an explicit, formal, and wellcommunicated way the process of normalisation and the discussions on the needed longterm changes in the strategy and institutional setting of monetary policies.

Основные приоритеты национальной экономики Азербайджанской Республики в условиях рыночной экономики

The article notes that in achieving socio-economic goals they were guided by the principles of effective government regulation, which ensured perfect competition in a market economy, transforming into an export-oriented economy, which will allow rational use of energy, which creates high added value. Thus, improving the competitiveness of the national economy, based on certain areas, allows you to achieve protection of macroeconomic stability, which will strengthen the coordination of monetary and fiscal policy. At the same time, the improvement of the business environment and the support of private initiative, the development of the financial services market, make it possible to improve foreign trade and investment policies.

Režim deviznog kursa u službi privrednog razvoja - primer Srbije, Crne Gore i Bosne i Hercegovine

The main objective of the economic policy of all countries is to simultaneously achieve internal and external balance, while giving priority to one of the objectives, depending on the current circumstances of economic development. High inflation rates in most developing countries have resulted in the establishment of price stability as the primary long-term goal of monetary policy. Although coordination of monetary and fiscal policy is necessary in order to achieve the goals of economic policy, the consensus between economists and politicians about the significant role of monetary policy in achieving goals has been reached. The aim of this paper is a comparative analysis of the efficiency of various exchange rate regimes in the countries of former Yugoslavia - Serbia, Montenegro and Bosnia and Herzegovina through the integration of monetary and real macroeconomic indicators. After presenting the theoretical foundations of the exchange rate regime applied in these countries, statistical analysis of selected macroeconomic indicators will lead to a comparative analysis of their efficiency.

Dominant-Currency Pricing and the Global Output Spillovers from Us Dollar Appreciation

Different export-pricing currency paradigms have different implications for a host of issues that are critical for policymakers such as business cycle co-movement, optimal monetary policy, optimum currency areas and international monetary policy co-ordination. Unfortunately, the literature has not reached a consensus on which pricing paradigm best describes the data. Against this background, we test for the empirical relevance of dominant-currency pricing (DCP). Specifically, we first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, producer-currency pricing (PCP) and local-currency pricing (LCP). In the model, under DCP the output spillovers from shocks that appreciate the US dollar multilaterally decline with an economy’s export-import US dollar pricing share differential, i.e. the difference between the share of an economy’s exports and imports that are priced in the dominant currency. Underlying this prediction is a change in an economy’s net exports in response to multilateral changes in the US dollar exchange rate that arises because of differences in the extent to which exports and imports are priced in the dominant currency. We then confront this prediction of DCP with the data in a sample of up to 46 advanced and emerging market economies for the time period from 1995 to 2018. Specifically, controlling for other cross-border transmission channels, we document that consistent with the prediction from DCP the output spillovers from US dollar appreciation correlate negatively with recipient economies’ export-import US dollar invoicing share differentials. We document that these findings are robust to considering US demand, US monetary policy and exogenous exchange rate shocks as a trigger of US dollar appreciation, as well as to accounting for the role of commodity trade in US dollar invoicing. JEL Classification: F42, E52, C50

Optimal Policy Mix for Inclusive Growth: Evidence from Nigeria

Unresolved issues on choice of optimal policy mix for inclusive growth pose intractable problems to policy-makers. Search for solution has continued in the present study which focused on extracting common or specific factor with proper combination of fiscal and monetary measures that could foster inclusive growth. Study spanned across 1980-2016. Data were sourced from Central Bank of Nigeria, National Bureau of Statistics, Abuja and World Development Indicators. Exploratory factor analysis technique was used to analyze the data. Results indicate that: (1) Optimal policy mix, compatible with inclusive growth, is expansionary fiscal-expansionary money, which blended company income tax, recurrent expenditure, money supply, domestic debt, credit to private sector, custom and exercise duties, net loans and advances, exchange rate, federally collected revenue, capital expenditure and petroleum profit tax in exact proportion of their respective regression weights (2) Decelerator policy mix undermined the effectiveness of optimal policy mix (3) Rising demand for money induced external borrowing which failed to impact significantly on growth. Study concluded that the determination of optimal policy mix that fosters inclusive growth justifies Keynes’s MEC theory as valid theoretical framework for the study. It was recommended, inter alia, that Macroeconomic Policy Committees be domiciled in finance ministries for effective co-ordination of fiscal and monetary policies.

The Dynamics of Public and Private Debt in Ghana

Abstract This paper explores the dynamics of public and private debt in Ghana for the past 32 years. Ghana’s total public debt stock to Gross Domestic Product (GDP) ratio has remained above the 60.0% sustainability threshold recommended by the West Africa Monetary Zone (WAMZ) since 2013. Implemented bank reforms in the country show an upward trend for domestic credit to private sector by banks as a percentage of GDP. Using exploratory review approach, the paper identified fiscal dominance, cost of borrowing, deterioration in export earnings, ineffective fiscal, monetary and debt management policies coordination as factors responsible for changes in total public debt stock. On the other hand, increased domestic borrowings by government from the banks, and Deposit Money Banks’ (DMBs)’ adverse selection in private sector credit allocation affect changes in domestic credit to the private sector by banks. Of these causes, fiscal dominance is the major determinant of public and private debt in Ghana. The study, therefore, recommends that government should pursue fiscal operations that are necessary to put public debt on a declining path. In addition, effective coordination of fiscal, monetary and debt management policies need to be strengthened together with the autonomy of the Bank of Ghana in the use of its monetary policy instruments.

Fiscal and Monetary Policy Coordination, Macroeconomic Stability, and Sovereign Risk Premia

AbstractIn standard macroeconomic models, equilibrium stability and uniqueness require monetary policy to actively target inflation and fiscal policy to ensure long‐run debt sustainability. We show analytically that these requirements change, and depend on the cyclicality of fiscal policy, when government debt is risky. In that case, budget deficits raise interest rates and crowd out consumption. Consequently, countercyclical fiscal policies reduce the parameter space supporting stable and unique equilibria and are feasible only if complemented with more aggressive debt consolidation and/or active monetary policy. Stability is more easily achieved, however, under procyclical fiscal policies.

Macroeconomic policy games

We develop a toolbox that characterizes the welfare-maximizing cooperative Ramsey policies under full commitment and open-loop Nash games between policymakers. We adopt the timeless perspective. Two examples for the use of our toolbox offer novel results. The first example revisits the case of monetary policy coordination in a two-country model to highlight sensitivity to the choice of policy instruments. For the second example, a central bank and a macroprudential policymaker are assigned distinct objectives in a model with financial frictions. Lack of cooperation can lead to large welfare losses even if technology shocks are the only source of fluctuations.

Macroeconomic Policy Games

Strategic interactions between policymakers arise whenever each policymaker has distinct objectives. Deviating from full cooperation can result in large welfare losses. To facilitate the study of strategic interactions, we develop a toolbox that characterizes the welfare-maximizing cooperative Ramsey policies under full commitment and open-loop Nash games. Two examples for the use of our toolbox offer some novel results. The first example revisits the case of monetary policy coordination in a two-country model to confirm that our approach replicates well-known results in the literature and extends these results by highlighting their sensitivity to the choice of policy instrument. For the second example, a central bank and a macroprudential regulator are assigned distinct objectives in a model with financial frictions. Lack of coordination leads to large welfare losses even if technology shocks are the only source of fluctuations.

Financial Technology, Digital Currency and Monetary Policy in Zimbabwe

The recent wave of financial innovation that has followed the financial inclusion strategy adopted by the Reserve Bank of Zimbabwe in 2015 poses a serious challenge to the national payments system and the conduct of effective monetary policy in the country. Despite the resultant reduction in financial frictions in settling domestic financial transaction, the possibility of creating new endogenous money in the economy should be closely monitored, and the Reserve Bank should consider making comprehensive national payment systems reforms that are consummate with changing dynamics in the globalized financial systems while considering adopting digital currency given that its hegemony on monetary creation is nearing its terminal. If this is not expediently, adequately and timely considered, new risks to monetary policy coordination and hence financial stability will follow, reversing all the gains realized during the initial stages of the financial inclusion strategy in Zimbabwe.