Easing Monetary Policy Research Articles

Quantitative easing (QE) monetary policy and its impact on inflation

Quantitative easing (QE) monetary policy and its impact on inflation

UKRAINE’S MONETARY POLICY UNDER MARTIAL LAW

The relevance of the research is due to the change in the monetary policy regime of the National Bank of Ukraine (NBU), which consists in the transition from inflation targeting with a floating exchange rate to a fixed exchange rate as the nominal anchor of monetary policy under martial law. Such a plan to change the monetary policy regime was carefully calculated and outlined in the NBU's Monetary Policy Guidelines for the Duration of Martial Law. The timeliness and effectiveness of the NBU's monetary policy decisions enabled it to mitigate the impact of the military shock on the macro-financial stability of the national economy. The purpose of the article is to consider the theoretical and practical aspects of the NBU's monetary policy under martial law. Methodology. The study uses a systematic method of cognition to determine the sequence of application of monetary policy instruments to smooth out monetary shocks of the wartime period; an abstract-logical method to understand the future monetary policy strategy based on the abandonment of the fixed exchange rate regime and a gradual return to inflation targeting; and a statistical method to analyse the dynamics of monetary indicators of the national economy. Results. The paper presents the main principles of the NBU's monetary policy under martial law. The first shock from the war led to changes in the conduct of monetary policy and a shift to unconventional instruments of its regulation. The gradual adaptation of the economy to the new conditions determined the NBU's further steps to ease monetary policy and move to greater exchange rate flexibility. Practical implications. The practical significance of the research results is to assess the conditions for the transition from the key policy rate-based inflation targeting regime as the main monetary policy instrument to the use of foreign exchange interventions as the main operation in the foreign exchange market under martial law. Value / Originality. The originality of the article is due to the need to identify the prerequisites for the transition to a new monetary policy strategy in a wartime economy. Conclusions. The NBU's timely response to the negative phenomena associated with deteriorating inflation expectations, multiple exchange rates and pressure on international reserves helped prevent the development of a currency and financial crisis in Ukraine. Despite the active hostilities, the NBU is trying to find options that will allow it to conduct an effective monetary policy in the face of a full-scale invasion and unprecedented internal and external shocks. Internationally, Ukraine has exceeded expectations and the NBU has shown a high degree of responsibility, professionalism and creativity in the conduct of monetary policy. Increased confidence in the central bank is a valuable resource in times of martial law.

ОБЛІКОВА СТАВКА НБУ: НАСЛІДКИ ТА ДОЦІЛЬНІСТЬ ПОДАЛЬШОГО ЗНИЖЕННЯ

Introduction. The purpose of the latest increase in the key rate from 10% to 25% in June 2022 is the following: protection of savings and income of individuals in national currency; increasing attractiveness of hryvnia-denominated assets; easing the pressure of excess liquidity on the foreign exchange market; strengthening the ability of the NBU to ensure exchange rate stability and streamline inflationary processes during the war. The increase in the key rate was also supposed to increase the yield on domestic government loan bonds and deposit certificates of the National Bank of Ukraine (NBU), rates on line deposits in the national currency, and the cost of servicing hryvnia loans for legal entities and individuals. Over a period of up to 15 months, the key rate remained at the same level of 25%. As the dynamics of inflation faded, the regulator started a cycle of gradual easing of monetary policy. allows to analyze the intermediate results of such a reduction. Reporting of the financial and external sectors of the economy published by the NBU and supervisory statistics as of December 1, 2023 allow to analyze the intermediate results of the reduction. Problem Statement. Determining the preliminary consequences and justifying the expediency of further gradual reduction of the NBU key rate aimed at overcoming the main problems of the monetary and credit system of Ukraine in the conditions of martial law. The purpose is the analysis of the main intermediate results of the gradual reduction of the key rate in Ukraine, which directly affect the performance of its key functions by the monetary and credit system of Ukraine, and justification of the most urgent state measures aimed at overcoming the current negative trends in the monetary sphere. Methods. General scientific and special methods are used: analysis, synthesis, grouping, description, comparison, theoretical generalization and abstract-logical. Results. The key preliminary consequences of the gradual reduction of the key rate in Ukraine are analyzed, in particular: the dynamics of refinancing attracted by banks, bank investments in NBU deposit certificates, investments of the regulator and banks in domestic government loan bonds (OVDPs), corporate and retail lending, bank deposits of households and corporations by terms and currencies, individual indicators of the foreign exchange market. Conclusions. The key positive consequences of the key rate reduction are: gradual recovery of banks' credit activity; reorientation of banks' investments from the purchase of NBU deposit certificates to increasing investments in OVDPs, which made it possible to stop emission financing of the budget deficit by the NBU; maintaining a positive yield on term deposits in the national currency, which stimulates the population to further increase the volume of bank deposits. Instead, the practice of sterilizing the "excess" liquidity of banking institutions through their purchase of overnight and three-month deposit certificates of the NBU continues and and provokes a further increase in the volume of excess liquidity of the banking system due to a fairly high level of profitability of this instrument. Expected conservation of moderate rates of inflation in the short term determines the expediency of a further gradual decrease in the level of the key rate, provided that the positive return on time deposits of the population in the national currency is maintained. To overcome the current negative trends in the monetary sphere it is advisable: to consider the possibility of reducing the yield of NBU deposit certificates to a level comparable to the yield of “short “ OVDPs; to ensure the synchronization of the yield of “new” time deposits of the population in the national currency by terms at the level of five state banks; to consider the expediency of resuming the practice of compulsory sale of part of the foreign currency earnings of exporters at the level of at least 50% during the period of martial law; to intensify the use of non-monetary methods and anti-inflation policy measures, taking into account the joint responsibility of the government and regulator for anti-inflation policy.

The effects of conventional and unconventional monetary policies of the US, EU, and China on global green investment

This study investigates how the monetary policies of the USA, EU, and China affect global green investment differently by using the dynamic autoregressive distributive lag (DARDL) model and kernel-based regularized least squares (KRLS). DARDL's results show that US monetary policy is not conducive to global green investment in the short and long term. The EU's conventional monetary policy negatively impacts global green investment, but only in the short term. However, China's conventional monetary policy boosts global green investment in the long term. The inference from the response simulations implies that the conventional monetary easing policy of the US, EU, and China positively influences global green investment in the long and short run. However, the magnitude of the response of the EU is greater than that of the US and China. Unconventional monetary policy easing of the US negatively influences global green investments in the short run, whereas China and EU policies affect it positively. However, in the long run, global green investment is unaffected by unconventional monetary policy easing in the case of the US. In contrast, China's and the EU's unconventional monetary policies easing have had a positive impact. In the case of financial development, a negative impact on global green investment is more strongly evident for China than for the US and the EU. Overall, the empirical results of this study recommend that a significant change in the monetary policies of large economies is required to promote global green investment for ecological transition.

Analysis of the Impact of Quantitative Easing Monetary Policy on the Japanese Economy

Quantitative easing (QE), which was implemented as a measure to address deflation and promote economic growth, is subject to varying interpretations regarding its effectiveness to Japan economy. Supporters attribute the efficacy of quantitative easing (QE) to its role in mitigating a more severe economic decline through the stabilization of asset prices and the maintenance of low interest rates, so preventing future crises. Nevertheless, it is important to acknowledge that divergent viewpoints shed light on the challenges associated with attaining long-term economic expansion. These challenges are often attributed to persistent structural concerns such as a progressively aging population, restrained levels of consumer demand, and cautious levels of company investment. Critics express apprehensions regarding the inadvertent ramifications of extended quantitative easing (QE), encompassing imbalances within financial markets and potential threats to financial stability. This abstract presents a synthesis of several perspectives, highlighting the intricate relationship between quantitative easing (QE) policies and Japan's underlying economic issues. It contributes to a nuanced discussion on the overall effectiveness of QE in the Japanese context.

Critical Evaluation about the Effects of Monetary Policy on Economic Recovery Under Keynesian Model

In response to the Covid-19 crisis and to mitigate its impact, countries have enacted a range of policies to stimulate effective economic development. In the context of Keynesianism, this paper evaluates the effectiveness of China's monetary policies enacted during Covid-19 as an example. Faced with tightening labor, supply, and consumption at home, China's central bank decided to ease monetary policy, increasing the overall money supply. Through the analysis of the Keynesian model, it is determined that the loose monetary policy used in China during Covid-19 has effectively stimulated aggregate domestic demand and increased GDP, but at the same time the price level has increased, the unemployment rate and the average domestic wage have increased. Through the evaluation of the loose monetary policy adopted by China during Covid-19, this paper proves that in the period of economic crisis, actively adopting loose monetary policy is effective, which is conducive to stimulating demand, increasing total output value, and conducive to economic recovery. At the same time, loose monetary policy will lead to higher unemployment and higher price levels. The living cost of residents will rise, and the instability of employment will lead to the decline of income expectations, which will affect the consumption willingness of residents. The government also needs to adopt policies to address livelihood issues after adopting loose monetary policy to deal with the economic crisis.

Monetary policy and housing market cycles

Abstract Using monthly data from 1978:M1 to 2019:M9, this paper provides empirical evidence concerning the role that monetary policy plays in the US housing market. We first show that shocks to short-run interest rates have significant impacts on house prices and that these effects are persistent. Our findings also provide evidence supporting the claim that too-low-for-too-long interest rates are responsible for the 2002–2006 US housing boom. We further investigate the different channels through which an easing monetary policy fuels the house price boom and find that faster sales and lower inventory levels in the housing market most amplify the policy effects. Lastly, we provide compelling evidence of the asymmetric effects of contractionary and expansionary monetary policies on house prices.

Potential Risks of Implementing Quantitative Easing Monetary Policy

As a result of the global recession caused by the 2020 COVID-19 pandemic, many countries adopted unconventional monetary policies. In response to the phenomenon of hyperinflation, the implementation of quantitative easing policies became the solution for many central banks to stabilise inflation. This paper will discuss quantitative easing monetary policy, the unlimited expansion model of monetary policy in support of fiscal policy, and quantitative tightening monetary policy, using the measures implemented by the Federal Reserve and the European Central Bank in response to the COVID-19 epidemic and their effects as examples. It is concluded that by analysing the forms that quantitative tightening can take, it is pointed out that the central bank maintains the market with complete certainty by signaling to participants that it is going to start implementing quantitative tightening and stating that it will only lead to a natural loss of bonds and won't involve any active sales, but at the same time it will limit the flexibility of the central bank's policy.

Doubling Down: The Synergy of CCyB Release and Monetary Policy Easing

Doubling Down: The Synergy of CCyB Release and Monetary Policy Easing

What drives bank liquidity creation? The interaction of monetary policy and strategic scope

The research investigates how the marginal influence of monetary policy on the expansion of liquidity creation changes depending on the strategic scope of banks. Through a sample of Vietnamese commercial banks between 2007 and 2019, we estimate measures of liquidity creation that consider all banking items and build up various monetary policy indicators. Empirical regressions are achieved with the dynamic generalized method of moments (GMM) estimator that is fitted to tackle the endogeneity issue. The study confirms the existence of the bank liquidity creation channel, i.e., an easing monetary policy boosts the banks' liquidity creation ability, both when the central bank reduces interest rates and injects more capital into the market. For banks with a strategic scope that relies more on non-interest revenues or diversifies more into various banking segments, the relationship between monetary policy and the generation of bank liquidity is strengthened when the central bank adjusts interest rates but mitigated if it changes the money supply using quantitative-based monetary tools. This paper expands the literature stream on monetary policy's liquidity creation channel, which is essential to the economy but has been little explored, by shedding light on the moderating role of bank income. Additionally, this study employs many policy indicators based on interest- and non-interest-rate tools to avoid misleading conclusions on the policy stance.

Effects of National Easing Monetary Policy on Chinese Enterprises’ Investment

Enterprise investment is closely related to cost of capital, and cost of capital is affected by lending rate driven by national monetary policy. For instance, the retail interest rate (including deposit, loan interest rates) of a bank would rise during the practice of tight national monetary policy. Excessively high loan interest rate would reduce enterprises’ investment due to increasing cost of capital. In this case, corporate investment behavior could be understood from national monetary policy. Taking listed companies publicly offered by Shanghai Stock Exchange and Taipei Exchange as the research samples, the open annual information from the database are acquired. Industry peculiarities, financial, securities, and insurance industries applicable to special accounting standards, as well as construction industry are excluded, and samples with incomplete or omitted data are deleted. The research results show that 1.the practice of easing policy in national monetary policy allows Chinese enterprises holding higher free cash flow, 2.Chinese enterprises with positive free cash flow appear higher investment behavior, and 3.the practice of easing policy in national monetary policy results in higher investment behavior of Chinese enterprises. According to the results, it is proposed to discuss the evaluation basis for impacts on industrial development during monetary policy. The results could assist policy makers in better understanding impacts of national monetary policy adjustment on enterprise investment effect as well as provide business managers for evaluating the effectiveness of national monetary policy.

Time-varying and spillover effects of the macroeconomy on nonfinancial corporate financialization: Evidence from China

Using quarterly data from 2007 to 2020 in China and the time-varying parameter vector autoregression model (TVP-VAR), this study systematically investigates the time-varying responses of corporate financialization to various macroeconomic shocks. The empirical findings reveal that nonfinancial corporate financialization is significantly and dynamically influenced by macroeconomic factors. Specifically, a decrease in economic policy uncertainty (EPU) generates a transient promotive effect on corporate financialization within six months, while monetary policy easing has a strong and persistent positive effect on the corporate financialization over two years. Conversely, the impact of economic growth on corporate financialization has experienced structural shifts throughout the sample period. Furthermore, a dynamic connectedness index based on TVP-VAR is employed for the first time to investigate the spillover effects among variables. The results show that nonfinancial corporate financialization is the net receiver of the fluctuations of M2, GDP growth, and EPU volatility. Quantitatively, 28.36% of corporate financialization variation is caused by M2 supply changes. Moreover, the spillover effects on financialization are time-varying and significantly greater during the extreme economic events. Our conclusions enrich the research findings of corporate financialization determinants.

A probit-based analysis of the deep stock market drawdowns

PurposeThis study is motivated in part by the fact that the unfolding 2022 bear market, which has reached the −25% drawdown, has not been preceded by the inverted 10Y-3 m spread or an inverted near-term forward spread.Design/methodology/approachThe authors develop a three-factor probit model to predict/explain the deep stock market drawdowns, which the authors define as the drawdowns in excess of 20%.FindingsThe study results show that (1) the rising credit risk predicts a deep drawdown about a year in advance and (2) the monetary policy easing precedes an imminent drawdown below the 20% threshold.Originality/valueThis study three-factor probit model shows adaptability beyond the typical recessionary bear market and predicts/explains the liquidity-based selloffs, like the 2022 and possibly the 1987 deep drawdowns.

Трансмісійний механізм монетарної політики в контексті забезпечення макроекономічної стабільності

Introduction. In 2020, the COVID-19 pandemic quickly spread to almost all countries, causing a downturn in the economy and worsening monetary stability. In terms of the scale of its effects, this stress even exceeded the impact of the global financial crisis. It was quite logical to revise the parameters of monetary policy, including lowering (or keeping low) key policy rates, accepting long-term refinancing operations, and reducing the required reserve ratio. All of these measures were intended to stimulate the economy, and the recent practice deserves an examination of how effective the transmission of monetary policy has been. Problem Statement. The implementation of monetary policy in the context of the pandemic is giving rise to new academic discussions about transmission channels, as well as the combination of the general and the particular in the context of countries. The purpose is to examine the transmission mechanism of monetary transmission to achieve the inflation target and ensure sustainable economic growth of the national economy. Methods. General scientific and specific methods of scientific cognition were used. In particular, the study used system analysis to describe models of the monetary policy transmission mechanism; abstract and logical analysis to summarize and build logical links between individual links in the monetary policy transmission mechanism; and statistical and economic analysis to analyze the impact of monetary transmission on inflation under the inflation targeting regime. Methods. System analysis was used to describe models of the transmission mechanism of monetary policy; abstract-logical – for summarizing and building logical connections between separate links of the transmission mechanism of monetary policy; statistical and economic - to analyze the impact of monetary transmission on inflation within the framework of the inflation targeting (IT) regime. Results. Transmission channels are defined as the chain of transmission of the impact from the key policy rate (discount rate) to the next link in the monetary transmission chain. Because of its properties (systematicity, consistency, and microfoundedness), neo-Keynesian logic is well suited to the main macroeconomic models that belong to the class of structural models (including both classical DSGE and semi-structural models). The model used by the National Bank of Ukraine to describe the transmission and build a medium-term forecast of the domestic economy also belongs to the class of structural models. A structural model in the neo-Keynesian logic combines the three most powerful transmission channels - interest rate, exchange rate, and expectations channels. An impulse in the key policy rate is instantly reflected in the 10-day interbank lending rate, and this rate is therefore the NBU's operational target for monetary policy. From the interbank lending rate, the impact of monetary policy is transmitted further to rates in other segments of the money market. Changes in interest rates affect the consumption and investment decisions of economic agents. From market interest rates and financial asset yields, the monetary policy impulse spreads further to lending activity and balance sheet indicators of companies and banks. Changes in the key policy rate affect prices and the value of assets on companies' balance sheets. From the credit sector, the impulse is smoothly transferred to economic activity and inflation. Aggregate demand, expectations, the exchange rate, and producer costs respond to monetary policy. Monetary policy affects expectations and, consequently, inflation by creating an “anchor” for its expected level in the medium term. Conclusions. Achieving the inflation target through the use of the IT regime is an important condition for achieving macroeconomic stability. The NBU's transition to IT was justified, as evidenced by the proven hypothesis of a sharp decline in inflation and price volatility in the medium term. Prices stabilized through the expectations channel. A timely response to the challenges of the pandemic should be accompanied by an easing of monetary policy aimed at reducing the cost of financial resources and restoring long-term lending to the economy. The experience gained enabled the banking system to withstand the next shock - a full-scale Russian aggression against Ukraine, using proven approaches. Studies have shown that the inflation target of 5% ± 1 p.p., which is optimal from the NBU's point of view, does not affect economic growth. The use of the key policy rate instrument demonstrates a delayed reaction of market participants with a lag of 9-18 months. The regulator focuses on the inflation target and, once it is achieved, on measures to support inflation within the planned target. Resolving the dilemma between the planned inflation rates and maintaining economic growth requires regulatory changes to the laws governing the central bank.

National Monetary Policy Responses in the COVID-19 Epidemic

The COVID-19 pandemic has had a significant influence on the economies of many different nations in the world. When the economy suffers a severe blow, monetary policy should help it get back on its feet. Building the home market and maximizing industrial allocation is now especially crucial because the COVID-19 outbreaks have made it difficult for countries to conduct normal commercial exchanges. The COVID-19 also exhibits the traits of persistent global epidemics. Every new outbreak of the disease has a detrimental effect on the economy and severely undermines consumer confidence. National monetary policy from the world's major central banks was quicker, broader, moreover, the response to the economic and financial crisis of COVID-19 was more broad than the one to the global financial crisis of 2008. The response of three major nations, including the United States, the United Kingdom, and China, to the COVID-19 will be critically analyzed in this paper. However, there are many potential threats to the government's easing of monetary policy to keep the economy stable while stopping the spread of the pandemic, which means that persistently low interest rates are no longer a sustainable option. Therefore, balancing the financial chaos and social problems caused by monetary policy is the key to ensure the sustainable development of the country.

Transmission Mechanism of U.S. Monetary Policy to Economies

Due to the special status of the United States and the U.S. dollar in the world economy, the U.S. monetary policy has a significant spillover effect on the world. Especially since the subprime mortgage crisis in 2007, the U.S. monetary policy has attracted more attention from the world. Combined with the previous literature, this paper finds that the transmission channels of the US monetary policy uncertainty spillover effect include exchange rate expectation channel, financial asset allocation channel, contagion of monetary policy uncertainty, and real option effect. Among them, the channel of exchange rate expectations, the channel of financial asset allocation and the channel of contagion of monetary policy uncertainty are responsive and rapid, while the real option effect has a slow and long-term impact on the real economy. At the same time, there are differences in the spillover effects of U.S. monetary policy uncertainty on different countries. The results of this study have certain guiding significance for monetary policy formulation in other countries, such as strengthening the supervision of cross-border bonds and cross-border investment. Especially under the impact of the new crown pneumonia epidemic, major developed economies have implemented a new round of quantitative easing monetary policies, and policymakers in emerging economies need to pay great attention to this.

Heterogeneity of Mortgage Refinancing Channel in Russian Regions

During the period of monetary policy easing in Russia, mortgage refinancing became popular, which involves the issuance of a new mortgage housing loan to repay an earlier loan on more favorable terms. There is a regionally heterogeneous refinancing of mortgages at lower mortgage rates. The purpose of this paper is to quantify the impact of monetary easing on mortgage refinancing and household consumption for groups of Russian regions. Econometric methods (vector autoregression models on panel data, estimated by Bayesian methods) and multivariate clustering (hierarchical analysis, k-means method) were used in the paper. Based on the impulse response functions, it is shown that during the period of monetary policy easing, the greatest effect of lowering mortgage interest rates on refinancing is typical for groups of regions with high- and middle-income levels, a liquid housing market, and a developed mortgage market. It is proven that refinancing is involved in the transfer of the effects of monetary policy to consumer spending and consumer lending, and this transfer is heterogeneously. Refinancing in low-income regions stimulates consumption and consumer borrowing. In regions with an average and high level of per capita cash income, after refinancing, consumer spending and consumer loans are temporarily reduced. The obtained results can be explained by the different types of financial behavior of borrowers in the use of top-up mortgage refinancing, depending on the level of their cash income. Based on the results of the study, the hypothesis about the heterogeneity of the refinancing channel in the Russian regions was confirmed. The scientific novelty of the study consists in the development of a methodological approach to the study of the refinancing channel and its approbation on Russian regional data.

How to understand high global food price? Using SHAP to interpret machine learning algorithm.

The global food prices have surged to historical highs, and there is no consensus on the reasons behind this round of price increases in academia. Based on theoretical analysis, this study uses monthly data from January 2000 to May 2022 and machine learning models to examine the root causes of that period's global food price surge and global food security situation. The results show that: Firstly, the increase in the supply of US dollars and the rise in oil prices during pandemic are the two most important variables affecting food prices. The unlimited quantitative easing monetary policy of the US dollar is the primary factor driving the global food price surge, and the alternating impact of oil prices and excessive US dollar liquidity are key features of the surge. Secondly, in the context of the global food shortage, the impact of food production reduction and demand growth expectations on food prices will further increase. Thirdly, attention should be paid to potential agricultural import supply chain risks arising from international uncertainty factors such as the ongoing Russia-Ukraine conflict. The Russian-Ukrainian conflict has profoundly impacted the global agricultural supply chain, and crude oil and fertilizers have gradually become the main driving force behind the rise in food prices.

Are monetary transmission channels effective under the quantitative and qualitative easing policy?

AbstractThis study measures the effectiveness of monetary transmission channels of the Bank of Japan's (BOJ) Quantitative and Qualitative Monetary Easing (QQE) policy in affecting Japan's inflation rate. The monetary transmission channels are interest rate, portfolio rebalancing and foreign exchange rate channels. Based on data from 1 August 2013 to 31 October 2019, the Granger's Causality Test showed that the interest rate channel was vital in transmitting the effect of monetary easing. Specifically, the interest rate channel transmitted the effect of QQE, QQE with a negative interest rate and QQE with yield curve control policy to the domestic price level. Portfolio rebalancing and foreign exchange rate channels did not influence Japan's inflation rate in all the QQE policy periods. The empirical results are robust against different estimation methods. Based on the findings, the study offers some imperative policy recommendations.

Comparison of US Quantitative Easing Monetary Policy Between 2020 and 2008

In March 2020, in response to the negative impact of the COVID-19 pandemic on the US economy and financial markets, the Federal Reserve resumed "unlimited" quantitative easing and launched a new monetary policy tool. This paper compares the difference between this round of QE and the last three rounds of QE in 2008 from the aspects of the current balance sheet of the Federal Reserve, the US fiscal stimulus policy and the Fed's monetary policy tools. Using the VAR model to estimate and compare the effects of the monetary policy tools in the financial market and the previous three rounds of QE. First, The Fed's balance sheet will shrink much bigger and faster than the previous cycle. Second, the Fed will act more urgently than the previous cycle to control inflation quickly to a reasonable range. Third, MBS purchases are positive for the USDX and the DJIA but are negative for the VIX.