Monetary Policy Response Research Articles

Inflation targeting and monetary policy response in India

India adopted the Flexible Inflation Targeting (FIT) regime in 2016 under the mentorship of the Monetary Policy Committee (MPC). With FIT’s introduction, the effectiveness of monetary policy transmission channels required a re-visit and this paper is a valuable contribution in this direction. Using the multivariate model with an augmented Bayesian set- up, we find that FIT-MPC has strengthened the credit and interest rate channels while their impact on output has weakened. The impact of Operation Twist – a set of unconventional measures pursued during the pandemic is visible. Overall, the findings highlight the overhauling effect of monetary policy transmission in the Indian context.

United States monetary policy response to the COVID-19 pandemic and its impact on unemployment rates

United States monetary policy response to the COVID-19 pandemic and its impact on unemployment rates

Unconventional Monetary Policy Response to Covid-19 and Its Impact on Inflation in Morocco

This study explores the impact of unconventional monetary policy on Morocco’s economy during the Covid-19 pandemic. We used a hybrid model combining a financial dynamic stochastic general equilibrium (DSGE) model with a standard epidemiology model, enabling us to consider both economic and epidemiological factors. Our results indicate that unconventional monetary policy cannot fully mitigate the adverse effects of a pandemic, except for an exogenous increase in Central Bank claims. We also found that Morocco’s high inflation is partly due to Bank Al-Maghrib’s unconventional monetary measures in response to the pandemic. Our research underscores the importance of monetary authorities balancing the benefits and risks of unconventional monetary policy. While it can stimulate the economy during crises, it should be used judiciously to avoid long-term negative effects. Incorporating epidemiological factors into macroeconomic models is crucial for understanding the intricate interplay between the economy and public health crises.

Analisis Inflation Targeting Framework (ITF) dan Perubahan Respon Kebijakan Moneter

The purpose of this study is to determine how the implementation of inflation targeting framework (ITF) and how the changes in monetary policy response. The data period starts from 2014 to 2023, with monthly data. The data analysis method used is a model of two interrelated simultaneous equations, called Two Stage Least Square (2SLS). The results of this study explain that the exogenous variables in the first equation of real interest rates, inflation, inflation gap, output gap have a positive and significant effect on the BI rate. Exogenous variables in the second equation, namely inflation target, BI rate, exchange rate, WTI world oil price have a positive and significant effect on inflation. However, the output gap has a negative and significant effect on inflation, and the money supply has no significant effect on inflation. The change in monetary policy response is seen from the increase or decrease of BI rate by 25 Basis points

Climate Change's Effect on Household Food Security in Sub-Saharan Africa and Optimal Monetary Policy

The resurgence of food insecurity in Sub-Saharan Africa during the past decade highlights the need to comprehend the phenomenon within a framework that includes all economic agents in these times of intensification of climate change. Thus, this paper, using a Dynamic Stochastic General Equilibrium (DSGE) model, analyzes the effects of climate shocks occurring in agricultural and non-agricultural sectors on household food security in Sub-Saharan Africa, while determining optimal monetary policy responses to mitigate these adverse effects. Findings highlight that climate shocks affecting the non-agricultural sector are more detrimental to long-term household food security than those affecting the agricultural sector, particularly for urban households. To mitigate these effects, flexible policies targeting food price inflation and headline inflation seem appropriate for rural and urban households, respectively. Nevertheless, in the absence of political and social pressure, flexible headline inflation targeting is optimal for mitigating climate shocks effects on Sub-Saharan Africa's food security.

The impact of monetary policy interventions on economic stability during global pandemics; a case study of the United States’ monetary policy initiatives in the fight against the Covid 19 pandemic

The study assesses the importance of monetary policy in the fight against global pandemics. Specifically, the study delves into United State’s monetary policy responses to the unprecedented COVID 19 pandemic; a global pandemic that pushed governments across the globe to institute strict measures as well as impose restrictions in their quest to contain the virus and ultimately minimize its economic ramifications. As such, the study compares the impact of monetary policy on economic growth (Real GDP) during the pandemic as against the pre-pandemic periods with the goal of assessing its relative impact on ensuring economic stability. The research shows that the impact of traditional monetary policy tools on economic stability and growth diminished during the Covid 19 pandemic compared to the pre-pandemic period. The pandemic, therefore, introduced a novel economic dynamic, one that various world economies were evidently not ready for. The result of the study calls for a holistic and adaptive monetary policy in periods that engender major economic uncertainties, such as global pandemics. The study shall add to the discourse regarding the limitation of monetary policy during pandemics. It shall provide suggestions that seek to enhance economic resilience and provide pertinent information that could potentially be incorporated into designing strategies that minimize the economic impact of pandemics in the future. Keywords: Pandemic, GDP, Economic Stability, Monetary Policy, COVID 19, Intervention, Economic Growth.

Research and Analysis of Effective Fiscal and Monetary Policy Response under the Background of International Financial Crisis

Research and Analysis of Effective Fiscal and Monetary Policy Response under the Background of International Financial Crisis

Examining Monetary Policy Measures and Their Impacts during and after the COVID Era: OECD Perspectives

Governments worldwide implemented various fiscal and monetary measures to address the adverse impacts of COVID-19 on their economies. The paper aims to examine the changes in the monetary policy measures due to COVID-19 and their impact on macroeconomic variables. To explore this relationship, this study utilizes fortnightly data from 2020 to 2023 on the OECD (Organisation for Economic Co-operation and Development) countries. The study employs a Panel Autoregressive Distributed Lag (ARDL) model to analyze the effects of the monetary policy responses of the OECD governments, and the obtained results reveal that within OECD countries, the prevailing trend of lower interest rate policies emerged during the pandemic. This policy approach yielded a dual effect: lowering both output growth and inflation rates, while concurrently exacerbating unemployment rates throughout the COVID-19 period. Consequently, it is clear that monetary policies have played a pivotal role in facilitating the recovery from a profound economic shock such as the COVID-19 pandemic. Given the significant economic repercussions of a pandemic and the crucial role that monetary policy plays in sustaining economic stability, the apparent lack of attention underscores the urgent necessity for additional discourse on this vital subject.

Menganalisis Dampak Krisis Ekonomi Terhadap Tingkat Ekonomi Makro

This Research Aims To Analyze The Impact Of The Economic Crisis On The Macroeconomic Level, Focusing On Key Variables Such As Economic Growth, Unemployment Rate, Inflation And Trade Balance. Using Historical Data And Quantitative Economic Analysis Methods, This Study Identifies Patterns And Trends That Emerge During Periods Of Economic Crisis In Various Countries. The Research Results Show That Economic Crises Tend To Cause A Significant Contraction In Gross Domestic Product (GDP), A Sharp Increase In The Unemployment Rate, As Well As Significant Price Fluctuations That Impact The Inflation Rate. In Addition, This Analysis Also Highlights How Fiscal And Monetary Policy Responses Can Speed Up Or Slow Down Economic Recovery. The Conclusions Of This Research Emphasize The Importance Of Appropriate Policy Strategies In Dealing With The Economic Crisis To Minimize Its Negative Impact On The Macro Economy.

General Equilibrium Model for Monetary Policy Responses to Macroeconomic Instabilities in Developing Economy: A Ghanaian Perspective

The study develops a standard New Keynesian model to examine how monetary authority reacts to both domestic and external shocks as well as how its policy decision impacts the general macroeconomy in developing African economy. Using Bayesian estimation techniques and a Ghanaian dataset, the article also seeks to determine the best-suited monetary policy rule for Ghana and countries with similar characteristics. The basic finding is that a forward-looking Taylor rule—where authority reacts to one-period-ahead inflation deviation from target alongside the current output gap—is the most appropriate monetary policy rule for Ghana. Another salient finding is that variations in output are mainly driven by price markup, labour supply, monetary policy and productivity shocks across the forecast horizons. In addition, the dominant determinants of inflation are exchange rate risk premium and price markup shocks. Collectively, the article also unveils that monetary policy responses to macroeconomic shocks are broadly in line with conventional economic theory. There is also conspicuous evidence that the general equilibrium model with representative consumers is practically suitable for monetary policy analysis in Ghana, as contractionary monetary policy impulse is able to contemporaneously induce disinflation and output contraction. Given the strong evidence of a large segment of the unbanked population in Ghana, the findings in this study could be verified based on a model that allows for the co-existence of optimizing and non-optimizing consumers. JEL Classification: B41, C5, C11, D11, D21, D41, D42, E2, E12, E43, E52, E58, F31, F41

Modeling the macroeconomic consequences of natural disasters: Capital stock, recovery dynamics, and monetary policy

Natural disasters can cause substantial damage to public and private sector infrastructure capital, generating macroeconomic losses through complex channels. These shocks must be managed and accounted for with macrofiscal and monetary policy to minimize their welfare impacts. To support this process, we adapt the World Bank Macrostructural Model to capture key transmission channels of natural (geophysical or climate-related) disasters and their immediate aftermath. The macroeconomic model is extended on several fronts: (1) a distinction is made between infrastructure and noninfrastructure capital; (2) the production function is adjusted to account for short-term complementarity across capital assets; (3) the reconstruction process is modeled to consider postdisaster constraints, with distinct processes for the reconstruction of public and private assets. Destroyed infrastructure capital makes the remaining noninfrastructure capital less productive, which means that disasters reduce the total stock of capital and its marginal productivity. Upon applying the model to Türkiye data, the welfare impact of a disaster — proxied by the discounted consumption loss — is found to increase nonlinearly with direct asset losses. Macroeconomic responses reduce the welfare impact of minor disasters but magnify it when direct asset losses exceed the economy’s absorption capacity. The welfare impact also depends on the preexisting economic situation, the ability of the economy to reallocate resources toward reconstruction, and the response of monetary policy. Appropriate macrofiscal and monetary policies offer cost-effective opportunities to mitigate the welfare impact of major disasters.

Redistributive fiscal policy and marginal propensities to consume

This paper studies the output effect of transfers in a New Keynesian model with heterogeneous dynasties of overlapping generations, which allows for arbitrary heterogeneity in marginal propensities to consume (MPCs). The role of MPCs is mainly to determine the timing of the fiscal stimulus. Thus, it is not MPCs per se that determine the cumulative effect on output, but rather the interaction between the timing of the stimulus and other features of the model, such as financial frictions and an endogenous monetary policy response. Financially-constrained households always prefer a front-loaded stimulus, while the endogenous monetary policy can generate an ambiguous relation between MPCs and output. From a normative perspective, however, there is no ambiguity: with larger differences in MPCs, macro stabilization can be obtained at a smaller welfare cost.

Monetary policy rule under rare events: With implications by digital finance development

This article studies the macroeconomic impacts of rare events and the choice of monetary policy rule in an estimated DSGE model using Chinese data. We quantify the characteristics of adverse macroeconomic effects on both the supply and demand side and explore the suitable monetary policy response in the context of digital finance development. The results show that the early stage of severe negative macroeconomic impacts amplified by financial frictions requires quantity-based tools to restore macroeconomic stability. After the impediment of financial frictions and the early impact of rare events are mitigated, price-based tools are more effective than quantity-based tools in achieving a rapid recovery. Therefore, a mixed monetary policy rule shows the advantage of flexibility and results in the highest welfare. In addition, digital finance development reduces financial frictions and stabilizes money demand, thus enhancing the relative importance of price-based tools.

Oil price shocks and macroeconomic dynamics in resource-rich emerging economies under regime shifts

How do global oil price fluctuations affect macroeconomic activity and monetary policy in resource-rich emerging economies? This paper tackles this question by developing a unified emerging market/rest-of-the-world DSGE framework featuring Ricardian and Non-Ricardian households, an oil-producing sector, a fuel subsidy programme, and a regime-switching process. The model is estimated using Bayesian methods, allowing us to be agnostic regarding regime shifts in the monetary policy rule and oil price volatility. Using data for Nigeria, we find substantial empirical support for the regime-switching behaviour and discuss how macroeconomic implications of oil price shocks may vary depending on the nature of the shock, monetary policy responses, and the fuel subsidy policy in place. Apart from providing important insights into the monetary policy transmission mechanism, the paper offers a novel, flexible, and functional model for future policy analysis, especially in resource-rich emerging countries.

Government Spending Between Active and Passive Monetary Policy: An Invariance Result

Abstract This paper develops a new approach to analyze the relationship between the government spending multiplier and monetary policy. We embed measures of monetary policy activism into a nonlinear SVAR model. Our model allows the central bank to adjust its monetary policy regime in response to the economic conditions that arise after government spending shocks. We find that, regardless of the monetary policy regime at the time of a spending shock, the central bank adjusts its regime quickly and responds actively towards inflation only a few quarters after the shock hits the economy. This rapid response of monetary policy leaves medium-run multipliers ultimately unaffected by whether the initial regime was active or passive. For both initial regimes, our five-year multiplier estimates lie between 1.2 and 1.5. An apparent exception to this result is the zero lower bound period between 2008Q4 and 2015Q4-during which monetary policy kept nominal interest rates at zero. Our multiplier point estimates for that era are consistently larger than unity.

Managing inflation expectations and the efficiency of monetary policy responses to energy crises

While ascertaining low and stable inflation expectations is a significant challenge across developed and emerging economies, energy shocks are central to this endeavor. Therefore, this study's prime objective is to investigate the role of energy shocks, monetary policy, and fiscal policy in managing inflation expectations in the context of the Federal Reserve's inflation targeting regime, adopted in 2012. We analyze monthly data on the United States from 1994 to 2022. Using the linear Autoregressive Distributed Lag (ARDL) and the Quantile ARDL (QARDL) estimators, we analyze and compare three different samples: full period, pre-inflation targeting regime (1994 to 2012), and post-inflation targeting regime (2012 to 2022). The conclusions suggest that inflation, energy shocks, and money supply have significant implications for inflation expectations in most quantiles during pre- and post-inflation targeting regimes. Policy implications for research and practice are also discussed.

From parameters to policies: sensitivity analysis and fiscal and monetary reactions

PurposeThis paper seeks to explore the sensitivity of these parameters and their impact on fiscal policy outcomes. We use the existing literature to establish possible ranges for each parameter, and we examine how changes within these ranges can alter the outcomes of fiscal policy. In this way, we aim to highlight the importance of these parameters in the formulation and evaluation of fiscal policy.Design/methodology/approachThe role of fiscal policy, its effects and multipliers continues to be a subject of intense debate in macroeconomics. Despite adopting a New Keynesian approach within a macroeconomic model, the reactions of macroeconomic variables to fiscal shocks can vary across different contexts and theoretical frameworks. This paper aims to investigate these diverse reactions by conducting a sensitivity analysis of parameters. Specifically, the study examines how key variables respond to fiscal shocks under different parameter settings. By analyzing the behavioral dynamics of these variables, this research contributes to the ongoing discussion on fiscal policy. The findings offer valuable insights to enrich the understanding of the complex relationship between fiscal shocks and macroeconomic outcomes, thus facilitating informed policy debates.FindingsThis paper aims to investigate key elements of New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models. The focus is on the calibration of parameters and their impact on macroeconomic variables, such as output and inflation. The study also examines how different parameter settings affect the response of monetary policy to fiscal measures. In conclusion, this study has relied on theoretical exploration and a comprehensive review of existing literature. The parameters and their relationships have been analyzed within a robust theoretical framework, offering valuable insights for further research on how these factors influence model forecasts and inform policy recommendations derived from New Keynesian DSGE models. Moving forward, it is recommended that future work includes empirical analyses to test the reliability and effectiveness of parameter calibrations in real-world conditions. This will contribute to enhancing the accuracy and relevance of DSGE models for economic policy decision-making.Originality/valueThis study is motivated by the aim to provide a deeper understanding of the roles macroeconomic model parameters play concerning responses to expansionary fiscal policies and the subsequent reactions of monetary authorities. Comprehensive reviews that encompass this breadth of relationships within a single text are rare in the literature, making this work a valuable contribution to stimulating discussions on macroeconomic policies.

Foreign investor portfolio flow and monetary policy response in the Indonesian stock market considering the COVID-19 pandemic

Foreign portfolio investment in developing countries, including Indonesia, plays a crucial role in the economy, where this fund flow can influence exchange rates and stimulate price increases in the stock market. During the COVID-19 pandemic, the volatility of foreign portfolio flows by investors has significantly increased. To anticipate these conditions, the monetary authorities in Indonesia have implemented various monetary policies to address the possibility of more adverse situations. This study examines the impact of the inflow or outflow of foreign portfolio investments and the monetary policies reflected in the 7-day repo rate of Bank Indonesia on the Indonesian stock market. The data were collected from April 4, 2016, to March 18, 2022. The research methodology involves the Non-Linear Autoregressive Distributed Lag and the Markov Switching Regression (MSR) model. The findings indicate that foreign investor portfolio flows influence the Jakarta Composite Index. There is a tendency for domestic investors to analyze the habits of foreign investors. The study also found that monetary policy is not proven to affect the Jakarta Composite Index, while the USD/IDR exchange rate has an impact on the Indonesian stock market. This indicates many companies listed on the Indonesia Stock Exchange have debt in dollars or are paid in US dollars, making them vulnerable to exchange rate fluctuations.

Responses of financial stress and monetary policy to global warming: Evidence from China

We explore the marginal dynamic effect of abnormal temperature rise on China's financial stress and monetary policy using monthly data from January 2002 to December 2019. Our empirical results demonstrate that: (a) China's financial stress has a positive response to an increase in abnormal temperature change shock significantly, especially in the 4–7 months after the shock; (b) the introduction of monetary policy regulation into the economic system can effectively alleviate the financial instability caused by the rise in temperature; (c) from the perspective of the effectiveness of monetary policy transmission, price-based monetary policy is generally better than quantity-based monetary policy; (d) the adjustment of monetary policy can effectively expand the financing scale of the whole society with credit scale mattering most; (e) when financial stress is higher, the impact of a temperature shock on the financial market is stronger, as the stabilizing effect of expansionary monetary policy is more obvious. Our results are robust to wider checks and have important policy implications.

Financial inclusion and monetary policy effectiveness in a monetary union: Heterogenous panel approach

AbstractWe examine the nexus between financial inclusion and inflation targeting monetary policy effectiveness in West African Economic and Monetary Union countries by employing a heterogenous panel approach that enables us to delineate the responses to policy innovations related to idiosyncratic country‐specific shocks, common shocks, and composite shocks. We find that these shocks significantly affect inflation and financial inclusion but with varying magnitudes, signs, time of responses, and persistence. We further demonstrate that inflation targeting monetary policy is differently associated with the various dimensions and indicators of financial inclusion. Overall financial inclusion shocks temporarily increase inflation; deposit shocks reduce inflation; and credit shocks increase inflation. Central bank policy rate differently responds across time horizon to overall financial inclusion shocks; and it increases due to credit shocks highlighting that the monetary authority responds to credit shocks by implementing contractionary monetary policy. Our results highlight that monetary policy aimed at promoting inclusive financial services and responses of monetary policy to financial inclusion should be specific to the dimensions of financial inclusion.