Monetary Policy Interactions Research Articles

Optimal control in the New Keynesian model with monetary and fiscal policy interactions

Dynamics of the New Keynesian model in continuous time with the Rotemberg pricing mechanism is considered within a framework of an optimal control problem. Various regimes of monetary and fiscal policy (‘active’ and ‘passive’) can lead to unstable dynamics in the economy. Parameters of the Taylor rules for both monetary and fiscal policies determine conditions for local equilibrium determinacy. Mapping out the ranges of the Taylor coefficient values where local determinacy cannot be obtained allows to control the economic system by controlling these parameters.

A Model of Endogenous Risk Intolerance and LSAPs: Asset Prices and Aggregate Demand in a “COVID-19” Shock

We theoretically investigate the interaction of endogenous risk intolerance and monetary policy following a large recessionary shock. As asset prices dip, risk-tolerant agents’ wealth share declines. This decline reduces the market’s risk tolerance and triggers a downward loop in asset prices and aggregate demand when the interest rate policy is constrained. In this context, large-scale asset purchases are effective because they transfer unwanted risk to the government’s balance sheet. These effects are sizable when the model is calibrated to match the estimates of aggregate asset demand inelasticity. The COVID-19 shock illustrates the environment we seek to capture.

The Coordination of Monetary and Fiscal Policy Interactions and Its Impact on the Performance of the Nigerian Economy

Fiscal and monetary policies have been adjudged by scholars to have strong implications for economic performance of countries across the globe. This paper assesses the impact of the interaction of monetary and fiscal policy coordination on the economic performance of Nigeria. The study adopted an econometric method in analyzing data which were obtained mainly from secondary sources, especially the CBN statistical bulletins. The estimation techniques used in the study are the Auto-Regressive Distributed Lag (ARDL) model, the Granger Causality and Vector Auto-regression. The data were tested for stationarity using ADF (1979) methods. The results obtained shows that all monetary variables react strongly to changes in fiscal variables except interest rate. Inflation and external debt are negatively signed in both long run and short run, implying that an increase in both variables will have a negative effect on economic performance. Also, the coefficient of INTR and FGRRg has positive impact in the long run, meaning that an increase in both will have a positive impact on economic performance. Also, the elasticity status of our model shows that while INTR, RGDPg and INF rate and their lags had coefficient of elasticity less than one, EXDBT and FGRRg and their lags had coefficients greater than one. Thus, it could be concluded from the findings that fiscal policy measures exert greater impact on the level of economic performance in Nigeria, than monetary policy. The study made some policy recommendations, which if implemented, could increase the level of interaction between fiscal and monetary policies and enhance their coordination for improved economic performance in the country.

Fiscal and monetary instruments of impact on economic development

The research subject includes the theoretical basis and mechanism of fiscal and monetary policy coordination. The study aims to justify the conceptual basis of fiscal- monetary policy interactions to ensure economic development. Methods. To achieve the appropriate tasks, we used a set of methods and approaches that helped ensure our investigation's conceptual unity. The systemic and structural approaches, analysis and synthesis methods, comparison, generalization, modeling, and scientific abstraction are applied. Results. In this paper, we improved the theoretical and methodological foundations of fiscal and monetary policy coordination. The author highlighted the necessity to use the institutional approach in that case. Also, we gave practical proposals to develop the system for assessing the effectiveness of the coordination of fiscal and monetary policy. Practical implications. Government economic policy and instruments of its implementation. Conclusions. Empirical experience has shown the advisability of fiscal and monetary policy coordination to ensure sustainable endogenous economic growth. Coordination of government financial policy measures in the context of the economic cycle stages should be based on an institutional approach. The interaction of fiscal and monetary policies should focus on increasing social welfare and the maintenance of long-term macroeconomic stability. The adaptive interaction of monetary and fiscal mechanisms and the improvement of the state's economic system's institutional architectonics contribute to the intensification of business entities' economic activity. Meanwhile, those factors positively influence on economy's competitiveness. The necessity of introducing a system for assessing the effectiveness of the coordination of fiscal and monetary policy determines effective measures of financial regulation at a certain stage of economic development.

Progressive consumption tax and monetary policy in an endogenous growth model

This paper analyzes the impact of the interaction between monetary policy and fiscal policy on the stability of an one-sector AK economy. The monetary authority pegs the money growth factor while the fiscal authority implements a progressive consumption tax. The demand of money is motivated by a fractional liquidity constraint on consumption expenditures. When only the monetary authority operates, the unique steady state is locally indeterminate if the intertemporal elasticity of substitution in consumption is low enough. When the fiscal authority is introduced, the interaction of fiscal policy and monetary policy modifies significantly the stability properties. In particular, the fiscal authority could either stabilize or destabilize the economy depending on the tax progressivity, the strength of the liquidity constraint and the intertemporal elasticity of substitution. Our numerical examples further verify those theoretical results.

Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg

Monetary Policy Interactions: The Policy Rate, Asset Purchases, and Optimal Policy with an Interest Rate Peg

Climate change and monetary policy: issues for policy design and modelling

Abstract This paper explores the interaction of monetary policy and climate change as they jointly influence macroeconomic outcomes, connecting policy and outcomes in each realm to the implications of the other. It also explores the nature of the macroeconomic model that would be required to explore the links between monetary policy and climate policy. The paper has four parts. First, it reviews the relevant macroeconomic outcomes of emissions mitigation policy and climatic disruption, exploring how negative supply shocks can affect central banks’ ability to forecast and manage inflation. Second, the paper reviews basic approaches to monetary policy, including inflation and output targeting, and other responsibilities that may fall to central bankers. Third, we bring together the two sets of issues to consider the appropriate monetary framework in a carbon-constrained and climatically disrupted world and to highlight the climate policy frameworks that can make monetary policies more efficient and effective. We then summarize the nature of the macroeconomic modelling framework that is needed to better analyse climate and monetary policy interactions. We conclude that policy responses to climate change can have important implications for monetary policy and vice versa and that, in light of the urgency of ambitious climate action, these policy spheres should be brought together more explicitly and more appropriate macroeconomic modelling frameworks developed.

Interaction of Monetary and Fiscal Policies in Turkey: A Dynamic Time Series Data Analysis

Monetary and fiscal policies are designed and implemented by different government agencies, each with its own objectives, resources, constraints, and incentives. The actions of monetary authority may affect the fiscal authority’s public debt management and fiscal deficit. On the other side, the fiscal authority’s action also may affect the stance of monetary policy and its results. This paper aims to find the level of fiscal or monetary dominance by evaluating the interaction of monetary and fiscal policies in Turkey for relevant period. For this purpose, it was examined the relationship between inflation rate, monetary policy interest rate, fiscal deficit, public debt in Turkey for 2000 to 2018 by using VAR and ARDL model. According to the results obtained from VAR analysis monetary variables significantly affect fiscal variables. However, there is no evidence of fiscal dominancy on monetary policy. The evidence acquired via ARDL bound test supports these findings. Hereunder, it can be concluded that monetary policy is dominating fiscal policy in the relevant period.

Interaction of monetary and fiscal policies in Turkey

This paper aims to investigate the interaction between monetary and fiscal policies in Turkey. For this purpose, a Bayesian Structural Vector Autoregression (SVAR) model with sign and zero restrictions is used. We particularly focus on how the fiscal and monetary policy variables respond to various macroeconomic shocks and whether the type of shocks matters. Our results confirm the importance of nature of shocks in terms of interaction between monetary and fiscal policies with the finding that both policy shocks are complementary in response to demand and supply shocks while they are substitute in response to shocks caused by the each other. Our main findings are robust to alternative variable definitions and identifying restrictions.

Monetary Policy and Private Sector Credit Interaction in Ghana

Using a series of econometric techniques, the study analysed interaction between monetary policy and private sector credit in Ghana. This study made use of monthly dataset spanning January 1999 to December 2019 of credit to the private sector (PSC) and broad money supply (M2). The results reveal that there exists cointegration, a long run stationary relation between monetary policy and private sector credit. This implies, increases in credit should prompt long-term increases in monetary policy. It is not surprising that growth in the private sector might have a stronger effect on monetary policy. The Error Correction Test is statistically significant and that all the variables demonstrate similar adjustment speeds. This implies that in the short run, both money supply and credit are somewhat equally responsive to their last period’s equilibrium error. There is unidirectional causation from private sector credit to monetary policy. It can be said that, there is an interaction between money supply and private sector credit. Thus, credit to private sector holds great potential in promoting economic growth. It can be recommended to the government to increase the credit flow to the private sector because of its strategic importance in creating and generating growth of the economy.

Tight and Loose, and Red and Blue: A 'Dance' of Macro Policies in the US

Using optimising policy framework, we build and estimate a small-scale DSGE model of the US, and tell the story of monetary and fiscal policy interactions in 1955-2018. We find that fiscal policy is important to identify shifts in monetary policy preferences, and it is shaped by the political color. We use this model to analyse the episode of zero lower bound on interest rate in 2008-15. We find that the bound constrained monetary policy, explain some observed irregularities in macroeconomic data, and demonstrate that a change to price level targeting could have generated a powerful lift-off from the constraint.

Monetary and Fiscal Policy Interactions in a Frictional Model of Money, Nominal Public Debt and Banking

In this paper we examine the interactions between fiscal and monetary policy in an economy with financial frictions, where fiat money, bank deposits and short and long-term nominal bonds coexist. Because agents face information frictions and bankers have limited commitment, fiat money is always accepted and bank deposits can be used in some trades. Within this frictional environment, we study how consumption inequality varies when the central bank pursues an active monetary policy and when the fiscal authority is active. Specifically, we find that consumption wedges across the different states of the world are more severe when an active central bank pursues expansionary monetary policy. Moreover, we find a unique stationary equilibrium when the monetary authority follows an active policy, while multiple stationary equilibria exist when the fiscal authority pursues an active regime. Consequently, such indeterminacy can result in greater volatility in economies in which the fiscal authority is active and the central bank is passive.

The impact of monetary policy on budgetary balance

Relevance of the research topic. In the context of financial globalization, it is important to determine the impact of monetary policy on budgetary balance, ensure sustainable economic development, and support macroeconomic equilibrium in the country. The study of the impact of monetary policy on a balanced budget is very relevant. Formulation of the problem. Under the conditions of transformational changes, the exchange rate and the peculiarities of its formation are an integral part of ensuring the development of the country's financial system. Of particular importance is the issue of ensuring the effective interaction of monetary and budgetary policies as one of the most important factors in the development of the economy through reindustrialization and modernization. Analysis of recent research and publications. The problem of the state’s monetary policy is today quite relevant for most countries of the world and widespread in the scientific works of famous foreign and domestic scientists: T. Bogolib, V. Heyets, I. Zapatrina, J. M. Keynes, N. Kornienko, A. Laffer, I. Lyutyi, A. Mazaraki, R. Masgrayev, V. Makogon, V. Oparin, M. Pasichnyi, A. Smith, J. Stiglitz, V. Fedosov, I. Chugunov, S. Yurii and others. Selection of unexplored parts of the general problem. However, there are a number of insufficiently disclosed issues regarding the impact of exchange rate fluctuations on significant macroeconomic indicators in the context of economic transformation. Setting the task, the purpose of the study. The objective of the study is to analyze the impact of the exchange rate on budgetary balance. The aim of the study is to determine the main objectives of the monetary policy of Ukraine. Method or methodology for conducting research. The article uses a set of scientific methods: the system approach, statistical analysis, structuring, analysis and synthesis. Presentation of the main material (results of work). The article analyzes the exchange rate and determines its effect on the formation of the budget deficit and public debt. The task of modern monetary and foreign exchange policy is delivered, directions of ensuring effective interaction of monetary and budget policies are considered. The field of application of results. The results of this study can be applied in the process of formation and implementation of the monetary policy of Ukraine. Conclusions according to the article. Maintaining balance and stability of budgets of various levels is a strategic objective of budget policy, especially in the context of transformational changes. Budget balance is characterized by the ratio of budget expenditures and revenues, their proportional change in economic uncertainty. It is important to ensure the effective interaction of monetary and budgetary policies as one of the most important factors in the development of the economy through reindustrialization and modernization. The solution of these issues involves an objective assessment of the situation in the domestic and world economies, taking into account the country's real capabilities in achieving the main strategic goals and ensuring economic development.

Is the Taylor rule optimal? Evaluation using a wavelet-based control model

ABSTRACT This paper extends the wavelet-based control (WBC) model of Crowley and Hudgins (2015) to compare the simulated performance of jointly optimal fiscal and monetary policy, where the policymakers place emphasis on a variety of macroeconomic targets, with the case where monetary policy follows a modified Taylor rule. The results show that the Taylor rule is likely to render higher interest rates, diminished investment, and appreciated real exchange rates compared with an unconstrained baseline simulation. We therefore find that the Taylor rule is suboptimal since it results in higher fiscal deficits due to substitution by policy authorities, thus confirming recent research on the interaction of fiscal and monetary policies. The analysis also compares the baseline and Taylor rule simulated forecasts when the central bank adopts a ‘hawkish’ inflation policy compared to a more ‘dovish’ policy stance.

Fiscal-Monetary Policy Interactions and Macroeconomic Performance in a Small Open Economy: A GMM Approach

The study investigates the nature and the effect of fiscal and monetary policy interactions on major macroeconomic variables in a small open economy of Nigeria between 1981 and 2018. The paper employs the generalized method of moment as technique of analysis due to its potential to address the endogeneity issues among the explanatory variables. Findings from the study reveals that interest rate and government expenditure have significant effect on output and inflation. Also, the study finds that fiscal and monetary policy interact as strategic substitutes in Nigeria. This implies that when one policy authority pursues a contractionary measure, the other policymaker counteracts the action using an expansionary policy. It is also revealed that the effect of fiscal and monetary policy interactions on output and inflation is negative and significant. This implies that the two policies perform better when combined in achieving price stability and sustained output growth in the country. Based on the findings, there is a need for macroeconomic policy coordination in Nigeria to optimise the macroeconomic objectives of the country.

Active, or Passive? Revisiting the Role of Fiscal Policy in the Great Inflation

We reexamine whether pre-Volcker U.S. fiscal policy was active or passive. To do so, we estimate a DSGE model with monetary and fiscal policy interactions employing a sequential Monte Carlo algorithm (SMC) for posterior evaluation. Unlike existing studies, we do not have to treat each policy regime as distinct, separately estimated, models. Rather, SMC enables us to estimate the DSGE model over its entire parameter space. A differentiated perspective results: pre-Volcker macroeconomic dynamics were similarly driven by a passive monetary/passive fiscal policy regime and fiscal dominance. Fiscal policy actions, especially government spending, were critical in the pre-Volcker inflation build-up.

Monetary-fiscal policies interactions and optimal rules in Egypt

Purpose This paper aims to estimate a New Keynesian small open economy dynamic stochastic general equilibrium (DSGE) model for Egypt using Bayesian techniques and data for the period FY2004/2005:Q1-FY2015/2016:Q4 to assess monetary and fiscal policy interactions and their impact on economic stabilization. Outcomes of monetary and fiscal authority commitment to policy instruments, interest rate, government spending and taxes, are evaluated using Taylor-type and optimal simple rules. Design/methodology/approach The study extends the stylized micro-founded small open economy New Keynesian DSGE model, proposed by Lubik and Schorfheide (2007), by explicitly introducing fiscal policy behavior into the model (Fragetta and Kirsanova, 2010 and Çebi, 2011). The model is calibrated using quarterly data for Egypt on key macroeconomic variables during FY2004/2005:Q1-FY2015/2016:Q4; and Bayesian methods are used in estimation. Findings The results show that monetary and fiscal policy instruments in Egypt contribute to economic stability through their effects on inflation, output and debt stock. The monetary policy Taylor rule estimates reveal that the Central Bank of Egypt (CBE) attaches significant importance to anti-inflationary policy and (to a lesser extent) to output targeting but responds weakly to nominal exchange rate variations. CBE decisions are significantly influenced by interest rate smoothing. Egyptian fiscal policy has an important role in output and government debt stabilization. Additionally, the fiscal authority chooses pro-cyclical government spending and counter-cyclical tax policies for output stabilization. Again, past values of the fiscal instruments are influential in the evolution of the future fiscal policy-making process. Originality/value A few studies have examined the interaction between monetary and fiscal policy in Egypt within a unified framework. The presented paper integrates the monetary and fiscal policy analysis within a unified dynamic general equilibrium open economy rational expectations framework. Without such a framework, it would not be easy to jointly analyze monetary and fiscal transmission mechanisms for output, inflation and debt. Also, it would be neither possible to contrast the outcome of monetary and fiscal authorities commitment to a simple Taylor instrument rule vis-à-vis optimal policy outcomes nor to assess the behavior of monetary and fiscal agents in macroeconomic stability in context of an active/passive policy decisions framework.

How does the interaction of macroprudential and monetary policies affect cross-border bank lending?

We combine a rarely accessed BIS database on bilateral cross-border lending flows with cross-country data on macroprudential regulations. We study the interaction between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies enacted in source (home) lending banking systems. We find significant interactions. Tighter macroprudential policy in a home country mitigates the impact on lending of monetary policy of a currency issuer. For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice-versa, easier macroprudential policy amplifies impacts. The results are economically significant.

Growing discoordination between monetary and fiscal policies in Ukraine

The slowdown in economic development caused by the reduction in the efficiency of the functioning of state institutions determined the focus of the governments of most countries of the world on achieving sustainable economic growth, as well as ensuring macroeconomic and macrofinancial stability. A major issue that is dealt with is the weakening of the interaction of monetary and fiscal policies in Ukraine. It can be assumed that one of the reasons hindering economic growth is growing discoordination between monetary and fiscal policies. The purpose of this study is to assess the nature of monetary and fiscal policies in Ukraine in 2000–2017 and justify the need for coordination between them to stimulate economic growth. For the quantitative assessment of the influence of monetary and fiscal factors on GDP, the models of autoregression with distributed lags – ARDL are used. The analysis makes it possible to distinguish and characterize three stages of combining the rigid and stimulating monetary and fiscal policy in Ukraine in 2000–2017. The article examines the influence of the dynamics of the monetary aggregate M3, the inflation rate and the weighted average base interest rate on the growth rates of real GDP in Ukraine, the impact of using the “monetary clamp” effect on the increase in the NBU’s interest rate, and the direct effect of monetary factors on the fiscal policy. The authors conclude that the inconsistency of monetary and fiscal policies is one of the reasons for the high volatility of macroeconomic indicators. The article substantiates the conclusion that it is necessary to overcome the increasing antagonism between monetary and fiscal policies in Ukraine and to strengthen their coordination.

Modelling of Fiscal and Monetary Policy Interactions in the Republic of Belarus

The article discusses classical and modern macroeconomic models of interaction of fiscal and monetary policies in Belarus. The hypothesis of this research is that the interaction of fiscal and monetary policies has a synergistic effect on economic growth and that at certain stages, one of these policies prevails over the other. This hypothesis was tested with the help of an IS-LM model, which was used to investigate the joint effects of monetary and fiscal policies on business activity in Belarus. A Markov switching model was developed in Eviews software to analyze the interaction between these policies. Regression dependences of the average tax burden (including the burden imposed by social security contributions) and GDP, investment and the refinancing rate were built by using Excel software. To solve the IS-LM model, the value of autonomous consumption was computed with the help of the adjusted value of the average propensity to consume. It was found that autonomous consumption is comparable with the budget of subsistence minimum in Belarus. The share of government spending in the GDP structure was on average 35.01%. The comparison of gross savings and investment showed that in the majority of periods, gross savings insignificantly exceeded the amount of investment, that is, the available funds were used for consumer lending rather than for investment. Analysis of the Markov switching model has led us to the conclusion that from the first quarter 2005 until the fourth quarter of 2009, the fiscal policy in Belarus was in the active regime. The passive fiscal policy regime was observed in the period between the first quarter of 2010 and the first quarter of 2019. In this period, a rise in the public debt was accompanied by an increase in the budget surplus. In the second quarter of 2019, there was a transition to a more active fiscal policy, which points to the need to intensify tax reforms.