Monetary Policy Interest Rate Research Articles

Investor sentiment, economic uncertainty, and monetary policy in Brazil,

ABSTRACT The aim of this study is to analyze how economic uncertainty and monetary policy affect investor sentiment in Brazil. Investor sentiment is an important element in the finance, economics, and accounting literature and its impact on financial markets is widely documented. However, understanding the variables that affect it remains an important challenge, and this research seeks to explore this gap within the Brazilian context. The study provides initial evidence regarding the impact of economic uncertainty and monetary policy on investor sentiment in Brazil. The findings documented here provide theoretical, managerial, and social contributions, with a possible impact on the areas of finance, economics, and accounting. Monthly data were used relating to four mechanisms of transmission of economic uncertainty and of monetary policy (interest rate, exchange rate, inflation rate, economic uncertainty index) and to the consumer confidence index as a proxy for investor sentiment (covering the period from January of 2006 to March of 2020). An autoregressive distributed lag model was estimated to capture short- and long-term relationships between the variables. The results indicate that investor sentiment is affected by economic uncertainty and by the main mechanisms of transmission of monetary policy to different extents and in the different time horizons. The evidence suggests that investors, policymakers, and monetary authorities should consider sentiment as a signal, whether for altering investment portfolios or for anticipating economic trends. It also provides support for focusing on economic and monetary policy in the National Financial Education Strategy (Estratégia Nacional de Educação Financeira - ENEF) recently adopted in Brazil

A note on financial vulnerability and volatility in emerging stock markets: evidence from GARCH-MIDAS models

ABSTRACT This paper establishes a predictive relationship between financial vulnerability and volatility in emerging stock markets. Focusing on China and India and utilizing GARCH-MIDAS models, we show that incorporating financial vulnerability can substantially improve the forecasting power of standard macroeconomic fundamentals (output growth, inflation and monetary policy interest rate) for stock market volatility. The findings have significant implications for investors to improve the accuracy of volatility forecasts.

Engaging central banks in climate change? The mix of monetary and climate policy

Given the recent debate on the role of central banks under climate change, this research theoretically investigates the mix of monetary and climate policy and provides insights for central banks who are considering their engagement in the climate change issue. The “climate-augmented” monetary policy is pioneeringly proposed and studied. We build an extended Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model as the method. By this model, we find the following results. First, the making process of monetary policy should consider the existing climate policy since it is a factor that can influence price level and inflation. Second, the reaction coefficients in traditional monetary policy rule can be better set to enhance welfare when climate policy is given. This provides a way to optimise the policy mix. Third, if a typical-form climate target is augmented into the monetary policy rule, a dilemma could be created. This means that it has some risks for central banks to care for the climate proactively by using the narrow monetary policy (interest rate).

Monetary policy and market interest rates: literature review using text analysis

PurposeThis paper aims to examine the relationship between monetary policy and market interest rates. This paper examines the efficiency of interest rate channel used in monetary regulation as well as implementation of monetary policy under low interest rates. This paper examines and reviews the scientific literature published over the past 30 years to determine primary research areas, to summarize their results and to identify appropriate measures of monetary policy to be used in practice in changing economic environment.Design/methodology/approachThis paper reviews 94 studies focused on the relationship between monetary policy and market interest rates in terms of meeting the goals of macroeconomic regulation. The articles are selected on the basis of Scopus citation and bibliometric analysis. A major feature of this paper is the use of text analysis (data preparation, frequency of terms and collocations use, examination of relationships between terms, use of principal component analysis to determine research thematic areas). Using the method of principal component analysis while studying abstracts this paper reveals thematic areas of the research. Thus, the conducted text analysis provides unbiased results.FindingsFirst, this paper examines the whole complex of relationships between monetary policy of central banks and market interest rates. Second, this research reviews a wide range of literature including recent studies focused on specific features of monetary policy under low and negative rates. Third, this study identifies and summarizes the thematic areas of all the researches using text analysis (transmission mechanism of monetary policy, efficiency of zero interest rate policy, monetary policy and term structure of interest rates, monetary policy and interest rate risk of banks, monetary policy of central banks and financial stability). Finally, this paper presents the most important findings of the studied articles related to the current situation and trends on the financial market as well as further research opportunities. This paper finds the principal results of studies on significant issues of monetary policy in terms of its efficiency under low interest rates, influence of its instruments on term structure of interest rates and role of banking sector in implementation of transmission mechanism of monetary policy.Research limitations/implicationsThe limitation of the review is examining articles for the study period of 30 years.Practical implicationsCentral banks of emerging economies should apply the instruments and results of the countries' monetary policies reviewed in this paper. Using text analysis this paper reveals the main thematic areas and summarizes findings of the articles under study. The analysis allows presenting the main ideas related to current economic situation.Social implicationsThe findings are of great value for adjusting the monetary policy of central banks. Also, these are important for people because these show the significant role of monetary policy for the economic growth.Originality/valueUsing text analysis this paper reveals the main thematic areas (transmission mechanism of monetary policy, efficiency of zero interest rate policy, monetary policy and term structure of interest rates, monetary policy and interest rate risk of banks, monetary policy of central banks and financial stability) and summarizes findings of the articles under study. The analysis allows defining the current ideas relevant to the monetary policy of developing countries. It is important for central banks because it examines the monetary policy problems and proposes optimal solutions.

Endogenous Growth, Downward Wage Rigidities and Optimal Inflation

Standard New Keynesian (NK) models feature an optimal inflation target well below two percent, limited welfare losses from business cycle fluctuations and long-term monetary neutrality. We develop a NK framework with labour market frictions, endogenous productivity and downward wage rigidity (DWR) which challenges these results. The model features a non-vertical long-run Phillips curve between inflation and unemployment and a trade-off between price distortions and output hysteresis that change the welfare-maximizing inflation level. For a plausible set of parameters, the optimal inflation target is in excess of two percent, a target value commonly used across central banks. Deviations from the optimal target carry welfare costs multiple times higher than in traditional NK models. The main reason is that endogenous growth and DWR generate asymmetric and hysteresis effects on unemployment and output. Price level targeting or a Taylor-rule responding to the unemployment rate can handle better the asymmetric and hysteresis effects in our model and deliver significant welfare gains. Our results are robust to the inclusion of the effective lower bound on the monetary policy interest rate.

Pengaruh Suku Bunga, Kurs Rill dan Pertumbuhan Ekonomi Terhadap Yield Obligasi Pemerintah: Lower Middel Income Countries di Asia Pasifik

This study explains the influence of monetary policy interest rates, real exchange rates and economic growth on government bond yields on Lower Middle Income Countries in Asia Pacific. This study combines cross section data in 5 countries with time series from 2007-2018, with the Panel Regression method and the Random Effect model selection test. The results show that: (1) Monetary Policy Interest Rates have a negative and significant effect on government bond yields on Lower Middle Income Countries in Asia Pacific, (2) The real exchange rate has a positive and insignificant effect on government bond yields for Lower Middle Income Countries in Asia Pacific. , (3) Economic growth has a negative and significant effect on government bond yields on Lower Middle Income Countries in Asia Pacific.

ANALYSING THE IMPACT OF ECONOMIC POLICIES ON UNEMPLOYMENT AND POVERTY IN NIGERIA

This study is carried out to empirically examine the effect of economic policies on unemployment and poverty in Nigeria between 1970-2019. The persistent and high level of poverty in Nigeria accompanied by severe unemployment despite the adoption and implementation of various economic policies in terms of fiscal and monetary policies is the motivation behind this study. The objective of the study is to examine how effective economic policies have been in terms of fiscal and monetary policies in curbing unemployment and poverty incidence. The variables used are Poverty index (POV), Unemployment Rate (UMP), fiscal policy instruments in terms of Government expenditure (GEX), Tax and Public Debt, Monetary policy instruments in terms of monetary policy rate (MPR), interest rate (INR) and money supply (MS). Time series dynamic analysis was used to analyses the impact of these macroeconomic instruments on poverty and unemployment. The Auto Regressive Distributed Lag (ARDL) Model was used to examine the short-run, interim and long-run effect of economic policies on unemployment and poverty between 1970-2019. Preliminary test such as stationarity test, cointegration test and trend analysis were conducted before estimation. The evidences from various econometrics analyses from this study revealed that, macroeconomic policies such as money supply, government capital expenditure, unemployment rate and interest rate have a statistically significant impact on poverty level in Nigeria from 1970-2019. The implication of this is that an increase in money supply and government expenditure has a negative effect on poverty level but an increase in unemployment rate and inflation rate will lead to higher poverty level in Nigeria since unemployment rate has a positive and significant impact on poverty level. The recommendations made include; that, since government capital expenditure has a negative impact on poverty level, emphasis should be laid on increasing government capital expenditure especially those meant for development programs and projects to enhance employment which will in turn reduce poverty level in the country.

PENGARUH SUKU BUNGA, KURS RILL DAN PERTUMBUHAN EKONOMI TERHADAP YIELD OBLIGASI PEMERINTAH : LOWER MIDDLE INCOME COUNTRIES DI ASIA PASIFIK

This study explains the influence of monetary policy interest rates, real exchange rates and economic growth on government bond yields on Lower Middle Income Countries in Asia Pacific. This study combines cross section data in 5 countries with time series from 2007-2018, with the Panel Regression method and the Random Effect model selection test. The results show that: (1) Monetary Policy Interest Rates has a positive and significant effect on government bond yields on Lower Middle Income Countries in Asia Pacific, (2) The real exchange rate have a negative and significant effect on government bond yields for Lower Middle Income Countries in Asia Pacific. , (3) Economic growth has a negative and significant effect on government bond yields on Lower Middle Income Countries in Asia Pacific.

The Impact of Interest Rate Transmission Channel on the Prices Development in the Eurozone Countries

The purpose of this article is to investigate the monetary policy interest rate channel capabilities to influence the inflation in individual Eurozone countries. As the differences among Eurozone countries still exist, the question is whether the common monetary policy can similarly control and influence the development of inflation and economic performance in the individual union’s countries. The reaction of inflation, product and exchange rate on 1% positive interest rate shock is examined via vector autoregression (VAR) model. We implement recursive Cholesky decomposition of variancecovariance matrix of model residuals. To estimate the model, we employ monthly data for period 2000M1-2019M7 consisting of 235 observations. VAR model allows computing impulse-response functions for estimation of interest rate pass-through to macroeconomic variables.

Bank Balance Sheets and External Shocks in Asia

In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs).

The Transmission of External Shocks in Asia

Asian economies are increasingly integrated to the global economy through trade and financial linkages, exposing them to the international financial cycle. This paper explores how external shocks are transmitted to Asian economies and whether the use of policies, such as the monetary policy interest rate, foreign exchange intervention (FXI) and macroprudential measures (MPMs), can mitigate the impact of these external shocks. It uses panel quantile regressions on a sample of 14 Asian advanced and emerging economies (AEs and EMs) to assess the impact of financial and real shocks on investment and GDP growth at the median and 5th percentile tail. It finds that external financial shocks tend to have a larger effect on Asian economies than real shocks, and that the main transmission channels through which shocks are propagated are capital flows (particularly via corporate and bank balance sheets) for EMs, and credit for AEs. It also finds evidence that for Asian EMs, FXI may help dampen the capital flows and real exchange rate channels and mitigate financial shocks in the short run, and monetary policy transmission tends to be relatively weak; meanwhile MPMs can help mitigate the credit channel for both AEs and EMs.

The Transmission of External Shocks in Asia: Country Characteristics and Policy Responses

Asian economies are increasingly integrated to the global economy through trade and financial linkages, exposing them to the international financial cycle. This paper explores how external shocks are transmitted to Asian economies and whether the use of policies, such as the monetary policy interest rate, foreign exchange intervention (FXI) and macroprudential measures (MPMs), can mitigate the impact of these external shocks. It uses panel quantile regressions on a sample of 14 Asian advanced and emerging economies (AEs and EMs) to assess the impact of financial and real shocks on investment and GDP growth at the median and 5th percentile tail. It finds that external financial shocks tend to have a larger effect on Asian economies than real shocks, and that the main transmission channels through which shocks are propagated are capital flows (particularly via corporate and bank balance sheets) for EMs, and credit for AEs. It also finds evidence that for Asian EMs, FXI may help dampen the capital flows and real exchange rate channels and mitigate financial shocks in the short run, and monetary policy transmission tends to be relatively weak; meanwhile MPMs can help mitigate the credit channel for both AEs and EMs.

Heterogeneous Households, Wealth Disparity and Unconventional Monetary Policy

This paper explores the income and wealth effects through modeling heterogeneous households while studying the effects of Unconventional Monetary Policy (UMP). The research finds that, through the methodological application of Weighted Expectation Maximization (WEM) Cluster Modeling and subsequent calculation of the Malhalanobis Distance, through recent periods of quantitative easing and low interest rates, there has been notable volatility and bifurcation in the distributions of capital gains and income variables to U.S. households. We herein utilize the weights inherent in modern multiply imputed surveys, such as the Federal Reserve Board's Survey of Consumer Finances (SCF), to apply the EM algorithm to empirically study wealth disparity in the U.S. through the effect of unconventional monetary policy and low interest rates, due to the Financial Crisis of 2008 and the Sars-CoV-2 pandemic, on wealth holders.

Bank Balance Sheets and External Shocks in Asia: The Role of Fxi, Mpms and Cfms

In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs).

DOES INFLATION TARGETING WORK IN EMERGING COUNTRIES? AN EXAMPLE OF GEORGIA

Monetary policy is the macroeconomic policy that allows central banks to influence the economy. It involves managing the money supply and interest rates to address macroeconomic challenges such as inflation, consumption, growth and liquidity. Historically, for a long time, the task of monetary policy was limited to controlling the exchange rate, which in turn was fixed (at the beginning of the 20th century on the gold standard) for the purposes of promoting international trade. Eventually such a policy contributed to the Great Depression of the 1930s. After the depression, governments prioritized employment. The central banks have changed their direction based on the relationship between unemployment and inflation, known as the Phillips curve. They believed in the link between unemployment and inflation stability, which is why they decided to use monetary policy (putting money into the economy) to increase total demand and maintain low unemployment. However, this was a misguided decision that led to stagflation in the 1970s and the addition of an oil embargo in 1973. Inflation rose from 5.5% to 12.2% in 1970-1979 and peaked in 1979 at 13.3%. Over the past few decades, central banks have developed a new management technique called «inflation targeting» to control the growth of the overall price index. As part of this practice, central banks are publicizing targeted inflation rate and then, through monetary policy instruments, mainly by changing monetary policy interest rates, trying to bring factual inflation closer to the target. Given that the interest rate and the inflation rate are moving in opposite directions, the measures that the central bank should take by increasing or decreasing the interest rate are becoming more obvious and transparent. One of the biggest advantages of the inflation targeting regime is its transparency and ease of communication with the public, as the pre-determined targets allows the National Bank›s main goal to be precisely defined and form expectations on of monetary policy decisions. Since 2009, the monetary policy of the National Bank of Georgia has been inflation targeting. The inflation target is determined by the National Bank of Georgia and further approved by the Parliament. Since, 2018- 3% is medium term inflation target of National Bank of Georgia. The inflation targeting regime also has its challenges, the bigger these challenges are in developing countries. There are studies that prove that in some emerging countries, the inflation targeting regime does not work and other monetary policy regimes are more efficient. It should be noted that there are several studies on monetary policy and transmission mechanisms in Georgia. Researches made so far around the topic are based on early period data. Monetary policy in the current form with inflation targeting regime started in 2009 and in 2010 monetary policy instruments (refinancing loans, instruments) were introduced accordingly, there are no studies which cover in full the monetary policy rate, monetary policy instruments and their practical usage, path through effect on inflation and economy. It was important to analyze the current monetary policy, its effectiveness, to determine the impact of transmission mechanisms on the small open economy and business development. The study, conducted on 8 variables using VAR model, identified both significant and weak correlations of the variables outside and within the politics like GDP, inflation, refinancing rate, M3, exchange rate USD/GEL, exchange rate USD/TR and dummy factor, allowing to conclude, that through monetary policy channels and through the tools of the National Bank of Georgia, it is possible to have both direct and indirect (through inflation control) effects on both, economic development and price stability

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.

Unconventional Monetary Policy and International Interest Rate Spillovers

After the 2008 global financial crisis, advanced economies turned to unconventional monetary policies to provide additional monetary stimulus while short-term interest rates were constrained by their effective lower bound. However, the speed of economic recovery differed markedly among these economies, leading to differences in the timing and intensity of unconventional monetary policies across central banks. These differences may have generated “spillover effects” that undermined policy tightening in the United States after 2015. Karlye Dilts Stedman assesses whether monetary policies from the European Central Bank, the Bank of Japan, and the Bank of England affect U.S. borrowing costs at and away from the effective lower bound. She finds evidence of spillovers from each of these central banks to the United States as well as evidence that these spillovers increased during the asynchronous withdrawal from unconventional monetary policy. Her results suggest that in the absence of international spillovers, long-term yields in the United States would have been higher than those observed at the end of 2017.

The use of credit cards among low- and middle-income individuals in Colombia and the channels of monetary policy

Data for a retail credit card, which enables customers to finance purchases of semi-durable and non-durable goods, are used to show the way in which monetary policy and other interest rates affect the credit limits, the probability of use, and the value of purchases. This credit card, targeted at low- and middle-income individuals, is held by a quarter of employed labour force in Bogotá. Permanent and transitory incomes play an intuitive role in these three dimensions of the credit card. Credit limits are determined by the intervention interest rate, which supports the presence of the lending channel. The probability of use is determined by the usury interest rate while monthly purchases are affected by the interest rate charged by the financial institution and the usury interest rate, both indicative of the broad credit channel. Interestingly, after considering the customer’s observable characteristics, macroeconomic environment matters, mainly the labour market performance.

Conventional and unconventional monetary policies: effects on the Finnish housing market

ABSTRACT This paper investigates how different types of monetary policy have affected house prices in Finland, a small euro area economy that has experienced pronounced business cycles over time. The analyses are carried out using the Bayesian structural vector autoregressive approach. Monetary policy interest rate shocks and balance sheet shocks are identified using zero and sign restrictions. The results reveal that both a policy interest rate shock and a balance sheet shock have a positive and temporary impact on house prices in Finland, with the response to a balance sheet shock being smaller and fading out faster. The peak of the effect of a policy rate shock on house prices in Finland arrives faster than in the whole euro area but the magnitudes of the peak impact are similar. The effect of a balance sheet shock on house prices is not notably different in Finland to what it is in the whole euro area.

Does the financial structure of banks influence the bank lending channel of monetary policy? Evidence from Colombia

PurposeThis paper tests the impact of the financial structure of banks on the bank lending channel of monetary policy transmission in Colombia.Design/methodology/approachWe use a monthly panel of 51 commercial banks for the period 1996:4–2014:8.FindingsAn increase in the monetary policy interest rate significantly reduces bank loan growth. The magnitude of this effect depends on banks’ financial structure. Additionally, we identify an asymmetric effect in which the bank lending channel is stronger in monetary contractions than during expansions. We show that this behavior is due to the heterogeneous response of banks with different levels of solvency. This finding has important implications for the design and implementation of monetary policy and coordination of central bank’s policy with key economic agents.Practical implicationsThe fact that the BLC is stronger in times of monetary contraction is quite interesting for central banking, as it shows that monetary policy transmission is harder during macroeconomic downturns. When investment plans are depressed, monetary stimulus may prove insufficient to reactivate credit demand. This has proven to be true in advanced economies after a strong recession and our results suggest that is also true in emerging market economies for economic downturns in general. Central banks may have to provide stronger shocks to reactivate private credit when the economy is facing a slow economic recovery.Originality/valueOur findings point out that an increase in the monetary policy interest rate significantly reduces bank loan growth. However, the magnitude of this effect critically depends on two aspects. First, bank heterogeneity matters. Particularly, the loan supply of better capitalized banks is less sensitive to monetary policy shocks. Second, the response of credit supply to shifts in short-term interest rates critically depends on the monetary policy stance. The BLC is stronger in times of monetary contraction than during expansions. Moreover, we show that this asymmetric behavior is due to the heterogeneous response of banks with different levels of solvency to the monetary policy stance.