Monetary Policy Interventions Research Articles

Analysing Monetary Policy Shocks by Sign and Parametric Restrictions: The Evidence from Russia

Most, if not all, of the studies in the existing literature that have examined the impacts of monetary policy implications on macroeconomic aggregates suffered from misleading impulse responses. To overcome the limitations in the existing literature and to fill the gap in the literature, this study applies the new Keynesian model by imposing the sign and parametric restrictions to investigate the effects of policy shocks on the economic aggregates for Russia by implementing SVARs, yielding a better understanding of the impacts of monetary policy shocks on the Russian economy and proving superior to other existing methods. Our approach avoids impulse response anomalies such as the price puzzle and eludes implausible overshooting responses to the subjected innovations by using prior information. Our findings indicate that although monetary policy shocks create a significant decrease in inflation in the short run within both median target responses and median responses, they have a tolerable negative effect on the output gap. On the other hand, demand shocks do not generate a significant rise in output but create inflation, while cost–push shocks generate significantly detrimental results in both inflation and output. The results draw a further step towards validating the new Keynesian theory in the Russian case by revealing the short-run nonneutrality of monetary policy intervention. Our findings also showed that the cost–push shocks have significant damaging effects on both inflation and output and that interest rates strongly respond to both cost–push and demand shocks. Our findings successfully solve the price puzzle problem, justify the new Keynesian theory that holds that monetary policy shocks only have a short-run effect, and imply that Volcker–Greenspan’s rule could be a useful guide for policy makers to solve the problem efficiently. In addition, our findings can be used to make important policy recommendations for policy makers as discussed in the conclusion section.

Covid-19’s Fever on Financial Markets in China: The Interaction Between Foreign Exchange Market and the Stock Market

The impacts of the COVID-19 pandemic on economies are different, however financial markets followed a similar pattern. This paper investigates the preliminary effect of the pandemic on China’s stock exchange market and foreign exchange market by comparing the pre-pandemic and post-pandemic periods. The results indicate that there is a significant interaction between two markets and both markets do not behave randomly. This linkage is crucial to determine the macroeconomic policies against a random walk. We investigate that the monetary policy interventions have positive effect to increase efficiency of financial markets. Moreover, financial markets do not follow a random walk path. It can be said that now, China’s money market in an upward trend due to the relatively reduce in uncertainty and pessimist expectations.

COVID-19 and policy responses: Early evidence in banks and FinTech stocks

The Australian government and Reserve Bank of Australia responded to challenges posed by the COVID-19 pandemic with a number of rapid interventions within a short period of time in early to mid-2020. We examine the impact of news relating to COVID-19, monetary policy interventions, containment measures, and the unwinding of restrictions on Australian bank and FinTech stock prices. The global pandemic was caused by factors outside the banking sector and capital markets, therefore, the policy responses from this unique crisis provides us with new knowledge. Bank and FinTech stock prices were more sensitive to the government's macroeconomic announcements and the unwinding of containment measures than to monetary policy interventions in this unique environment. The response of banks and FinTechs to COVID-19 related macroeconomic decisions is consistent with the response of bank stock prices in previous financial crises. This finding suggests a stronger emphasis on macroeconomic announcements is required as a stabilizing policy tool when managing future crises from outside the banking and capital market sectors.

Financial sector rescue programs: Domestic and cross border effects

We assess the effectiveness of the financial sector stabilisation measures taken by the Austrian authorities in the wake of the global financial crisis. Employing an event study methodology, we evaluate domestic and cross-border effects involving Central, Eastern and South-eastern European economies. We identify recapitalisations and public guarantees as the most effective sovereign interventions. Both mitigate financial market stress at home and abroad. However, a risk-shifting effect emerges at the sovereign’s expense which undermines their effectiveness relative to monetary policy interventions. Moreover, in complement to the actual implementation, the mere announcement of interventions already mitigates financial market stress, underscoring the extent of policy credibility.

A near real-time economic activity tracker for the Brazilian economy during the COVID-19 pandemic

During the COVID-19 pandemic, policymakers needed to assess the impact of large monetary and fiscal policy interventions in as close to real time as possible—yet existing survey-based indicators are usually released monthly or quarterly. The use of high-frequency data to track economic activity has become widespread. This paper constructs a near real-time economic activity indicator for the Brazilian economy during the COVID-19 pandemic. Brazil's integrated national electricity sector, which covers over 98% of the population, allows us to construct an economic activity indicator based solely on electricity consumption data that are available at near real time and accounts for activity in the large informal sector of the economy. We construct our indicator by isolating the variability in electricity consumption that is not related to economic activity, then measure how well monthly and quarterly versions of our indicator track against standard economic indicators. The results show strong correlation with standard indicators, notably during economic shocks.

Investigating the impact of monetary policy on foreign exchange market in Europe during COVID-19 pandemic

ABSTRACT In this paper, we investigated how policy rate modifications – the main instrument used by central banks to provide liquidity during the current health crisis – influenced the evolution of the exchange rate, which is a key element within macro-stabilization policies. We documented that foreign exchange markets in European countries responded asymmetrically to monetary policy interventions devoted to the encouragement of spending and the stimulation of the economy. However, this only occurred during extreme events, which is a side-effect of the monetary policy on the foreign exchange market. These results contribute to the assessment of the space for manoeuvres by monetary policymakers regarding key policy rate modifications as a response to pandemic shocks.

Eurozone Stock Market Reaction to Monetary Policy Interventions and Other Covariates

The joint effect of the global economic and sovereign debt crisis forced the European Central Bank (ECB) to apply conventional and non-standard expansionary monetary policy interventions in order to stabilize eurozone economies. We conducted a panel regression econometric analysis to study the influence of euro area monetary authority policy interventions, along with two main macroeconomic variables and a sentiment indicator, on market equity returns of eurozone countries for the period January 2007 to December 2017. Our findings suggest that conventional and non-standard monetary policy innovations had a positive lagged impact on equity returns of euro area monetary markets. More specifically, interest rate cuts evenly influenced market indices while non-conventional actions mainly affected core eurozone countries that were less affected by the crisis. We also document a strong negative relationship between inflation rates and market returns. In addition, the sentiment indicator produces positive effects on returns because it contains information that is not incorporated into other macro variables.

Monetary and Macroprudential Policies Under Dollar-Denominated Foreign Debt

This paper studies the optimal monetary and macroprudential policies in a small open economy that borrows from abroad in foreign currency. The model features a novel mechanism in which sudden stops due to an occasionally binding borrowing constraint trigger a sharp currency depreciation through balance of payments adjustments, thereby increase the domestic-currency value of foreign debt and cause severe economic downturns. A policy analysis shows that a contractionary monetary policy mitigates depreciation during a crisis, but the anticipation of policy interventions during the crisis induces larger borrowings ex ante and destabilizes the economy. A combination of an ex ante macroprudential tax on foreign borrowing and ex post monetary policy interventions can stabilize the economy and improve social welfare.

What is the Impact of a Major Unconventional Monetary Policy Intervention?

What is the Impact of a Major Unconventional Monetary Policy Intervention?

Do SMEs benefit from the corporate sector purchase program? evidence from the eurozone

In this paper, we study the impact of the European Central Bank Corporate Sector Purchase Program on small and medium sized firms' financing using restricted data from the Survey of Access to Finance of Enterprises. We find that following the announcement, credit access improved through the reduction of both formal and informal credit constraints. Loans terms also improved as manifested by a reduction on loan application costs. The unconventional monetary policy intervention is also transmitted through trade credit in production networks as unconstrained borrowers extend more trade credit following the announcement of the program.

COVID-19 and Its Impact on Financial Markets and the Real Economy

The COVID-19 pandemic severely disrupted financial markets and the real economy worldwide. These extraordinary events prompted large monetary and fiscal policy interventions. Recognizing the unusual nature of the shock, the academic community has produced an impressive amount of research during the last year. Macro-finance models have been extended to analyze the impact of epidemics. Empirical papers study the origins and consequences of the disruptions and the impact of policy interventions. New research evaluates the ongoing financial fragility and its relation to previous episodes and regulations. This special issue contains early contributions to this important and rapidly developing literature.1

Bank risks and lending outcomes: Evidence from QE

This paper investigates the impact of bank risk positions on their lending outcomes during quantitative easing (QE) interventions. We find that after the first and second round of QE, banks with lower default probabilities expand lending more in comparison to their risky counterparts. However, differences were no longer relevant in the third round of QE, which occurred at a time when the banking sector health was improved relative to QE1. Our findings suggest that bank riskiness is important for the transmission of unconventional monetary policy interventions.

COVID-19 and Its Impact on Financial Markets and the Real Economy

The COVID-19 pandemic severely disrupted financial markets and the real economy worldwide. These extraordinary events prompted large monetary and fiscal policy interventions. Recognizing the unusual nature of the shock, the academic community has produced an impressive amount of research during the last year. Macro-finance models have been extended to analyze the impact of epidemics. Empirical papers study the origins and consequences of the disruptions and the impact of policy interventions. New research evaluates the ongoing financial fragility and its relation to previous episodes and regulations. This special issue contains early contributions to this important and rapidly developing literature.

The impact of economic and political instability in economic growth In Yemen during the period 1990-2017

Political and economic stability is one of the most important pillars of growth and prosperity and a basic requirement for all countries, regardless of their political system, as instability creates an inappropriate environment for economic and social development, foremost of which is the weakness and deterioration of economic growth rates. The research aims to study the impact of economic and political instability on economic growth in Yemen during the period (1990-2017). However, the research problem is focused on determining the extent to which economic and political instability contributes to economic growth, and then the hypothesis is that this instability leads to a deterioration of economic growth. The research reached several results, the most important of which is the negative growth of the local product during the period under study, the high rates of inflation, deficits of the general budget, balance of payments and political instability, and that the origin of instability is due to many internal and external political and economic reasons. In general, the standard estimates indicated that the variable of the public budget deficit was more influential in economic growth, while political stability came second, then the balance of payments deficit was the weaker effect of inflation. The research recommended the use of monetary and financial policy interventions to achieve economic stability, and the necessity of reforming the structure of the political system, building a civil state, the peaceful transfer of power, and excluding social marginalization, Panel Data Methodology.

Monetary policy and household net worth

This paper investigates the interrelation between household balance sheets, collateral constraints, and monetary policy. Using data on the U.S. economy, we estimate a monetary DSGE model with financial frictions and occasionally binding borrowing constraints. The model implies stronger effects of monetary policy interventions when the borrowing constraint is binding compared to situations when it turns slack. In a prediction analysis we find that, out of a set of alternative plausible endogenous model variables, the level of household net worth is the single best predictor of the tightness of the borrowing constraint, which implies that monetary policy is more effective when household net worth is low. We test this model prediction in the data and provide robust empirical evidence on asymmetric effects of monetary policy across the household net worth cycle that validates the model predictions. A contractionary monetary policy shock leads to a large and significant fall in economic activity during periods of low household net worth. In contrast, monetary policy shocks have only small and mostly insignificant effects when net worth is high.

COVID-19 Effects on the Canadian Term Structure of Interest Rates

In Canada, COVID-19 pandemic triggered exceptional monetary policy interventions by the central bank, which in March 2020 made multiple unscheduled cuts to its target rate. The aim of this paper is to assess the extent to which Bank of Canada interventions affected the determinants of the yield curve. By applying Functional Principal Component Analysis to the term structure of interest rates we find that, during the pandemic, the long-run dependence of level and slope components of the yield curve is unchanged with respect to previous months, although the shape of the mean yield curve completely changed after target rate cuts. Bank of Canada was effective in lowering the whole yield curve and correcting the inverted hump of previous months, but it was not able to reduce the exposure to already existing long-run risks.

Why Has the COVID-19 Pandemic Had a Limited Impact on the Primary Housing Market in Poland?

In this paper we present the first insights into the as yet unexamined impact of the COVID-19 pandemic on the primary housing market in Poland, with a focus on Warsaw, which is the largest real estate market in the country. We explain the structural features that allowed the market to return to pre-shock levels after the pandemic shock. After the 2007–2008 global financial crisis the negative consequences lasted for several years. This time a sharp monetary policy and fiscal intervention was carried out. Moreover, the developer sector has expanded its production capacity. We show empirically that through monopolistic competition developers were able to restrict the excessive demand that was observed before the COVID-19 pandemic broke out. Another important structural change was the increase in the demand for housing, mainly for investment purposes, which was financed predominantly with cash and contributed to the growth of the rental market.

Interactions and Coordination between Monetary and Macroprudential Policies

I study monetary and macroprudential policy intervention in a general equilibrium economy with recurrent boom-bust cycles. forward-looking variables to also react to policy intervention during phases in which the intervention is inactive. Macroprudential policies that contain systemic risk in financial markets during booms, therefore, relax market-based funding constraints during busts, which helps mitigate the severity and shorten the duration of economic meltdowns. Contractionary monetary interventions during booms also have (latent) beneficial effects during busts. Coordination between the two policy instruments improves social welfare over standard, Recurrence causes noncoordinated policy interventions, but improvement is moderate. (JEL E32, E44, E52, E61)

Heterogeneous Loans and the Effect of Monetary Interventions

The amount of credit in the economy is a heterogeneous aggregate that can be analyzed across different dimensions. Considering such dimensions provides insights into the effect of monetary policy interventions because the credit components are observed to respond differently. Several possible motivations are behind such a differential response and those relate to either demand and supply factors intrinsic to the transmission mechanism of monetary policy. Our objective is to unveil such a differential response across a couple of relevant dimensions and discuss the possible causes behind what observed. The analysis refers to the US and is based on a vector auto-regression estimated using Bayesian techniques and identified with a combination of sign and zero-restrictions.

Forecasting U.S. Yield Curve Using the Dynamic Nelson–Siegel Model with Random Level Shift Parameters

In this paper, we develop a new model based on the classical dynamic Nelson-Siegel model by introducing random level shift (RLS) parameters. The built-in RLS can capture cyclical fluctuations in interest rates and structural breaks induced by technological progress, financial crisis, major monetary policy interventions, etc. In addition, the model can be used to forecast future structural breaks. We apply the model to fit and forecast daily U.S. Treasury yield curves and the model outperforms other widely used models. The empirical results show that the model not only has a better in-sample fit with residuals exhibiting less persistence but also has superior out-of-sample performance. Moreover, the model performs very well especially for short-term and long-term bonds, and the performance improves as the forecasting horizon increases.