Monetary Policymakers Research Articles

The Mechanism of Shifting From Direct Monetary Policies to Indirect Monetary Policies

After 2008, a new term appeared on monetary policies after the direct monetary policies failed to reach a solution to the economic deficit that occurred in the economies of many countries, especially after the mortgage crisis that plagued the financial markets in most countries of the world, as these countries tried to reduce the interest rate to Zero or close to it in order to move the economy, but it did not respond despite the fact that the interest rate is the main tool and is considered the control stick in direct monetary policies. Thus, it became imperative for those countries to use new tools in order to get out of that crisis. Japan is considered the first to use these new policies and solutions before that period, and he is the first to call them indirect monetary policies. These tools were called by many names, including quantitative easing, credit facilitation and others. Many names, but it was the best solution by monetary policy makers for many countries, including the United States of America, the United Kingdom of Britain and the European Union, which represent the most powerful economies in the world,

Commodity futures prices pass-through and monetary policy in India: Does asymmetry matter?

Like many other emerging market economies, India is practising flexible inflation targeting through monetary policy. As the success of inflation targeting regime largely depends upon the ability of the central bank to predict the future path of inflation accurately, it is important to identify the predictors of inflation. The paper empirically examines the informational role of commodity futures prices for monetary policy in India considering the possible presence of asymmetries. Employing the Nonlinear Autoregressive Distributed Lag (NARDL) as estimation strategy, this study is probably the first attempt to examine the asymmetric relationship between commodity futures prices and macroeconomic variables relevant to monetary policymaking. The results are expected to assume significance for the policymakers as the presence of pass-through effects of commodity futures prices confirms its role as an information variable in the process of monetary policy making in India.

The role of labor market structure and shocks for monetary policy in Kazakhstan

In this paper , we study the role of labor market structure and shocks for monetary policy in Kazakhstan employing a New Keynesian model with labor market rigidities. We estimate the model using Bayesian techniques to identify labor market shocks that are important for monetary policy-making. The estimation results suggest that shocks to the bargaining power of workers explain most of the output and inflation fluctuations. Thus, it should be closely monitored by the central bank. In addition, we examine to what extent different labor market characteristics affect the transmission of monetary policy. The results show that a more flexible wage-setting process improves the transmission mechanism. A monetary policy shock translates faster to inflation. Furthermore, we find that the relevance of other features of the labor market for the transmission of monetary policy shocks is limited.

International Measures of Common Inflation

A key challenge for monetary policymakers in achieving their inflation goals—particularly important at the current juncture—is to be able to distinguish between persistent inflationary changes and short-term idiosyncratic shocks. The most common approach for filtering out short-term price shocks from inflation is to focus on measures of "core" inflation, traditionally defined as the change in the consumer price index (CPI) excluding food and energy prices.

What determines wholesale funding costs of the global systemically important banks?

Raising capital on wholesale debt markets is an important source of funding for banks and non-banking institutions throughout the world. We investigate the determinants of wholesale funding costs for the Global Systematically Important Banks (G-SIBs) using credit default swaps, the proxy for the cost of wholesale debt funding. Using 25 G-SIBs which are heavily reliant on debt capital markets across multiple currencies, this paper investigates whether the default risk of the interbank lending system, i.e., LIBOR-OIS spread is a new global macroeconomic factor in determining G-SIBs’ CDS spreads. Based on time-fixed effects and bank-fixed effects, we find default risk from the US banking system seems to play a greater role in explaining the wholesale funding costs of the G-SIBs than that of their home-country equivalent default risk. Overall, the findings make an important contribution to domestic and international debt funding markets and provide an insight for financial intermediaries, regulators, and monetary-policy makers.

Do Exchange Rates Fluctuations Influence Gold Price in G7 Countries? New Insights from a Nonparametric Causality-in-Quantiles Test

Abstract In the recent era, gold is considered an essential investment source, a source of hedging inflation, and a medium of monetary exchange. The gold and exchange rate nexus become prominent after events like sovereign debt crisis, subprime mortgage crisis, low-interest rate problem, and global financial market solvency. These events attract the attention of researchers and academician for investigating the dynamics of the relationship between gold and exchange rates, and the majority of the studies discusses the linear dynamics, but the non-linear dynamics are ignored. Therefore, the current research investigates the non-linear dynamics of gold price and exchange rate relationship in G7 countries using the new technique named the nonparametric causality approach. This study uses monthly data from the years 1995(January)-2017 (March). The empirical results show that exchange rate return causes gold prices in four out of G7, especially at the low tails. This study also gives valuable insights for monetary policymakers, gold exporter’s international portfolio managers, and hedge fund managers.

The Influence of Global Financial Liquidity on the Indonesian Economy: Dynamic Analysis with Threshold VAR

Empirical studies of the global liquidity spillover on Indonesia’s economy are still relatively limited. Most of the global contagion literature on Indonesia’s economy focuses only on the effects of real shock (on output) due to financial shock. We assert that the effect of global output on Indonesia macroeconomic conditions is a fairly relevant issue to be studied. This research aims to investigate the interdependent relationships between world GDP, world commodity prices, world inflation, trade flows, capital inflow, capital account transactions, reserve accumulation, global liquidity (e.g., global broad money), and monetary aggregates, with regard to Indonesia’s GDP variables and inflation. This paper uses threshold vector autoregression (TVAR) to capture regime changes in the variables of the world economy. World economic data and Indonesia’s economic data were utilized to prove different responses to the world economic situation in two different regimes. This research identified two groups of upper regime and lower regime world variables—namely, world inflation, world GDP, and world commodity prices. TVAR estimation resulted in a smaller residual sum of squares compared to VAR estimation. Different regimes resulted in differences in Indonesia’s economic responses due to the shock of world economic variables. The findings generated by this research are expected to be insightful to monetary policymakers in Indonesia.

THE IMPACT OF TECHNOLOGY ON REGIONAL PRICE DISPERSION IN THE US

We analyze the behavior of inflation in the era of fast pace information thanks to technological advances, especially internet. Owing to readily available information, prices/inflation should quickly converge under perfect competition. To this end, we explore the possibility of price convergence in regional inflation in the USA including the permanency of such a phenomenon if observed, a concern for monetary policy makers. Empirically, we analyze standard deviation of regional inflation with special attention to technology. We show that standard deviation of inflation is not constant over time, but not necessarily ever-declining. Technology seems to help reduce price dispersion across regions.

Evaluation of Stackelberg Leader-Follower Interaction Between Policymakers in Small Open Economies

The problem of coordination between policymakers seems to have created fundamental problems related to economic and social costs, targeted inflation, potential growth, and a high budget deficit. To resolve these problems in this framework, it is important to see the results of the interaction between policymakers and to propose an optimal policy strategy. In this study, the interactions between monetary and fiscal policymakers are examined game theoretically within the framework of the New Keynesian model. The strategic interaction between these policymakers is assessed using the DSGE (Dynamic Stochastic General Equilibrium) model for a small open economy. From this point of view, the interaction between policymakers is assessed within the framework of hypothetical scenarios. The optimal monetary and fiscal policies for a small open economy are derived from the leader-follower mechanism solution known as the Stackelberg solution. Optimal Stackelberg policy rules derived for a small open economy contribute to the literature of economics. The performance of the game theoretically derived optimal policy rules is evaluated through dynamic simulation within the framework of counterfactual experiments. The parameters developed for the model are calibrated for the Turkish economy. Dynamic simulation of the models, the impulse response functions, and the social loss analysis shows that the optimal policy mix for the Turkish economy is when the monetary policymaker is the leader, and the fiscal policymaker is the follower.

Can Recurrent Neural Networks Predict Inflation in Euro Zone as Good as Professional Forecasters?

This paper investigates whether a specific type of a recurrent neural network, in particular Jordan neural network (JNN), captures the expected inflation better than commonly used feedforward neural networks and traditional parametric time-series models. It also considers competing survey-based and model-based expected inflation towards ex-post actual inflation to find whose predictions are more accurate; predictions from survey respondents or forecasting modelers. Further, it proposes neural network modelling strategy when dealing with nonstationary time-series which exhibit long-memory property and nonlinear dependence with respect to lagged inputs and exogenous inputs as well. Following this strategy, overfitting problem was reduced until no improvement in forecasting accuracy of expected inflation is achieved. The main finding is that JNN predicts inflation in euro zone quite accurately within forecasting horizon of 2 years. Regarding rational expectation principle we have found a set of demand-pull and cost-push inflation characteristics as exogenous inputs which helps in reducing overfitting problem of recurrent neural network even more. The sample includes euro zone aggregated monthly observations from January 2000 to December 2019. The results also confirm that inflation expectations obtained from JNN are consistent with Survey of professional forecasters (SPF), and thus, monetary policy makers can use JNN as a complementary tool in shortcomings of other inflation expectations measures.

Does foreign monetary policy drive Australian banks' wholesale funding costs?

In this paper, we analyze whether Australian banks' wholesale funding (WF) costs are driven by foreign monetary policy. Using data for 2000–2015, we find that in aggregate, WF costs are not directly affected by the Reserve Bank of Australia's cash rate, except for issues in Australian dollars. The impact is indirect, through the yield of Australian government bonds. WF costs for issues in non-Australian currencies (except Japanese yen) depend on foreign monetary policy. The paper also shows that WF costs do not depend on the volatility index and exchange rates. Our results have implications for regulators and monetary-policy makers.

Can the Federal Reserve Effectively Target Main Street? Evidence from the 1970s Recession

Modern central bankers confront a challenge of providing economic stimulus even when the policy rate is constrained by a lower bound. This challenge has led to substantial innovation by policymakers and a proliferation of new policy tools. In this paper, I offer evidence on the efficacy of a new tool known as funding for lending, which provides banks with subsidized funding to make additional loans. I focus on a historical episode from the United States in which the Federal Reserve provided banks with steeply subsidized loans to promote the expansion of credit within their local communities. I show that the cheap funding succeeded in generating more lending by countering banks' excessive liquidity preference. The additional credit benefited the real economy. Local areas enjoyed higher rates of small business formation and more rapid employment growth. Finally, I show that the cost of the subsidy provided by the government was more than offset by the additional payroll taxes paid out of higher wages and salaries. These results suggest that funding for lending programs deserve consideration for the modern central banker's toolkit and demonstrate that certain unconventional tools can offer monetary policymakers the means to pursue more targeted objectives.

Central Bank Policy and the concentration of risk: Empirical estimates

Before the 2008 crisis, the cross-sectional skewness of banks’ leverage went up and macro risk concentrated in the balance sheets of large banks. Using a model of profit-maximizing banks with heterogeneous Value-at-Risk constraints, we extract the distribution of banks’ risk-taking parameters from balance sheet data. The time series of these estimates allow us to understand systemic risk and its concentration in the banking sector over time. Counterfactual exercises show that (1) monetary policymakers confront the trade-off between stimulating the economy and financial stability, and (2) macroprudential policies can be effective tools to increase financial stability.

CENTRAL BANK COMMUNICATION DESIGN: TOWARDS TRANSPARENCY OF MONETARY POLICY

The object of the article is central bank communication design (particularly target audience, channels and instruments) and central banks’ transparency measurement. The purpose is to summarise the central bank communication policy's conceptual basics and clarify how transparent the NBU’s monetary policy is. Methodology. The paper applies the Dincer and Eichengreen (2014) and Al-Mashat et al. (2018) methods of transparency measurement, using the NBU’s published documents and website data as of 2021. Results. It has been emphasized that communication design should be based on central bank’s communication objectives, information demand from defined stakeholders and target groups, capabilities of application of channels and instruments. Ensuring confidence in monetary policy calls for simplified language and format that reflects the general public's interest. The shift to the growing role of the type of communication channel and interaction of central bank with the general public are marked out. The meaning of transparency, criteria, and indices (Eijffinger-Geraats, Dincer-Eichengreen, Crowe-Meade, Cournede-Minegishi, CBT-IT index) are under consideration. According to Dincer and Eichengreen, the NBU’s transparency index reaches almost a perfect score of 12 (out of 15), affirming NBU’s political and policy transparency improvements. The NBU’s CBT-IT transparency index scores 11.45 (out of 20), which points to the need to eliminate gaps of the FPAS designed to support full-fledged inflation- forecast-targeting (3.2 out of 9) in the light of improvements in the monetary policymaking process (5.75 out of 7) and transparency about monetary policy objectives (2.5 out of 3). Practical implications. The enhancement of the NBU’s transparency level reflects the development of its communication policy as transparency of monetary policy requires constant and coherent messages via diversified channels and instruments for a defined target audience, following a clear purpose of strategic communication. Value/originality. It has been highlighted that central bank communication design is the basis for financial market participants' trust, favouring monetary policy transparency.

The response of Brent crude oil to the European central bank monetary policy

This paper examines the impact of European Central Bank (ECB) monetary policy decisions on oil prices and liquidity using an event study with intraday data. We analyse the period from January 1999 to December 2020, which includes the financial crisis that started in August 2007. Our results show a significant response for oil returns only during the financial crisis. Specifically, we find that Brent crude oil futures’ returns responded negatively to unexpected variations in the Italian risk premium as a measure of unconventional monetary policy actions – and positively to unexpected variations in short-term interest rates. That is, an unexpected increase in short-term interest rates and reductions in the Italian risk premium are taken as positive signals anticipating the end of the financial crisis. Moreover, as Brent is priced in US dollars, we have tested if the Brent response is due to the exchange rate response. We find that the null hypothesis of equal response from Brent and the exchange rate to ECB monetary policy announcements cannot be rejected. These are important results for monetary policy makers and financial agents.

Effect of Foreign Exchange Reserves and Money Supply on Exchange Rate in South Sudan

Since the establishment of the Central Bank of South Sudan in 2011, monetary policymakers have been changing their policy instruments over the years in an attempt to stabilise the country’s economy. This study investigated the effect of foreign exchange reserves and money supply on the exchange rate in South Sudan over the period 2012 to 2019. Empirical studies of the effect of foreign exchange reserves and money supply on the exchange rate are reviewed in both developed and developing countries. Annual data from the World Bank Economy Statistics Database was analysed using an advanced pivot table. The findings of this study indicate that a decrease in foreign exchange reserves causes a depreciation in the exchange rate. The results also confirm that an increase in money supply causes depreciation in the exchange rate. The findings are in line with the findings of all the empirical studies that are reviewed in this paper.

Nexus of Gold Price-Exchange rate-interest rate-Oil Price: Lessons for Monetary Policy in Pakistan

This study aims to evaluate the links among gold price, oil price, exchange rate and interest rate in Pakistan. All these channels are interconnected and have impact on monetary policy of the country. Monthly data ranging from 1995-01 to 2016-12 is used for the analysis based on VAR Model. Exchange rate depreciations are responded by tight monetary policy actions, which seem to have a significant effect on exchange rate stabilization process and raise gold price. Changes in oil prices at global level strongly affect the nexus in Pakistan. Monetary policy managers are suggested to take changes in gold prices as indicators of short-run fluctuations in Pakistan economy. The study contributes in two ways. Firstly, as a case study of Pakistan, it analyzes the role of gold market in response to changes in exchange rate and world oil prices. Secondly, the study links up monetary policy decisions to the nexus of gold price-oil price-exchange rate. Findings of the study may be useful for monetary policy makers, academia, and gold industry alike.

The macroeconomic effects of monetary policy: Evidence from Japan

This study examines the macroeconomic effects of monetary policy in Japan. We apply the new identification strategy proposed by Bu et al. (2021) to the Japanese case and estimate monetary policy shocks that bridge periods of conventional and unconventional monetary policymaking. We show the macroeconomic effects of monetary policy; a contractionary monetary policy shock significantly decreases output and inflation rates even under the effective lower bound. However, because the shorter-term and longer-term nominal interest rates are already close to zero, the magnitude of monetary policy shocks on the macroeconomic variables is modest.

Proportionality and procedure of monetary policy-making

Abstract In a highly controversial decision, the German Federal Constitutional Court (FCC) decided that the Public Sector Purchase Program (PSPP) of the European Central Bank (ECB) was ultra vires because it violated the principle of proportionality. The FCC took a procedural approach to proportionality, finding that the ECB had failed to substantiate its balancing assessment. Therefore, the Court considered itself unable to review whether PSPP was substantively proportionate, but announced that it might do so in a future case. The judgment raises the fundamental question of how courts should review monetary policy. The article begins by exploring the role of central banks between independence and accountability. Then, it analyzes, in three steps, what role the principle of proportionality should play in the realm of monetary policy. First, I argue that a traditional substantive balancing test as part of proportionality review is not applicable to monetary policy decisions and highlight the pitfalls of the FCC’s approach. Second, I claim that the imposed procedural “duty to substantiate” is not suitable to promote the democratic accountability of the ECB. Third, I contend that, therefore, the PSPP ruling creates an impetus for strengthening the ECB’s supranational accountability. I suggest that improving the monetary dialogue with the EU Parliament and establishing a comprehensive transparency regime for the ECB could further this goal. Ultimately, I propose that a narrow reading of the PSPP ruling could reconcile the current conflict between the FCC and the ECB and still provide a sufficient level of judicial accountability for the ECB’s monetary policy-making.

International Historical Evidence on Money Growth and Inflation: The Role of High Inflation Episodes

Abstract How long is the long run in the relationship between money growth and inflation? How important are high inflation episodes for the unit slope finding in the quantity theory of money? To answer these questions, we study the relationship between excess money growth and inflation over time and across frequencies using annual data from 1870 to 2013 for 16 developed countries. Wavelet-based exploratory analysis shows the existence of a close stable relationship between excess money growth and inflation only over long time horizons, i.e. periods greater than 16–24 years, with money growth mostly leading. When we investigate the sensitivity of the unit slope finding to inflation episodes using a “time-frequency-based” panel data approach, we find that low-frequency regression coefficients estimated over variable-length subsamples are largely affected by high inflation episodes occurring in the 1910s, the 1940s, and the 1970s. Taken together, our results suggest that inflationary upsurges affect regression coefficients, but not the closeness of the long-run relationship. This reconciles the validity of the quantity theory of money with the current disinterest of monetary policymaking in money growth.