Monetary Policy Rate Research Articles

A New Approach to Estimating the Natural Rate of Interest

AbstractBuilding upon the insight that M1 velocity is the permanent component of nominal interest rates—see Benati (2020)—I propose a novel, and straightforward approach to estimating the natural rate of interest, which is conceptually related to Cochrane's (1994a) proposal to estimate the permanent component of Gross National Product (GNP) by exploiting the informational content of consumption. Under monetary regimes (such as inflation‐targeting) making inflation I(0), the easiest way to implement the proposed approach is to (i) project the monetary policy rate onto M1 velocity—thus obtaining an estimate of thenominalnatural rate—and then () subtract from this inflation's sample average (or target), thus obtaining therealnatural rate. More complex implementations based on structural vector autoregressions (VARs) produce very similar estimates. Compared to existing approaches, the one proposed herein presents two key advantages: (i) under regimes making inflation I(0), M1 velocity is equal, up to a linear transformation, to the real natural rate, so that the natural rate is, in fact,observed; and (ii) based on a high‐frequency estimate of nominal GDP, the natural rate can be computed at the monthly or even weekly frequency. In the U.S., Euro area, and Canada, the natural rate dropped sharply in the months following the collapse of Lehman Brothers. Likewise, the 1929 stock market crash was followed in the U.S. by a dramatic decrease in the natural rate.

Monetary Policy and Bond Prices with Drifting Equilibrium Rates

AbstractWe study the drift and cyclical components in U.S. Treasury bonds. We find that bond yields are drifting because they reflect the drift in monetary policy rates. Empirically, modeling the monetary policy drift using demographics and productivity trends, plus long-term inflation expectations, leads to cyclical deviations of bond prices from their drift that predict bond returns in- and out-of-sample. These bond cycles can be interpreted as term premia or/and temporary deviations from rational expectations in a behavioral framework. Through the lens of our model, we detect a significant role of the latter in determining the cyclical properties of yields with short maturities.

Monetary Policy and People’s Socio-Economic Welfare in Nigeria

This study examined the effect of monetary policy on the socio-economic welfare of Nigerians between1980 and 2021 from three perspectives: income, health and education. We assessed the short and long run effects of six monetary policy variables (lending rate, savings deposit rate, liquidity ratio, monetary policy rate, loan deposit ratio and private sector credit to gross domestic product ratio) and inflation (control variable on three different socio-economic welfare variables (gross domestic product per capita, child mortality rate and primary and secondary school enrolment) during the study period.Results of the auto-regressive distributed lag (ARDL) technique show thatrevealed interest rate, liquidity rate and private sector credit have negative and significant effect on the per capita income while savings deposit rate, monetary policy rate, loan deposit rate and inflationhvesa positive and significant on per capita income. In the long run liquidity ratio and monetary policy rate have significant positive effect on income per capita while the ratio of private sector credit to GDP has a significant negative effect on it. Inflation has a positive but insignificant effect on per capita income. Furthermore, in the short run, all the selected monetary policy variables have significant effects on child mortality rate. While the effect of interest rate, liquidity ratio and monetary policy rate is negative, that of savings deposit rate, loan deposit ratio, private sector credit and inflation is positive. On the long run, interest rate, private sector credit and inflation have positive effect on child mortality but whereas the effect of interest rate is insignificant, the other two have significant effect. Regarding number of school enrolment, in the short run, interest rate has a negatively significant effect while liquidity ratio, loan deposit ratio and inflation have direct positive effect on it. Savings deposit rate has an insignificant positive effect on it while private sector credit has a negative insignificant effect on it. On the long run, interest rate, private sector credit and inflation have an insignificant positive effect on the number of primary and secondary school enrolment. Savings deposit rate, monetary policy rate and loan deposit ratio have insignificant negative effect on it. The effect of liquidity ratio is significantly positive. The study concluded that monetary policy has significant effect the socio-economic welfare life of Nigerians both in the short and long run. The study recommends the sustenance of the existing liquidity ratio and monetary policy rate due to their favourable effects on the people’s welfare.

The impact of central bank of Nigeria's intervention programmes on effectiveness of monetary policies

The study was conducted to find out the impact of the CBN intervention programmes on the effectiveness of monetary policies in Nigeria. It analysed the impact of the CBN intervention programmes on inflation and output using an ARDL model and evaluated the impact of the programmes on the responsiveness of inflation and output to changes in the monetary policy rate, using a segmented model. The results show that the intervention programmes have no-significant impact on inflation in Nigeria both in short and in the long-run. However, in the long run, a unit increase in the amount spent on the programmes increases the GDP by 0.047 unit, which was found to be statistically significant at 7 per cent level. On the impact of the intervention programmes on the effectiveness of the monetary policy, the segmented model results show that the introduction and implementation of the CBN intervention programmes had no significant impact on the responsiveness of inflation and output to changes in the monetary policy rate in Nigeria. However, the coefficient of the additive dummy confirms a significant difference between the output during the period of massive intervention and period of no intervention. Specifically, output during the period of massive intervention, other things being equal, was ₦91.45 billion higher than that of periods of no intervention.

Regulatory Institutions and National Economic Development in Nigeria

The financial sector is the epicenter of productive activity of an economy as it performs the vital role of financial intermediation, provider of payment services and the arbiter of monetary policy communication and implementation. Therefore, the objective of the study is to examine the effect of CBN as a regulatory institution on national economic development in Nigeria. The study used ex-post facto research design and the study covered a period of ten years (2011 – 2020). The study employed ordinary least square (OLS) method of estimation to establish the importance of the independent variables on the dependent’s variables. The findings revealed that Monetary policy Rate (MPR) has insignificant positive (202.2958/0.2296 ˃ 0.05) effect on the National Economic Development in Nigeria; Credit to Private Sector (CPS) has insignificant negative (-208.6998/0.1319 ˃ 0.05) effect on the National Economic Development in Nigeria; Liquidity Ratio (LQR) has significant negative (-57.09290/0.0503 = 0.05) effect liquidity ratio on the National Economic Development in Nigeria; and Interest rate (INT) has insignificant negative (-274.8069/0.1717 ˃ 0.05) effect liquidity ratio on the National Economic Development in Nigeria. The study concluded that the CBN current policies has been anti-people and over the years not having significant effect on economic development in Nigeria. The study recommended among other things that CBN should critically re-examines its regulatory policies to focus more on visionary policies that would cause the financial deepening indicators, monetary policy rate and exchange rate to positively and significantly engender development of the financial system. Central Bank of Nigeria should check mate their policy rates to ensure the prevention of inflation in the economy.

Alternative Analysis of Bank Lending Channel in Turkey After 2010

Traditional bank lending channel in the monetary transmission explains the relationship between monetary policies of Central Banks and the bank lending behavior. In this article, the existence of traditional bank lending channel and an alternative analysis of bank lending in the monetary transmission of Turkey is investigated between 2011 and 2018 using bank level data and GMM method. Additionally, we indicate whether the reaction of banks differ according to their bank specific caharacteristics. Asset quality, capital adequacy, liquidity ratio, asset size and profitability rates are used as bank characteristics. Since Central Bank of Turkey began to use multiple monetary policy tools to cope with financial stability issues at the end of 2010, the choice of an indicator for the monetary policy is important. In this article, we revise the analysis of bank lending view as the key assumptions of traditional bank lending are not valid. Different from prior research, to analyze the change in credit supply we use both monetary policy rates and actual interest rates (BISTREPO and weighted average cost of Central Bank of Turkish Republic) as monetary policy indicators. Using monetary policy rates, our findings indicate that traditional bank lending channel does not work. Using BISTREPO as monetary policy indicator, our findings indicate that it is significant in the credit supply change. Taking the bank characteristics into account only bank size is significant in mitigating the negative effects of monetary policy shocks. This finding shows that banks that have larger asset size may find different funding alternatives and continue to lend during monetary policy shocks. Additionally, when weighted average cost of the CBTR funding are used as a monetary policy indicator, our findings show that this rate is also significant in the credit supply change and similar to prior results higher bank size may mitigate the negative effects of monetary policy shocks.

Monetary policy regimes and price stability in the West African monetary zone

The study examined monetary policy regimes and price stability in the West African Monetary zone. This was undertaken given that countries in the zone are implementing different monetary policy regimes to achieve price stability for macroeconomic stability and economic growth, yet these have been elusive. So, the objective of the study was to examine the effect of monetary policy regimes on price stability in the West African monetary zone. The study adopted an ex-post facto research design and obtained secondary data from documents of the Central Banks of the WAMZ countries, the World Bank Development Indicator (WDI), the International Monetary Fund (IMF), and the International Financial Statistics (IFS) database for the period from 2001 to 2021. The method of data analysis involved the use of descriptive and analytical statistical tools. The estimation technique employed was the Panel Autoregressive Distribution Lag model, complemented by the Juodis, Karavias, and Sarafidis (2021) granger-causality test. The findings of the study indicate that the various monetary policy regimes being implemented in the West African Monetary Zone yielded conflicting effects on price stability. On the whole, the results show that the monetary policy rate against the money supply is more effective to achieve price stability in the West African monetary zone. Hence, the study makes the following recommendations; policymakers must ensure that an effective monetary policy is put in place to curb the persistent inflation in the zone that undermines socioeconomic development. Countries should review monetary policy rates appropriately to stimulate output growth, and, there should be cooperation between the monetary and fiscal authorities in the West African Monetary Zone to ensure smooth coordination and consistency in monetary and fiscal pursuits.

Regulations, Bank Stability Measures and Stock Market

Regulations directed at bank stability affect the entire financial system because of the strategic role banks play in the economy. The impact of regulations on bank performance have been examined. However, the use of bank regulatory stability indicators and aggregate financial regulatory instruments to account for stock market returns in Nigeria post-global financial crisis is limited, which is the gap this study seeks to fill. Data for this study was collected from investigated banks’ audited annual reports, the Central Bank of Nigeria Statistical Bulletin and Nigerian Stock Exchange official daily price list. Thirteen (13) banks listed in the Nigerian Exchange Limited for the 2010 to 2020 were investigated. The Difference Generalized Method of Moments was applied to the dynamic model to examine the effect of regulations, bank stability indicators on the returns of bank stocks. The Arrelano and Bond procedure was used to test for autocorrelation in the regression output, while the J.statistic enunciated by Hansen was employed to evaluate the existence or otherwise of over/under constraints in the instrumental variables incorporated in the estimation tool. E-view 9.0 econometric computer application was used for the analysis. This study found that bank liquidity ratio, an indicator of bank stability in this study positively and significance determines stock market returns. Also, capital adequency ratio, another bank stability indicator in this study positively and significantly drives stock returns. Similarly, monetary policy rate, an indicator used by the Central Bank of Nigeria to regulate aggregate liquidity positively and significantly influence bank stock returns. This study also revealed that the prescribed cash reserve ratio used by the Central Bank to regulate the capacity of banks to grant credits is negatively and significantly related to stock returns in Nigeria. This implies that a rise in cash reserve ratio limits the ability of banks to create credits, thereby reducing interest income from loans, thus reducing bank earnings. These findings imply that: (i) Investors should incorporate bank stability indicators and aggregate monetary policy regulatory instruments in their investment strategies if they hope to achieved maximum returns on investment. (ii) The regulatory authority can influence stock market performance through the concurrent utilization of bank stability indicators enunciated in Basel regulatory accord and monetary policy instruments (iii) The use of Cash reserve ratio as the regulatory instrument is potent in ensuring bank stability but it has adverse effect on bank stock returns because of its effect on interest income and earnings through its limitation on credit creations. Therefore, the central bank should reconsider the current cash reserve ratio and make it more friendly for banks' credit creation.

Impact of monetary policy on disaggregate inflation in Nigeria: A structural var approach

This paper examined the impact of monetary policy on disaggregate inflation in Nigeria over the period January 2002 – June 2020. The paper also investigated the impact of oil price shocks on macroeconomic variables in Nigeria. Using a linear Structural VAR approach, we found evidence that a decline of the monetary policy rate does not reduce inflation. In addition, exchange rate seems to have a significant impact on core inflation. That is, a shock to exchange rate decreases core inflation in the long-run, although there is no impact in the short-run. However, in the case of food inflation, an exchange rate shock increases food inflation in the long-run, likely due to the impact on food import. The study further establishes that oil price shock is key in explaining fluctuations in macroeconomic variables in Nigeria.

Impact of Monetary Policy on Credit and Investment in Nigeria (1981 – 2020)

In auspicious macroeconomic setting, monetary policy should increase credit availability, particularly in the real sector, to spur investment; however, this is not the case in the Nigerian economy. In this study, the impact of monetary policy on bank credit and investment in Nigeria from 1981 to 2020 was investigated. The central bank of Nigeria’s statistics bulletin was the source of the data used in this study. Using the data gathered, the study used Auto-Regressive Distributed Lag (ARDL). The study’s findings indicate that bank loans and investment have a long-term association with monetary policy. In addition, it was observed that while bank loans to the private sector and the liquidity ratio had short-term negative effects on investment, the cash reserve ratio, monetary policy, money supply, and inflation rate had long-term positive effects on investment. According to the study’s findings, monetary policy significantly and favorably affects bank credit and investment in Nigeria. The study suggested that the CBN adjust the monetary policy rate by reducing the cash reserve ratio, which will increase liquidity and allow the banks to discharge their credit capacity with the aim of improving investment in Nigeria. Monetary authorities should view credit as a major channel for implementing monetary policies, and this urgent adjustment should be made.

Monetary policy and economic growth in Nigeria: Evidence from bounds and Bayer-Hanck cointegration techniques

This paper contributes to the monetary policy-economic growth debate by investigating whether monetary policy stimulates economic growth in Nigeria. Using time series data from 1970 to 2018 and deploying the autoregressive distributed lag (ARDL) model, bounds and the Bayer- Hanck (2013) cointegration tests, evidence from the main and robustness checks show that (1) a significant long-run association exists, and (2) a percentage increase in the monetary policy rate results in 0.055 percentage decline in economic growth, on average, ceteris paribus. In other words, these findings confirm that a statistically significant inverse relation exists between monetary policy and economic growth in Nigeria. Trade openness also exerts asymmetric contemporaneous (0.094) and lag (-0.059) impacts on economic growth at the 1% and 5% significance levels, respectively. Similarly, the inflation rate contemporaneously reduces economic growth (-0.002) at the 1% significance level while its lag impacts are asymmetric and statistically significant at the 10% and 5% levels, respectively. Policy recommendations are discussed.

Monetary Policy Tools and Nigeria’s Manufacturing Sector Output

Manufacturing sector output has been experiencing dwindling output over the years, despite the efforts by the monetary authorities. Manufacturing sector in any economy is seen as one of the drivers of industrialization and economic development, as such government policies affect their performance. Hence, this paper examined the asymmetric effect of monetary policy tools on Nigeria’s manufacturing sector output between 1986 and 2022. Non-linear Autoregressive Distributed Lag (NARDL) method was adopted in carrying out empirical analysis. Cointegration using bounds test revealed the variables have long-run relationship. Findings from the paper revealed that positive effect of private sector credit has a corresponding positive impact on manufacturing sector output. While the negative effect led to a decrease in the output. Further findings showed that positive effect of monetary policy rate led to an increase in manufacturing sector output; while the negative effect led to a decrease in manufacturing sector output. Both variables were found to have statistically insignificant relationship with manufacturing sector output in Nigeria during the period covered. Based on these findings, the monetary authorities are encouraged to continue with improving programmes or schemes that will lead to more funding for the manufacturing; and are encouraged to take into account monetary policy that captures the economic reality on the ground.

미국의 통화정책과 국내 주식 투자자의 반응

Purpose - The primary objective of this article is to investigate the impact of U.S. monetary policy on institutional / individual / foreign investor reactions in the Korean stock market.
 Design/methodology/approach - This study employs a high frequency event study methodology to identify U.S. monetary policy shocks and quantify the impact of identified shocks on investor reactions. The dependent variable in the regression model is net stock purchase, while the explanatory variables are U.S. monetary policy shocks. The model is estimated for the period 2000-2019, including 156 FOMC meetings.
 Findings - Foreign investors immediately sell stocks in response to contractionary U.S. monetary shocks. They do not, however, react to anticipated changes in monetary policy rates, confirming the rationality of foreign investors. Individual investors demonstrate the opposite response, indicating that a non-trivial proportion of individual investors are irrational.
 Research implications or Originality - This study adds to the current literature on the effect of U.S. monetary policy on the Korean stock market. This study demonstrates a heterogeneous response to U.S. monetary policy shocks, validating the rational investment behavior of foreign investors, while individual investors exhibit a certain degree of irrationality. Methodologically, this study adds to the literature by quantifying the impact of U.S. monetary policy employing a sharper identification method allowing a simple and consistent estimation.

NEW RELATIONSHIP BETWEEN NATIONAL CURRENCY RATE AND INFLATION

The exchange rate and inflation indicators reflect how expensive or cheap this monetary resource will be for society or business entities. Given Georgia’s transitional and open economy, which is also dependent on imports and the national currency is pegged to the US dollar with a floating exchange rate, the price of these resources is volatile over time. The given dynamics in the last 30 years are typical for both standard and crisis periods. To define economic stability, we will use the following indicators within the scope of this work – Gross Domestic Product (GDP), inflation and national currency exchange rate. We need to focus on the last two indicators for the sake of this research. For individuals and legal entities, these data are essential for their short, medium and long-term activities – accumulation and spending of monetary resources, purchases, sales, demand allocations, etc. The study considers two major crises, which Georgia went through in the form of a typical crisis with the 2008 Russia- Georgia war. It continues as an atypical crisis due to the COVID-19 pandemic and the Russia-Ukraine war. Both events significantly impacted on our country’s inflation rate and the national currency exchange rate. Accordingly, it will be interesting to determine what kind of correlation was revealed in the first crisis and what new correlation was formed within the second indefinite crisis. As a result of regression and correlation analysis, it has been determined what contribution the monetary policy rate had in managing the mentioned crises and how much it helped Georgia’s economy. In particular, the influence of the monetary policy rate on the exchange and inflation rates has been studied.

Evaluation of The Determinants of Domestic Bonds in Ghana

The study sought to examine the determinants domestic bonds in Ghana using secondary data. The researcher used the Government of Ghana bonds issued in 2013 to 2017 and has not matured by 31st December 2019. A sample of 6 Government of Ghana bonds which have been on the secondary market for at least two years with a tenor of at least three years was used by the researcher. Based on the stationary and the existence on cointegration vectors, the study investigated long and short run effects using ARDL (1,0,1,1,1,1) and ARDL (1,2,2,2,2,2) Error Correction Models respectively. The E-Views version 11 was used to conduct the analysis. It was found that GDP had a long run insignificant positive effect on Ghana Government Bond Prices, but a short run significant positive effect on Ghana Government Bond Prices. The second major finding was that Exchange Rate had a significant positive effect on Ghana Government Bond Prices in the long run, but this significant effect was negative in the short run. Thirdly, it was revealed that inflation had a significant negative effect on Ghana Government Bond Prices both in the long and short run. Risk Free Rate of Return had a significant negative effect in the long run but had insignificant effect in the short run. Monetary Policy Rate had significant positive effects in the long and short run. It was concluded that increases in Exchange Rate, Gross Domestic Products and monetary policy led to corresponding increases in the prices of government bonds while increases in Inflation, and Risk Free Rate of Return led to a decrease in the prices of Government bonds. In the short run, an increase in Exchange Rate and Inflation leads to a decrease in bond prices while an increase GDP, Risk Free Rate of Return and Monetary Policy Rate leads to a corresponding increase in bond prices. It is recommended that investors consider inflation, GDP, exchange rate, Risk Free Return and Monetary Policy, among other factors, when making decisions on the position to take in a bond as it determines bond prices. Policymakers should aim at working to achieving low inflation and exchange rate figures as that will increase bond prices and make it more attractive to foreign investors. It is also important that policy makers understand and manage effectively risk free bonds and the monetary policy as they have significant effects on the prices of government bonds.

Identifying the Effects of Macroeconomic Attention Through Foreign Investor Distraction

AbstractWhile the causal impact of limited attention to macroeconomic news is difficult to detect, this article proposes one solution: exploiting when foreign investors are “distracted” by risk factors in their home markets. I demonstrate that financial activity in the average foreign investor’s home market decreases foreign attention paid to 21 emerging economies, measured using Google search volume for economy-specific financial terms that emanate from outside each economy’s border. Exploiting this effect using an instrumental variables approach, I find that an exogenous increase in foreign attention preceding a scheduled monetary policy rate announcement raises preannouncement stock returns and announcement day turnover.

POST-CONSOLIDATION MACROECONOMIC VOLATILITY AND FINANCIAL PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA (2006 – 2020)

This study aims to examine the effect of volatility of macroeconomic variables on the financial performance of Deposit Money Banks in Nigeria. Secondary annual time series data from 2006 to 2020 on variables for this study were obtained from the Central Bank of Nigeria Statistical Bulletin 2021. A GARCH model analysis of annual time-series data on liquidity ratio, foreign exchange rate, interest rate, Real GDP, monetary policy rate, credit reserve ratio, inflation rate and aggregate bank profit as a measure of banks’ profitability from 2006 to 2020 was undertaken. The empirical findings showed that there exists volatility in these variables with LIQR, INTR, MPR, EXCR, and RGDP positively affecting banks’ financial performance; while INFL and CRR negatively affect banks’ profitability within the period under consideration. The study recommends that monetary policies should be introduced by Central Bank of Nigeria towards increasing MPR, RGDP and reduce CRR, INFL to stimulate the financial performance of deposit money banks and the general stability of the financial system in Nigeria

How Effective are Monetary Policy Tools in Controlling Inflation in Nigeria? An Empirical Investigation

Abstract In applying the monetary policy in controlling inflation, the monetary authorities employ a mix of tools, which when varied, transfer their effects to the target outcome of inflation control. Despite monetary authorities having employed series of strategies including recently, inflation targeting, the Nigerian inflation rates have remained uncontrollable, thereby, suggesting that the question could, however, be of the effectiveness of tools being employed. This study thus, examines the effectiveness of monetary policy rates, treasury bills rates and liquidity ratio in controlling inflation in Nigeria using annual data covering the period between 1981 and 2019. Unlike most existing studies that employed a combination of policy tools and intermediate outcomes, this study employed only monetary policy tools in its analysis. Results obtained from the estimated ARDL (2, 2, 1, 2) model suggest that both in the long-run and short-run, monetary policy rates have insignificant impact on inflation rates, thus, implying that they have been ineffective in inflation control. More so, treasury bills rates were found to be effective only in the short-run as lagged treasury bills rates showed a significant negative impact on inflation in the short-run while liquidity ratio proved effective only in the long-run with an unfavourable effect on inflation control in the short-run. It is recommended, therefore, that the monetary authorities reduce the size of the informal financial system by strengthening the official financial system in a bid to make the monetary tools of choice more effective for inflation control.

Effect of Monetary Policy Rate on Market Interest Rates in Nigeria: A Threshold and NARDL Approach

This study examines the effect of monetary policy rate (MPR) on market interest rates in Nigeria. For parsimony, we develop two indexes called the short-term interest rate (SINT) and Lending interest rate (LINT) to represent deposit and lending rates respectively. The nonlinear autoregressive distributed lag (NARDL) and threshold regression models are adopted. The study uses monthly data from 2002:M1 to 2019:M12. The results of the threshold regression model indicate that the degree of the effect of MPR on SINT and LINT above the estimated threshold of 11 and 13 percent respectively is greater and significant than if MPR were to be below the threshold. Moreover, estimates from the nonlinear ARDL model show that increasing MPR induces a positive effect on short-term and lending interest rates, while a negative effect holds if MPR is decreased. For LINT, the magnitude of the negative effect is little, while for SINT, the effect is statistically insignificant. This depicts the downward stickiness of prices, which supports the argument that the ineffectiveness of MPR only holds when it is adjusted downward. We recommend that the monetary authority should focus on reforming the banking system in ways that remove downward rigidities in the effect of MPR on interest rates in order to engender greater efficiency of monetary policy.

Monetary Policy and Banking Sector Stability in Nigeria

This study investigates the impact of monetary policy on banking sector stability in Nigeria, utilizing quarterly data for the period 2007Q1 to 2021Q4. The study employs the autoregressive distributed lag (ARDL) bounds testing approach to cointegration. Results show that a long run relationship exist between banking sector stability and monetary policy in Nigeria. Furthermore, monetary policy rate, liquidity ratio, and cash reserve ratio are found to enhance banking sector stability. The study recommends, among others, that cash reserve and liquidity ratios should be kept at levels that will prevent excess liquidity in the system.