Monetary Policy Regime Research Articles

Факторы, влияющие на базовые ставки центральных банков в контексте неопределенности экономической политики

The relevance of the research topic is determined by the current unstable state of the world economy and the increasing role of central banks, which have the ability to positively influence countries’ economic development. Central banks, when implementing monetary policy, adhere to a certain strategy and accepted methods, including using monetary policy rules. The aim of this study is to evaluate the Taylor rule linking the central bank’s benchmark interest rate, the inflation rate, and the deviation of a country’s economic development from its trajectory. Developing the Taylor rule, we add a factor to the central bank reaction equation that reflects the level of uncertainty. The econometric assessment is based on statistics for two countries, the USA and the Russian Federation, whose central banks currently adhere to different monetary policy regimes introduced at different times. Despite differences between the countries’ economies and central banks’ monetary policies, uncertainty-related indices have shown their significance.

Monetary policy framework in Sri Lanka and its impact on the financial sector: A review

Monetary policy is a prominent stabilization mechanism often used to accomplish price and economic stability in a country. The success of monetary policy depends on the operating economic environment, the institutional framework adopted, and the choice and mix of the instruments used. The aim of this paper was to review the evolution of the monetary policy framework in Sri Lanka and its impact on the financial sector. The review is important, and monetary policy is intended to impact aggregate spending in the economy to contribute to the goals of full employment, price stability, sustainable economic growth, and balance of payments equilibrium. The paper reviewed more than twenty-five research and review papers using a thematic approach. The paper explains the historical evolution of monetary policy regimes in Sri Lanka and the reasons for adopting various monetary and exchange rate policy regimes from time to time. The review considers national and international studies on monetary policy regimes and their impact on the financial system. The paper concludes that the Currency Board could not influence the money supply in any way, and until the adoption of open economy policies in 1977 under the fixed exchange rate regimes, the Central Bank had no control over domestic inflation. The review also identifies that flexible inflation targeting is the international best practice of Central Banking, and flexible inflation targeting enables the maintenance of low inflation, thereby helping economies achieve a high and stable growth path. However, it emphasizes that it should be maintained sustainably subject to several conditions through government intervention.

Determinants of Monetary Policy: An Application of Regime Switching Model

The monetary policy of India has undergone substantial changes since 2013, particularly after taper tantrum episodes. The RBI moved from WPI to CPI for measuring inflation. Monetary policy anchoring shifted from a multiple-indicator approach (MIA) to flexible inflation targeting (FIT) in 2016 to deal with the aftermath of the global financial crisis. In this context, the study examined whether there was a significant shift in the monetary policy regime using a non-linear model (Markov Switching-Vector Autoregression Model) covering monthly data from 2013 to 2020. The study also investigated the role of the inflation rate, oil price, growth rate, and exchange rate in influencing monetary policy in India. The study found no change in the RBI monetary policy regime, and monetary policy remained biased towards controlling the inflation rate.

INFLATION AND ECONOMIC GROWTH TRENDS: GLOBAL AND SOUTH AFRICAN PERSPECTIVES

This paper explores the global inflation and economic growth trends, with a special focus on South Africa, from the 1970s – the period marked by the crumbling of the Bretton Woods system and the ensuing stagflation – to 2022. Our exploration reveals that global inflation is driven mainly by advanced economies, and there are signs of a negative correlation between the levels of income and inflation rates. We observed a structural break in global inflation in 1995 when inflation substantially decreased and became more stable than before. Our analysis links this structural break and stability in inflation to the emergence of strict monetary policy regimes like inflation targeting. Emerging and developing economies experienced a substantial decrease in inflation after they adopted inflation-targeting policies, as compared to advanced economies. In contrast, AEs benefitted from a significant rise in their economic growth. For South Africa, the trends in inflation and economic growth displayed a different picture. Although negligibly, South Africa’s inflation rose three years after adopting inflation targeting. During the same period, the South Africa experienced rising economic growth. To better understand the relationship between inflation and economic growth, we suggest the use of extensive data and models to investigate the structural breaks experienced.

The Phillips curve for an open economy: The evolution of inflation processes in Russia

Modern specifications of the Phillips curve are actively used in the study of inflation dynamics, but many of them do not consider the influence of external variables. In this paper, we use a non-linear GMM to estimate the Phillips curve equation for a small open economy which includes the expected change in the exchange rate on Russian data. Estimates show that the assignment of the new head of the Bank of Russia in 2013 and the subsequent transition to the inflation targeting regime significantly reduced the impact of expectations of a change in the ruble exchange rate on inflation which confirms the efficiency of the modification of the monetary policy regime. Another interesting result is that the outbreak of the pandemic has again led to an increase in the impact of the expected change in the exchange rate on inflation which may be a result of increased uncertainty in import prices. The empirical results also show that the pandemic caused a decrease in price rigidity in the Russian economy while the transition to an inflation targeting regime did not affect price rigidity.

The inflation targeting regime in Ukraine and Czech Republic: a comparative analysis

The main purpose of this article is to determine the impact of the inflation targeting re-gime on the inflation rates in Ukraine and the Czech Republic, to identify the advantages and disadvantages of its use, to study the evolution and dynamics of inflationary processes in Ukraine and the Czech Republic, as well as the nature and causes of inflation in Ukraine and the Czech Republic. A separate goal is to analyze the conditions and features of the Czech Re-public's experience with the introduction of inflation targeting and the formation of recommen-dations of successful measures to achieve inflation goals for Ukraine. In the paper, the authors examined the practice of applying the inflation targeting regime in Ukraine and the Czech Re-public in order to identify the positive and negative consequences of the implementation of this monetary policy regime. A review of publications has shown varying attitudes towards the in-flation targeting regime. The paper describes the chronology of inflationary processes in the re-searched countries, the dynamics of the consumer price index, the socio-economic consequences and causes of inflation. Attention is focused on the need for state regulation of inflationary pro-cesses. The effectiveness of the anti-inflationary policy was determined. In line with the findings of the study, the prospects for the implementation of an effective monetary anti-inflationary policy aimed at effective regulation of inflationary processes are outlined. The authors conclude that the study of the National Bank of Ukraine's (NBU) monetary policy is important because it affects inflation, the exchange rate, and economic growth. Economic agents always adjust fi-nancial risks, keeping in mind that historically inflation has been one of the most acute prob-lems for Ukraine , which has an uneven constant development. This study is aimed at determin-ing the nature and causes of modern inflation in Ukraine and in Czech Republic and the possi-bility of its regulation by monetary methods. Differences in the dynamics of inflation processes in the presented countries indicate that inflation in each country has specific features related to pricing, purchasing power, money circulation, anti-inflationary and countercyclical policies. However, unevenness and cyclical development of inflation is typical for the studied countries. The results of this study are of interest to the Ministry of Economy of Ukraine, the National Bank of Ukraine, as well as the Committee on Ukraine's Integration into the European Union, whereas the processes of European integration contribute to reducing inflation in the future. The authors conclude that in the process of creating effective economic policy, it is necessary to use the experience of other countries that have achieved stable, multi-year success in this pro-cess. This study highlights the discussion about inflation targeting experience in the transition economies of Ukraine and Czech Republic. The authors emphasize that circumstances that led to the transition from exchange rate pegging to inflation targeting have made significant pro-gress in reducing inflation. The authors discovered that the focus of inflation-targeting by cen-tral banks should be on the medium-term horizon in order to ensure inflation reduction as well as inflation level appropriate for price stability.

Macro welfare effects of flexible labor contracts

We develop a Dynamic-Stochastic-General-Equilibrium model to study the macro welfare effects of flexible labor contracts. Capturing the empirical properties observed in the data, we incorporate two labor sectors in our DSGE framework: a fixed sector and a flexible sector. The fixed sector offers contracts that exhibit rigidities in working-hours and wages while the flexible sector offers flexible contracts in both dimensions. We calibrate the model utilizing Eurozone data and show that in the benchmark currency union economy, welfare would monotonically increase if fixed sector’s wage rigidity goes up, while welfare would monotonically decline in wage rigidity if the benchmark economy were to switch to inflation targeting. We also show that it is the working-hour flexibility of flexible labor contracts that reinforces the desirability of wage stickiness in the fixed sector. Finally, we obtain strikingly different optimal flexible sector sizes for economies in currency union and inflation targeting monetary policy regimes: while the optimal flexible sector size for a currency union economy turns out to be 0%, the optimal flexible sector size for an economy with inflation targeting is 100%. These important results prevail because large fluctuations in consumption associated with flexible labor arrangements are too costly for households in a currency union with limited monetary policy flexibility — outweighing the production flexibility gains from flexible labor contracts. In this respect, our paper formalizes the welfare concerns related to the growing flexible labor sector sizes in Eurozone and urge policy makers to pay special attention to regulations that induce more flexible labor arrangements in this region.

Quantitative easing effectiveness: Evidence from Euro private assets

AbstractProponents of quantitative easing (QE) unconventional policy have rather overstated some evidence that structural time series models do not predict long‐term asset prices and yields as well as naive random walk forecasts, implying that predictions of price reversals cannot be profitable and, therefore, that QE effects are not transitory. Indeed, in this work we present evidence that naive models do not outperform structural vector autoregressive and Markov switching models in out‐of‐sample forecasting of corporate bond yields purchased by the European Central Bank, when the information set includes base money growth. It turns out that structural time series models provide additional information regarding the likelihood of price reversals, thus motivating investors to offset the effects of QE interventions if they perceive unconventional monetary policy regimes as temporary.

Global Financial Crisis: Causes and Reactions

This paper examines the reasons behind the financial crisis of 2008, its effects, and the subsequent developments. At that time, the federal government's monetary policy promoted subprime loans, and credit default swaps were derived based on subprime loans. This series of reasons led to a huge bubble in the real estate market and directly caused the subprime mortgage crisis. Companies are closing one after another, unemployment and inflation are rising, and people's lives are getting more complex. To survive this crisis, the government passed pertinent legislation to support economic growth, and banking regulators corrected these laws to stop a repeat of the subprime mortgage crisis. Nowadays, the outbreak of the COVID-19 epidemic and the conflict in Ukraine have brought the world economy into trouble again. As a result, the 2008 financial crisis study is crucial to understanding modern society because it can be used to prevent future financial crises and effectively address economic problems.

Identifying money and inflation expectation shocks to real oil prices

The paper extends the well-known three-variable SVAR model that explains real oil prices based on supply and demand shocks to the oil market. We identify significant monetary sources of shocks to real oil prices through a money supply shock and an inflation expectations shock. Results indicate robust significance of these two monetary shocks under a variety of time periods, using an alternate aggregate demand variable, and adding a fourth fundamental variable based on oil inventories. We also use alternative money aggregates for the money supply. Given their significance, we derive a historical variance decomposition of real oil price changes by each shock's contribution. We find a significant displacement of oil supply and demand factors by monetary factors that we match up to historical US monetary policy regimes. During major oil price episodes when monetary shocks dominate, the US money supply and inflation expectation shocks largely explain oil price increases above fundamentals. We interpret this in terms of the US monetary policy during crisis periods and find a common component of that policy linked to oil price episodes. Results imply that US monetary policy led to unintended consequences in energy markets. The results could facilitate improvements in international energy policy, US monetary policy, and global economic stability.

Effect Of Monetary Policy Regimes On Output Growth In West Africa

This paper examines the effect of monetary policy regimes on output growth in West Africa. This was undertaken given that countries in the region require output growth, but are pursuing different monetary policy regimes and are yet to witness adequate output growth. So this set the objective of the study. The study made use of a longitudinal research design that obtained cross-section data from the secondary sources of the Central Banks of the selected countries, the World Bank Development Indicator, the International Monetary Fund as well as the International Financial Statistics database for the period from 2000 to 2021. The data analysis method involved using both descriptive and inferential statistics. The Panel Autoregressive Distributed Lag (ARDL) using a Pooled Mean Group (PMG) regression was used for the estimation. The results obtained indicate that the monetary policy rate was only effective in the short run to exert a significant effect on output growth, while the money supply was significant in both the short run and long run. So, the study makes the following recommendations; money supply is an effective tool for achieving output growth and this should be effectively managed to curb inflationary trends that may arise as a result of increased money supply in order not to reverse economic growth. Monetary authorities should promote activities in all sectors of the economy, particularly in the high-growth sectors. There should be cooperation between the monetary and fiscal authorities in West Africa to ensure smooth coordination and consistency in monetary and fiscal pursuits.

A horse race of alternative monetary policy regimes under bounded rationality

We introduce bounded rationality, along the lines of Gabaix (2020), in a canonical New Keynesian model calibrated to match Canadian macroeconomic data. We use the model to provide a quantitative assessment of the macroeconomic impacts of alternative monetary policy regimes—flexible inflation targeting (FIT), average-inflation targeting (AIT) and price-level targeting (PLT)—with an effective lower bound (ELB) constraint. First, our results suggest that the benefits of adopting history-dependent monetary policy regimes rely on two important assumptions: rational expectations and the central bank’s emphasis in stabilizing real variables such as the output gap. The macro-stabilization advantage of PLT disappears even for small deviations from rational expectations, and it is especially undermined when the central bank assigns a high weight on output volatility. Second, the presence of cost-push shocks, such as the ones global economies have experienced since the recovery from the pandemic, introduces important policy trade-offs that poses practical challenges which are best tackled using an AIT regime. Third, in choosing the optimal window width under the AIT regime, a central bank that assigns some emphasis on real sector stability needs to be mindful of expectation formation. If economic agents are sufficiently far from being rational, our simulations indicate that the optimal window is between 1 and 2.5 years.

Monetary policy when export revenues drop

We study how monetary policy should respond to shocks that permanently alter the steady state structure of the economy. In such a case monetary policy affects not only the short run misallocations due to nominal rigidities, but also relative prices which stimulate reallocation of capital. We consider a permanent and negative shock to export revenues that requires a larger traded sector and a smaller non-traded sector in the new steady state. This reallocation calls for a change in relative prices during the transition, but may also lead to a period of high unemployment. We show how an appropriate monetary policy could mitigate the welfare costs of the transition by allowing the exchange rate to depreciate, and thereby allowing inflation to increase in the short run. Traditional monetary policy regimes, such as inflation targeting or a fixed exchange rate, would imply high unemployment and inefficiently slow transition. Stabilizing nominal wage growth, in contrast, would be close to the welfare-optimal monetary policy.

What to target? Insights from a lab experiment

This paper compares alternative monetary policy regimes within a controlled lab environment, where groups of participants are tasked with repeatedly forecasting inflation in a simple macroeconomic model featuring only the dynamics of interest rates, inflation and inflation expectations. Average-inflation targeting can replicate the price path observed under price-level targeting in the presence of disinflationary shocks and enable subjects to coordinate on simple heuristics that reflect the concern of the central bank for past inflation gaps. However, this depends on the exact specification of the policy rule. In particular, if the central bank considers more than two lags, subjects fail to form expectations that are consistent with the monetary policy rule, which results in greater inflation volatility. Reinforcing communication around the target helps somewhat anchor long-run inflation expectations.

Origin of Korean entrepreneurship

ABSTRACT South Korea is known for its highly developed economy, which has undergone significant growth and transformation over the past few decades. As a result, South Korea is now considered one of the world’s most prosperous and dynamic economies, with a strong focus on innovation, technology, and exports. Research has attributed Korea’s economic success to several factors: its government monetary policy, entrepreneurial business owners, a productive labor force, an education-oriented Confucian culture, and favorable international trade. This paper focuses on Korea’s global emergence through a historical exploration of Confucian influence and the teachings of renowned Korean philosopher Nammyeong Jo Shik. Our article proposes that Jo Shik is the father of Korean entrepreneurship. Jinju City, where Jo Shik promulgated his most influential teachings, may be the birthplace of Korean entrepreneurship. This city is the home of the first-generation founders of Korea’s leading global companies, such as Samsung, LG, GS, and Hyosung Corporation.

An Empirical Analysis of Macroeconomic and Bank Specific Factors Ascertaining Bank Deposit: A Study on Bangladesh

Bank working capital is largely determined by the level of bank deposits. As the primary source of funds for carrying out lending activities, deposits are the lifeblood of a banking firm. More savings encourages more investment which in turn ensures economic growth. This paper tries to find out relevant factors influencing volume of deposit mobilization by commercial banks. The study is based on the opinion of 200 sample professionals from 29 listed private commercial banks in Bangladesh. The result shows that Government monetary policy, bank size, diversified services, state of local and national economy dominates the collection of bank deposit by commercial banks. Probable implication from the findings is investment friendly government monetary policy that can lead towards improving bank-specific factors as enhancing bank size and ensuring diversified services for more deposit attraction.

MONETARY POLICY OF WORLD BANKS DURING THE PANDEMIC

MONETARY POLICY OF WORLD BANKS DURING THE PANDEMIC

INFLATION TARGETING OF THE NATIONAL BANK OF THE REPUBLIC OF KAZAKHSTAN

The article presents the results of achieving a stable level of inflation in the medium term, which is a fundamental factor in sustainable economic growth. Since 2015, the National Bank has been pursuing monetary policy in the inflation targeting regime with a floating tenge exchange rate, hence inflation targeting is a monetary policy regime in which price stability is the ultimate goal. An important role in the inflation targeting regime is played by the interest rate channel, through which the central bank's interest rate policy affects market rates with further transfer to the consumer, savings, and investment behavior of the population, and, ultimately, to inflationary processes. The analysis shows that the dynamics of inflationary processes in Kazakhstan is significantly influenced by the import of goods, the share of which in consumption has not changed for several years. Thus, over the past 5 years, the share of imports in the consumption of consumer goods has fluctuated on average within 33-42%. The largest number of imported goods can be traced in the consumption of non-food products, the share of which increased from 63% in 2015 to 93% in 2019. At the same time, the share of imports in food consumption increased from 16% in 2015 to 18% in 2019.

Who borrows from the Eurosystem’s lender-of-the-last-resort facility?

We use a unique data set that comprises for each German bank its recourse to the Eurosystem’s marginal lending facility (MLF) along with a large variety of detailed bank level data including the daily liquidity position to study the drivers of banks’ recourse to the LOLR facility for the period January 2004 to October 2010. We find that larger banks and banks with lower liquidity buffers and higher idiosyncratic liquidity risks make more frequent and extensive use of the LOLR support. These results not only hold for crises periods and episodes of tight money markets but also for tranquil periods, irrespective of the different monetary policy regimes. Our results have two implications: First, they suggest that riskier banks benefit more from the LOLR-facility, which might affect competition in the financial sector, promoting riskier banks and foster risk-taking behaviour. Second, data on banks’ reserve management can be a useful tool for microprudential supervision to derive high-frequency indicators for predicting liquidity shortages at the individual bank level.

Using arbitrary precision arithmetic to sharpen identification analysis for DSGE models

SummaryWe introduce arbitrary precision arithmetic to resolve practical difficulties arising in the identification analysis of dynamic stochastic general equilibrium (DSGE) models. A three‐step procedure is proposed to address local and global identification and the empirical distance between models. The method is applied to monetary and fiscal policy interaction models, revealing exact observational equivalence in a small‐scale model between an indeterminate passive monetary and fiscal policy regime and determinate regimes, and near observational equivalence in a medium‐scale model. Additionally, the method yields new insights for a model with news shocks, demonstrating that wage markup shocks can be replaced by unanticipated moving average shocks, resulting in near observational equivalence.