Monetary Policy Report Research Articles

Policy rules and forward guidance following the Covid-19 recession

In August 2020, the Federal Open Market Committee adopted a far-reaching Revised Statement on Longer-Run Goals and Monetary Policy Strategy. The framework contains two major changes from the original 2012 statement. First, policy decisions will attempt to mitigate shortfalls, rather than deviations, of employment from its maximum level. Second, the FOMC will implement Flexible Average Inflation Targeting. We show how to modify the rules in the Fed’s Monetary Policy Report to be consistent with the revised statement, how the pattern of falling behind the curve, pivot, and getting back on track in Fed policy during 2021 and 2022 could have been avoided by following inertial rules consistent with either the original or the revised statements, and how current and projected Fed policy for 2023 – 2026 is in accord with the prescriptions from inertial rules.

Deep factor asset pricing with policy guidance based on multi-source heterogeneous information

We propose a novel latent factor pricing model to extract latent pricing factors and corresponding factor loadings from multi-source heterogeneous information through a deep learning architecture. Notably, we pioneer the extraction of policy pricing factors from China’s national strategies (“Five-Year Plans”, “Government Work Reports”, and “Monetary Policy Reports”) using natural language processing and a dynamic topic model. The proposed mixed-frequency deep factor asset pricing (MIDAS-DF) model learns from mixed-frequency heterogeneous data and captures nonlinear joint patterns between inputs and outputs, providing more nuanced insights into asset pricing. The empirical analyses of the Chinese A-share market from January 1, 2003 to July 31, 2022 show that the MIDAS-DF model outperforms competing models in pricing individual stocks, various test portfolios, and investment portfolios. The results also demonstrate that low-frequency policy information anchors long-term pricing trends, while high-frequency market and sentiment information refine short-term pricing accuracy. They work together to enhance the pricing performance.

The effects of the Federal Reserve Chair’s testimony on interest rates and stock prices

We study how congressional testimony about monetary policy by the Chair of the Board of Governors of the Federal Reserve System affects interest rates and stock prices. First, we study testimony associated with the Federal Reserve’s Monetary Policy Reports (MPRs) to Congress. Testimony for a particular MPR is usually given on two days, one day for each chamber of Congress. We separately study the first day and second day of MPR testimony. We also study testimonies not associated with MPRs but that are still related to monetary policy. We find that first-day MPR testimonies cause the largest movements in interest rates and generate negative co-movement between interest rates and stock prices. Testimonies not associated with MPRs have similar but weaker effects. Second-day MPR testimonies cause the smallest movements in interest rates and generate no co-movement between interest rates and stock prices.

The Effects of the Federal Reserve Chair’s Testimony on Treasury Interest Rates

Communication by the Federal Reserve is important for the conduct of monetary policy. We study how one form of Federal Reserve communication, the congressional testimony by the Chair of the Board of Governors (the Fed Chair), affects interest rates on 2-year and 10-year Treasury Notes. We study three types of Fed Chair testimony: the first day of Monetary Policy Report testimony, the second day of Monetary Policy Report testimony, and testimonies not associated with the Monetary Policy Report but that still relate to monetary policy. We find that the average size of interest rate changes is largest around first-day Monetary Policy Report testimonies and smallest around second-day Monetary Policy Report testimonies. We also document that the sizes of interest rate changes can vary over time and often correspond to the level of the federal funds rate.

Communicating financial stability in monetary policy reports: a text-mining experiment in postcommunist countries

PurposeFinancial stability has become a focal point for central banks since the global financial crisis. However, the optimal mix between monetary and financial stability policies remains unclear. In this study, the “soft” approach to such policy mix was tested – how often monetary policy (in inflation reports) analyses financial stability issues. This paper aims to discuss the aforementioned objective.Design/methodology/approachA total of 648 inflation reports published by 11 central banks from post-communist countries in 1998-2019 were reviewed using a text-mining method.FindingsResults show that financial stability topics (mainly cyclical aspects of systemic risk) on average account for only 2%of inflation reports’ content. Although this share has grown somewhat since the global financial crisis (in CZ, HU and PL), it still remains at a low level. Thus, not enough evidence was found on the use of a “soft” policy mix in post-communist countries.Practical implicationsGiven the strong interactions between price and financial stability, this paper emphasizes the need to increase the attention of monetary policymakers to financial stability issues.Originality/valueThe study combines two research areas, i.e. monetary policy and modern text mining techniques on a sample of post-communist countries, something which to the best of the authors’ knowledge has not been sufficiently explored in the literature before.

Is the People's Bank of China consistent in words and deeds?

The People's Bank of China (PBC) now frequently uses communication as a policy tool. Whether its words are consistent with its deeds is important for the public to understand the PBC's complex behavior. In this paper, we employ a supervised learning model to construct monetary policy (MP) and economic outlook (EC) communication indices based on the outlook section of quarterly China Monetary Policy Reports (MPRs). We find that the PBC not only adjusts its interventions according to the corresponding economic situation, but also takes into account the information released in the previous outlook section, which indicates its consistency in words and deeds. Using a time-varying parameter model, we further find that the PBC's consistency of words and deeds has made progress over time. The PBC tends to be more consistent in words and deeds under higher uncertainty, and the improvement of such consistency can significantly decrease disagreement about inflation expectations. An additional analysis shows that the full text of MPRs can help predict future monetary policies on a longer time horizon.

Policy Rules Consistent with the FOMC’s Longer-Run Goals and Monetary Policy Strategy

Abstract The Federal Open Market Committee’s revised Statement on Longer-Run Goals and Monetary Policy Strategy implements flexible average inflation targeting and mitigates shortfalls, rather than deviations, of employment from its maximum level. We show how the Taylor, balanced approach, and balanced approach (shortfalls) rules in the Monetary Policy Report could be modified to be consistent with the revised statement. Federal funds rate prescriptions from the consistent rules are both closer to the liftoff from the effective lower bound in December 2015 and provide a better fit to the actual federal funds rate than the rules currently included in the Report. The prescriptions from the balanced approach rules are closer to the liftoff and provide a better fit than the prescriptions from the Taylor rules.

Monetary policy in a world of radical uncertainty

Monetary policy in a world of radical uncertainty

Understanding Trend Inflation Through The Lens of The Goods and Services Sectors

Monetary policy is largely concerned with managing the part of inflation that is persistent (or permanent), a quantity often referred to as trend inflation. For example, a casual reading of any monetary policy report from the Federal Reserve Board will make it clear that, in addition to total (or headline) inflation, the Federal Reserve also focuses on underlying (or core) measures of inflation that exclude more volatile components such as food and energy prices. This strategy is based on the belief that fluctuations in components such as food and energy prices are ultimately temporary and, consequently, should be excluded from monetary policy considerations about the long-run path of inflation. Trend inflation is thus closely related to the concept of core inflation, since both measures provide a reading on inflation without the transient “noise” that is expected to fade in the short run. A more recent development is that goods and services—the two main sectors used to measure inflation—have been experiencing considerably different dynamics over the past three decades. Our goal in this paper is to understand how such contrasting behaviors at the sectoral level affect the aggregate level of trend inflation dynamics. To do so, we develop an empirical framework that accounts for historical changes in the volatility and comovement of trend inflation in the goods and services sectors for the US. Our main finding is that, while both sectors used to contribute to the overall variation in aggregate trend inflation, since the 1990s variations in trend inflation have been almost entirely dominated by the services sector. Two changes in sector-specific inflation dynamics drive our key result: (i) a large fall in the variance of trend inflation in the goods sector; and (ii) the disappearance of comovement between the two sectors. We document similar findings when extending our analysis to Australia and Canada, suggesting our results are not US-specific.

Money multiplier under Basel capital ratio regulation: implications for counter-COVID-19 stimulus

ABSTRACT The COVID-19 induced the central bankers to search the most efficient stimulus measures. As a solution, they made an unprecedented step. They lifted down the reserve requirement (RR) to zero. This was done in the United States [FRS. 2020. “Federal Reserve Actions to Support the Flow of Credit to Households and Businesses.” Accessed February 10, 2021. Board of the Governors of the Federal Reserve System] and Morocco [BKAM. 2020. “Monetary Policy Report No. 55.” Accessed from Central Bank of Morocco Website]. The existing monetary theory literature suggests that the broad money supply should go to infinity as a result. Then we may expect the rapid economic recovery. However, this may not come true. The novelty of this paper is the development of the money multiplier theory. We explain why a step to set the RR at zero may boost (though slight) the cash-intensive economy (like Morocco) and may not deliver any benefit to a mostly cashless one (like the US, Canada, or the EU).

Policy Rules and Economic Performance

Debates about the conduct of monetary policy have evolved over time from “rules versus discretion” to “policy rules versus constrained discretion.” We propose a metric to evaluate monetary policy rules that are consistent with constrained discretion by calculating quadratic loss ratios, the (inflation plus unemployment) loss in high deviations periods divided by the loss in low deviations periods, with policy rules with higher loss ratios preferred to rules with lower loss ratios. The central results of the paper are (1) economic performance is better in periods of low deviations from policy rule prescriptions than in periods of high deviations from policy rule prescriptions for the vast majority of rules, and (2) rules with larger coefficients on the inflation gap than on the output gap are preferred to rules with larger coefficients on the output gap than on the inflation gap. These results are robust to policy lags between one and two years, different weights on inflation loss than on unemployment loss, various definitions of high and low deviations periods, fixed and time varying neutral real interest rates, fixed and time-varying inflation targets, and measuring economic slack by either the output gap or the unemployment gap. We conclude that (1) the Fed should “constrain” constrained discretion by following a rule that responds more strongly to inflation gaps than to output gaps and (2) this type of rule should be added to the Fed's semi-annual Monetary Policy Report.

Policy Rule Forward Guidance Following the COVID-19 Recession

The Federal Open Market Committee’s revised Statement on Longer-Run Goals and Monetary Policy Strategy implements flexible average inflation targeting and mitigates shortfalls, rather than deviations, of employment from its maximum level. We first show how the Taylor, balanced approach, and balanced approach (shortfalls) rules in the Monetary Policy Report could be modified to be consistent with the revised statement. Federal funds rate prescriptions from the consistent rules are both closer to the liftoff from the effective lower bound in December 2015 and provide a closer fit to the actual federal funds rate than the rules currently included in the Report. We then compare prescriptions from the rules with the Committee’s forward guidance. While all of the rules prescribe liftoff from the effective lower bound before the Committee’s 2024:Q1 prescription, the prescribed liftoff with the balanced approach (consistent) rule is closest to the Committee’s. Finally, we consider longer-run scenarios. While the gap between the federal funds rate prescribed by the consistent rules and the Committee’s framework is about 2.5 percent in 2023:Q4, it is eliminated by 2026:Q2.

The Impact of Monetary Policy Communication in an Emerging Economy

Since the adoption of the inflation targeting framework by Bank Indonesia (BI), monetary policy communication has played an increasingly important role in BI’s policy toolkit. This paper assesses BI’s monetary policy communication from three perspectives: i) its transparency and clarity, ii) its ability to align market expectation and BI’s policy decisions (predictability), and iii) its impact on financial markets. In particular, we assess the impact of BI’s monetary policy practices by focusing on its monetary policy press releases and monetary policy reports. The results show that Bank Indonesia has made significant progress in the transparency of its communication as well as in the institutional framework to support this. Nonetheless, the results also suggest ways in which the impact of communication can be further improved, including by strengthening the clarity of policy messages, its consistency with the policy framework and the depth of the money market.

The Impact of Monetary Policy Communication in an Emerging Economy: The Case of Indonesia

Since the adoption of the inflation targeting framework by Bank Indonesia (BI), monetary policy communication has played an increasingly important role in BI's policy toolkit. This paper assesses BI's monetary policy communication from three perspectives: i) its transparency and clarity, ii) its ability to align market expectation and BI's policy decisions (predictability), and iii) its impact on financial markets. In particular, we assess the impact of BI's monetary policy practices by focusing on its monetary policy press releases and monetary policy reports. The results show that Bank Indonesia has made significant progress in the transparency of its communication as well as in the institutional framework to support this. Nonetheless, the results also suggest ways in which the impact of communication can be further improved, including by strengthening the clarity of policy messages, its consistency with the policy framework and the depth of the money market.

Two Types of (Slight) Flexibility in Bank of Canada Projections, 2003–2019

Central bankers and other economists sometimes describe the inflation targeting practiced in Canada as flexible. This flexibility refers to deferring the planned return of the Consumer Price Index (CPI) inflation rate to the 2 percent target. In this article, I outline two ways to measure flexibility: by seeing whether the forecast for future inflation varies with either (1) current values of inflation or output growth or (2) the forecast for future output growth. The latter correlation would suggest that the Bank of Canada aims to stabilize output growth in addition to stabilizing the inflation rate. I describe how to detect evidence of these two types of flexibility in the Bank of Canada’s own forecasts (also known as projections) from its quarterly Monetary Policy Report. However, there is little sign of economically significant flexibility between 2003 and 2019.

Una aproximación lingüística al discurso de la economía a partir del género. Informe de política monetaria

El discurso de la economía ha transitado por una tensión entre pertenecer a una Ciencia Social (CS) y presentar rasgos prototípicos de una Ciencia Básica (CB). Ahora bien, evidenciar esta hibridez desafía a los investigadores del lenguaje, sobre todo si estos textos son parte de la formación de un economista. Particularmente, el Informe de Política Monetaria (IPOM) no ha sido estudiado desde el punto de vista lingüístico, por lo que se busca observar, en un corpus de 45 textos, si el género IPOM evidencia dicha tensión discursiva de la disciplina. Para lograr ese objetivo, se ha optado por una metodología basada en dos dimensiones: Contexto de Producción y Organización Retórico-Funcional. Tras el análisis, los hallazgos del corpus IPOM-2013 integradamente muestran que el género IPOM efectivamente evidencia dicha tensión con rasgos más características de la CB como es el uso de recursos matemáticos y, por otro lado, rasgos de la CS, asociados a la modalización del discurso en su macromovida central.

ПРО СТАН ПРАВОВОГО ЗАБЕЗПЕЧЕННЯ ОБІГУ КРИПТОВАЛЮТ В УКРАЇНІ: ПОГЛЯД КРІЗЬ ПРИЗМУ ЗАРУБІЖНОГО ДОСВІДУ

The development of information technologies is accelerated in the modern world. The digitization of socio-economic relations is carried out on the basis of peer-to-peer blockchain technology. Bitcoin is a cryptographic protocol. The article shows that, to date, there is no common understanding of Cryptocurrency, in some sources they are treated as currency and other goods or raw materials in other. At this moment, cryptocurrency in Ukraine is not regulated at all. This article discusses the potential legal classification of Bitcoin and the consequences thereto. Bitcoin has been, and continues to be, used by some for the purchase of illegal substances and in furtherance of crimes. Nonetheless, Bitcoin possesses significant economic upside over traditional currencies and methods of transaction online. The National Bank of Ukraine (NBU) has not yet recognized bitcoin or other encrypted currencies. Several bills to regulate encrypted money have been submitted, but none has yet been passed. The Ukrainian parliament has been actively trying to find a solution for creating a legislative and regulatory framework specific to the cryptocurrency industry. Ukrainian draft laws give their own definition of crypto-currency, mining and other specific terms; stipulate those who have the right to engage in mining, how the activities of exchanges are regulated, and the attendant moments, such as legal responsibility and specific taxation. Yet, the proposed legislation has not yet been passed into the law. Ukraine should monitor world trends and not miss a chance to use new technologies and innovations in the financial sector. On the basis of the analysis of domestic and foreign practices, a number of non-regulated by Ukrainian law of the creation and circulation of cryptocurrencies have been identified by the law of Ukraine, proposed ways of resolving issues of determining their legal nature and legal regulation. The situation regarding the definition of legal status of cryptographic goods in foreign countries and Ukraine is analyzed. The main points to be solved in the course of approval of the right regulation of cryptocurrencies in Ukraine are determined. REFERENCES Liashenko V.I., Vyshnevskyi O.S. Tsyfrova modernizatsiia ekonomiky Ukrainy yak mozhlyvist proryvnoho rozvytku: monohrafiia. Kyiv, 2018 [in Ukrainian]. Cryptocurrency Market Capitalizations. Top 100 Cryptocurrencies by Market Capitalization. URL: https://coinmarketcap.com Ponsford M.A Comparative Analysis of Bitcoin and Other Decentralised Virtual Currencies: Legal Regulation in the People’s Republic of China, Canada, and the United States. Hong Kong Journal of Legal Studies. 2015. Vol. 9. URL: http://ssrn.com/abstract=2554186 Kryptovaliuta: Zibraty po kryptakh. Kryptofakhivtsi roziasniuiut yurystam znachennia naiposhyrenishykh sliv “latyny maibutnoho” kryptomovy. Za materialamy vydannia “Ukrainskyi Yuryst”. URL: http://axon.partners/uk/blog/cryproalphabet/ [in Ukrainian]. Nermin Hajdarbegovic. Japan Makes First Bitcoin-Related Drug Arrest. Coindesk. May 9, 2014. URL: . https://www.coindesk.com/japan-makes-first-bitcoin-related-drug-arrest Pravove rehuliuvannia kryptovaliutnoho biznesu. Axon Partners, ForkLog Research. URL: http://axon.partners/wpcontent/uploads/2017/02/Global-Issues-of-Bitcoin-Businesses-Regulation.pdf [in Ukrainian]. The Federal Reserve System’s semiannual monetary policy report to the Congress. The U.S. Government Printing Office. September 17, 2015. URL: http://www.cftc.gov/PressRoom/PressReleases/pr7231-15 Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC (Text with EEA relevance). Official Journal of the European Union. L 267. 10.10.2009. P. 7—17. Court of Justice of the European Union PRESS RELEASE No 128/15. URL: https://curia.europa.eu/jcms/upload/docs/application/pdf/2015-10/cp150128en.pdf O razvitii tsifrovoy ekonomiki: Dekret Prezidenta Respubliki Belorus ot 21.12.2017 No. 8. URL: http://president.gov.by/ru/official_documents_ru/view/dekret-8-ot-21-dekabrja-2017-g-17716/ [in Russian]. V instytuti Patona pratsiuvala nezakonna fabryka Bitcoin. Informatsiinyi Aktsent. URL: https://www.infa.ua/v-insty-tutipatona-pratsyuvala-nezakonna-fabry-ka-bitcoin/ [in Ukrainian]. Prokuratura y SBU vyluchyly v Kyievi 400 bitkoin-ferm. Informatsiinyi Aktsent. URL: https://www.infa.ua/v-insty-tutipatona-pratsyuvala-nezakonna-fabry-ka-bitcoin/ [in Ukrainian]. Pro obih kryptovaliuty v Ukraini: proekt Zakonu Ukrainy vid 06.10.2017 No. 7183. URL: http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=62684 [in Ukrainian]. Pro stymuliuvannia rynku kryptovaliut ta yikh pokhidnykh v Ukraini: proekt Zakonu Ukrainy vid 10.10.2017 No. 7183-1. URL: http://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=62710 [in Ukrainian].

Central Bank Communication and Monetary Policy Surprises in Chile

This paper assesses the quality of the CBC’s communication policy by looking at the predictability and effectiveness of monetary policy communications by the Central Bank of Chile (CBC). To do so, we construct indeces of monetary policy surprises for the three major communication channels of the CBC: the release of policy meetings’ statements, minutes, and monetary policy reports (IPoM). We assess monetary policy predictability and efficacy by looking at the size and time-evolution of monetary policy surprises associated with meeting statements and the impact of the above communication channels on asset markets. We find that, in general, the CBC’s has been effective in its forward guidance through its statements and IPoM. Policy actions are quite predictable, especially post the global financia crisis. The response of equity prices and the exchange rate to monetary policy surprises have the right sign but are not robust. We also find an asymmetric response of equity prices to minutes suggesting that market participants extract information on the status of the economy especially when minutes have a loosening effect. Finally, to look at the macroeconomic impact we find that a 100 bps monetary policy tightening shock implies a decline in economic activity (IMACEC) of about 2 pp. after one year, while the response of inflation is more muted.

Central Bank Communication and Monetary Policy Surprises in Chile

This paper assesses the quality of the CBC's communication policy by looking at the predictability and effectiveness of monetary policy communications by the Central Bank of Chile (CBC). To do so, we construct indeces of monetary policy surprises for the three major communication channels of the CBC: the release of policy meetings' statements, minutes, and monetary policy reports (IPoM). We assess monetary policy predictability and efficacy by looking at the size and time-evolution of monetary policy surprises associated with meeting statements and the impact of the above communication channels on asset markets. We find that, in general, the CBC's has been effective in its forward guidance through its statements and IPoM. Policy actions are quite predictable, especially post the global financia crisis. The response of equity prices and the exchange rate to monetary policy surprises have the right sign but are not robust. We also find an asymmetric response of equity prices to minutes suggesting that market participants extract information on the status of the economy especially when minutes have a loosening effect. Finally, to look at the macroeconomic impact we find that a 100 bps monetary policy tightening shock implies a decline in economic activity (IMACEC) of about 2 pp. after one year, while the response of inflation is more muted.

What Do Central Banks Know about Inflation Factors?

We offer a novel methodology for assessing the quality of central bank monetary policy reports. We evaluate their economic content by comparing verbally reported inflation factors with factors identified from a simple new Keynesian model. Positive correlations indicate that the reported inflation factors were similar to the model-identified ones, marking high-quality inflation reports. Although sample bank reports on average identified inflation factors correctly, the degree of forward-looking reporting varied.