Monetary Policy Response Research Articles

Macroeconomic responses to financial stress shocks: Evidence from the US and the Eurozone

This paper investigates the macroeconomic effects of an unexpected financial stress shock in the United States and the Eurozone, focusing mainly on the effect on unemployment and the response of monetary policy. First, we estimate Impulse Response Functions (IRFs) based on a Structural Vector Autoregression (SVAR) model with short-run restrictions according to economic theory. Next, we perform panel data analysis shedding light on the factors that affect unemployment in the two regions. Our findings indicate a significant impact of financial stress shocks on the macroeconomic environment, but with different policy responses from the Federal Reserve (Fed) and the European Central Bank (ECB). The impact of higher financial stress on economic activity and employment is negative in both regions, but the duration of the impact on unemployment is shorter in the US, suggesting a quicker recovery in the US labor market compared to the Eurozone. The faster recovery of the US labor market is primarily due to the superior institutional and regulatory performance in the US. These findings provide policymakers with valuable lessons about the importance of continuous monitoring and quick action to mitigate the negative effects of financial instability on economic activity.

Expectations and the transmission of international uncertainty: Evidence from cross-country survey data

Abstract This paper evaluates (i) the transmission of global uncertainty shocks to the expectations of professionals and disagreement among them and (ii) the relevance of policy choices in open economies in the context of the impossible trinity. Relying on a large set of survey data covering a wide range of expected macroeconomic outcomes for 33 countries, we establish evidence for an expectation channel of global uncertainty shocks. Global uncertainty exerts significant and adverse effects on expectations over domestic macroeconomic outcomes across the board and also frequently spills over to disagreement over these outcomes, increasing domestic uncertainty. Finally, we identify nonlinear relationships between the policy choices in an open economy and the transmission of uncertainty shocks. Policy choices affect the expected downswing in GDP in the aftermath of uncertainty shocks, the expected response of monetary policy, and the exchange rate and disagreement over future macroeconomic outcomes.

Identifying policy determinants of bank default risk during the COVID-19 pandemic: empirical evidence from the U.S. and Canada

ABSTRACT This study examines the policy determinants of bank default risk, proxied by credit default swap (CDS) spreads, using quarterly data from the U.S. and Canada for the period 2020 to 2022. The analysis considers four determinant groups: the COVID-19 pandemic shock, aggressive monetary and fiscal policy responses, macroprudential-related bank financial fundamentals, and macroeconomic and market conditions. Utilizing General Least Squares (GLS) and dynamic panel models with system General Method of Moments (GMM), the findings reveal that rising COVID-19 deaths significantly widen CDS spreads. Expansionary monetary policies reduce bank default risk, though the effectiveness under conventional monetary policy is reduced by increasing COVID-19 deaths. In contrast, expansionary fiscal policies and inflation broaden CDS spreads. The combined analysis highlights policy stances as dominant factors, with macroprudential-related fundamentals having minimal impact. The findings are robust using both 5-year and 10-year CDS measures. This study has significant policy implications during health and economic crises. For financial stability, policymakers should prioritize reducing pandemic-related deaths, utilize expansionary monetary policies with health support strategies, balance fiscal support to avoid excessive government spending, and implement measures to control inflation. It is essential to enhance coordination between healthcare, fiscal, and monetary authorities for effective policy implementation.

Teaching principles of macroeconomics after COVID-19

The COVID-19 pandemic uniquely affected nearly all the subject matter in a typical principles of macroeconomics class. Fluctuations in the basic macroeconomic data in the COVID era were staggering and offer new teaching opportunities. In addition, because the recession was primarily driven by supply side shocks, the entire episode offers a unique avenue to present the theoretical models of the macroeconomy. Finally, new fiscal and monetary policy responses crafted over the past two recessions need to be fully incorporated into the material of macro principles going forward.

Inflation targeting and monetary policy response in India

India adopted the Flexible Inflation Targeting (FIT) regime in 2016 under the mentorship of the Monetary Policy Committee (MPC). With FIT’s introduction, the effectiveness of monetary policy transmission channels required a re-visit and this paper is a valuable contribution in this direction. Using the multivariate model with an augmented Bayesian set- up, we find that FIT-MPC has strengthened the credit and interest rate channels while their impact on output has weakened. The impact of Operation Twist – a set of unconventional measures pursued during the pandemic is visible. Overall, the findings highlight the overhauling effect of monetary policy transmission in the Indian context.

United States monetary policy response to the COVID-19 pandemic and its impact on unemployment rates

United States monetary policy response to the COVID-19 pandemic and its impact on unemployment rates

Unconventional Monetary Policy Response to Covid-19 and Its Impact on Inflation in Morocco

This study explores the impact of unconventional monetary policy on Morocco’s economy during the Covid-19 pandemic. We used a hybrid model combining a financial dynamic stochastic general equilibrium (DSGE) model with a standard epidemiology model, enabling us to consider both economic and epidemiological factors. Our results indicate that unconventional monetary policy cannot fully mitigate the adverse effects of a pandemic, except for an exogenous increase in Central Bank claims. We also found that Morocco’s high inflation is partly due to Bank Al-Maghrib’s unconventional monetary measures in response to the pandemic. Our research underscores the importance of monetary authorities balancing the benefits and risks of unconventional monetary policy. While it can stimulate the economy during crises, it should be used judiciously to avoid long-term negative effects. Incorporating epidemiological factors into macroeconomic models is crucial for understanding the intricate interplay between the economy and public health crises.

Analisis Inflation Targeting Framework (ITF) dan Perubahan Respon Kebijakan Moneter

The purpose of this study is to determine how the implementation of inflation targeting framework (ITF) and how the changes in monetary policy response. The data period starts from 2014 to 2023, with monthly data. The data analysis method used is a model of two interrelated simultaneous equations, called Two Stage Least Square (2SLS). The results of this study explain that the exogenous variables in the first equation of real interest rates, inflation, inflation gap, output gap have a positive and significant effect on the BI rate. Exogenous variables in the second equation, namely inflation target, BI rate, exchange rate, WTI world oil price have a positive and significant effect on inflation. However, the output gap has a negative and significant effect on inflation, and the money supply has no significant effect on inflation. The change in monetary policy response is seen from the increase or decrease of BI rate by 25 Basis points

Climate Change's Effect on Household Food Security in Sub-Saharan Africa and Optimal Monetary Policy

The resurgence of food insecurity in Sub-Saharan Africa during the past decade highlights the need to comprehend the phenomenon within a framework that includes all economic agents in these times of intensification of climate change. Thus, this paper, using a Dynamic Stochastic General Equilibrium (DSGE) model, analyzes the effects of climate shocks occurring in agricultural and non-agricultural sectors on household food security in Sub-Saharan Africa, while determining optimal monetary policy responses to mitigate these adverse effects. Findings highlight that climate shocks affecting the non-agricultural sector are more detrimental to long-term household food security than those affecting the agricultural sector, particularly for urban households. To mitigate these effects, flexible policies targeting food price inflation and headline inflation seem appropriate for rural and urban households, respectively. Nevertheless, in the absence of political and social pressure, flexible headline inflation targeting is optimal for mitigating climate shocks effects on Sub-Saharan Africa's food security.

The impact of monetary policy interventions on economic stability during global pandemics; a case study of the United States’ monetary policy initiatives in the fight against the Covid 19 pandemic

The study assesses the importance of monetary policy in the fight against global pandemics. Specifically, the study delves into United State’s monetary policy responses to the unprecedented COVID 19 pandemic; a global pandemic that pushed governments across the globe to institute strict measures as well as impose restrictions in their quest to contain the virus and ultimately minimize its economic ramifications. As such, the study compares the impact of monetary policy on economic growth (Real GDP) during the pandemic as against the pre-pandemic periods with the goal of assessing its relative impact on ensuring economic stability. The research shows that the impact of traditional monetary policy tools on economic stability and growth diminished during the Covid 19 pandemic compared to the pre-pandemic period. The pandemic, therefore, introduced a novel economic dynamic, one that various world economies were evidently not ready for. The result of the study calls for a holistic and adaptive monetary policy in periods that engender major economic uncertainties, such as global pandemics. The study shall add to the discourse regarding the limitation of monetary policy during pandemics. It shall provide suggestions that seek to enhance economic resilience and provide pertinent information that could potentially be incorporated into designing strategies that minimize the economic impact of pandemics in the future. Keywords: Pandemic, GDP, Economic Stability, Monetary Policy, COVID 19, Intervention, Economic Growth.

Research and Analysis of Effective Fiscal and Monetary Policy Response under the Background of International Financial Crisis

Research and Analysis of Effective Fiscal and Monetary Policy Response under the Background of International Financial Crisis

Examining Monetary Policy Measures and Their Impacts during and after the COVID Era: OECD Perspectives

Governments worldwide implemented various fiscal and monetary measures to address the adverse impacts of COVID-19 on their economies. The paper aims to examine the changes in the monetary policy measures due to COVID-19 and their impact on macroeconomic variables. To explore this relationship, this study utilizes fortnightly data from 2020 to 2023 on the OECD (Organisation for Economic Co-operation and Development) countries. The study employs a Panel Autoregressive Distributed Lag (ARDL) model to analyze the effects of the monetary policy responses of the OECD governments, and the obtained results reveal that within OECD countries, the prevailing trend of lower interest rate policies emerged during the pandemic. This policy approach yielded a dual effect: lowering both output growth and inflation rates, while concurrently exacerbating unemployment rates throughout the COVID-19 period. Consequently, it is clear that monetary policies have played a pivotal role in facilitating the recovery from a profound economic shock such as the COVID-19 pandemic. Given the significant economic repercussions of a pandemic and the crucial role that monetary policy plays in sustaining economic stability, the apparent lack of attention underscores the urgent necessity for additional discourse on this vital subject.

Menganalisis Dampak Krisis Ekonomi Terhadap Tingkat Ekonomi Makro

This Research Aims To Analyze The Impact Of The Economic Crisis On The Macroeconomic Level, Focusing On Key Variables Such As Economic Growth, Unemployment Rate, Inflation And Trade Balance. Using Historical Data And Quantitative Economic Analysis Methods, This Study Identifies Patterns And Trends That Emerge During Periods Of Economic Crisis In Various Countries. The Research Results Show That Economic Crises Tend To Cause A Significant Contraction In Gross Domestic Product (GDP), A Sharp Increase In The Unemployment Rate, As Well As Significant Price Fluctuations That Impact The Inflation Rate. In Addition, This Analysis Also Highlights How Fiscal And Monetary Policy Responses Can Speed Up Or Slow Down Economic Recovery. The Conclusions Of This Research Emphasize The Importance Of Appropriate Policy Strategies In Dealing With The Economic Crisis To Minimize Its Negative Impact On The Macro Economy.

General Equilibrium Model for Monetary Policy Responses to Macroeconomic Instabilities in Developing Economy: A Ghanaian Perspective

The study develops a standard New Keynesian model to examine how monetary authority reacts to both domestic and external shocks as well as how its policy decision impacts the general macroeconomy in developing African economy. Using Bayesian estimation techniques and a Ghanaian dataset, the article also seeks to determine the best-suited monetary policy rule for Ghana and countries with similar characteristics. The basic finding is that a forward-looking Taylor rule—where authority reacts to one-period-ahead inflation deviation from target alongside the current output gap—is the most appropriate monetary policy rule for Ghana. Another salient finding is that variations in output are mainly driven by price markup, labour supply, monetary policy and productivity shocks across the forecast horizons. In addition, the dominant determinants of inflation are exchange rate risk premium and price markup shocks. Collectively, the article also unveils that monetary policy responses to macroeconomic shocks are broadly in line with conventional economic theory. There is also conspicuous evidence that the general equilibrium model with representative consumers is practically suitable for monetary policy analysis in Ghana, as contractionary monetary policy impulse is able to contemporaneously induce disinflation and output contraction. Given the strong evidence of a large segment of the unbanked population in Ghana, the findings in this study could be verified based on a model that allows for the co-existence of optimizing and non-optimizing consumers. JEL Classification: B41, C5, C11, D11, D21, D41, D42, E2, E12, E43, E52, E58, F31, F41

China Slowdown Shocks, the West and Australia*

Western economies, including Australia, have benefited from several decades of extraordinary Chinese expansion. Yet, in recent years, slowing growth and demographic decline has diminished these gains, while geopolitical developments have further restricted growth‐driving commerce. Our purpose is to review key sources of recent contractionary changes within China and to assess their likely consequences for the West. Modelling scenarios emerge that see future economic losses in China and abroad, with the worst affected group being China's own low‐skill workers. Long‐term losses in the West are smaller but pervasive, with Australia's economic welfare per capita impaired most. Short‐term effects depend on China's monetary policy response, with a freeing up of China's exchange rate likely to minimise harm both in China and abroad.

Modeling the macroeconomic consequences of natural disasters: Capital stock, recovery dynamics, and monetary policy

Natural disasters can cause substantial damage to public and private sector infrastructure capital, generating macroeconomic losses through complex channels. These shocks must be managed and accounted for with macrofiscal and monetary policy to minimize their welfare impacts. To support this process, we adapt the World Bank Macrostructural Model to capture key transmission channels of natural (geophysical or climate-related) disasters and their immediate aftermath. The macroeconomic model is extended on several fronts: (1) a distinction is made between infrastructure and noninfrastructure capital; (2) the production function is adjusted to account for short-term complementarity across capital assets; (3) the reconstruction process is modeled to consider postdisaster constraints, with distinct processes for the reconstruction of public and private assets. Destroyed infrastructure capital makes the remaining noninfrastructure capital less productive, which means that disasters reduce the total stock of capital and its marginal productivity. Upon applying the model to Türkiye data, the welfare impact of a disaster — proxied by the discounted consumption loss — is found to increase nonlinearly with direct asset losses. Macroeconomic responses reduce the welfare impact of minor disasters but magnify it when direct asset losses exceed the economy’s absorption capacity. The welfare impact also depends on the preexisting economic situation, the ability of the economy to reallocate resources toward reconstruction, and the response of monetary policy. Appropriate macrofiscal and monetary policies offer cost-effective opportunities to mitigate the welfare impact of major disasters.

Redistributive fiscal policy and marginal propensities to consume

This paper studies the output effect of transfers in a New Keynesian model with heterogeneous dynasties of overlapping generations, which allows for arbitrary heterogeneity in marginal propensities to consume (MPCs). The role of MPCs is mainly to determine the timing of the fiscal stimulus. Thus, it is not MPCs per se that determine the cumulative effect on output, but rather the interaction between the timing of the stimulus and other features of the model, such as financial frictions and an endogenous monetary policy response. Financially-constrained households always prefer a front-loaded stimulus, while the endogenous monetary policy can generate an ambiguous relation between MPCs and output. From a normative perspective, however, there is no ambiguity: with larger differences in MPCs, macro stabilization can be obtained at a smaller welfare cost.

Monetary policy rule under rare events: With implications by digital finance development

This article studies the macroeconomic impacts of rare events and the choice of monetary policy rule in an estimated DSGE model using Chinese data. We quantify the characteristics of adverse macroeconomic effects on both the supply and demand side and explore the suitable monetary policy response in the context of digital finance development. The results show that the early stage of severe negative macroeconomic impacts amplified by financial frictions requires quantity-based tools to restore macroeconomic stability. After the impediment of financial frictions and the early impact of rare events are mitigated, price-based tools are more effective than quantity-based tools in achieving a rapid recovery. Therefore, a mixed monetary policy rule shows the advantage of flexibility and results in the highest welfare. In addition, digital finance development reduces financial frictions and stabilizes money demand, thus enhancing the relative importance of price-based tools.

Oil price shocks and macroeconomic dynamics in resource-rich emerging economies under regime shifts

How do global oil price fluctuations affect macroeconomic activity and monetary policy in resource-rich emerging economies? This paper tackles this question by developing a unified emerging market/rest-of-the-world DSGE framework featuring Ricardian and Non-Ricardian households, an oil-producing sector, a fuel subsidy programme, and a regime-switching process. The model is estimated using Bayesian methods, allowing us to be agnostic regarding regime shifts in the monetary policy rule and oil price volatility. Using data for Nigeria, we find substantial empirical support for the regime-switching behaviour and discuss how macroeconomic implications of oil price shocks may vary depending on the nature of the shock, monetary policy responses, and the fuel subsidy policy in place. Apart from providing important insights into the monetary policy transmission mechanism, the paper offers a novel, flexible, and functional model for future policy analysis, especially in resource-rich emerging countries.

Government Spending Between Active and Passive Monetary Policy: An Invariance Result

Abstract This paper develops a new approach to analyze the relationship between the government spending multiplier and monetary policy. We embed measures of monetary policy activism into a nonlinear SVAR model. Our model allows the central bank to adjust its monetary policy regime in response to the economic conditions that arise after government spending shocks. We find that, regardless of the monetary policy regime at the time of a spending shock, the central bank adjusts its regime quickly and responds actively towards inflation only a few quarters after the shock hits the economy. This rapid response of monetary policy leaves medium-run multipliers ultimately unaffected by whether the initial regime was active or passive. For both initial regimes, our five-year multiplier estimates lie between 1.2 and 1.5. An apparent exception to this result is the zero lower bound period between 2008Q4 and 2015Q4-during which monetary policy kept nominal interest rates at zero. Our multiplier point estimates for that era are consistently larger than unity.