Monetary Policy Strategy Research Articles

The extraordinary events as an environment for the development and implementation of the monetary policy of the National Bank of Ukraine

The paper establishes that the extraordinary events represented by the pandemic and martial law over the past five years have become powerful catalysts for changes in the banking business. It is shown that maintaining the financial stability and defense capability of the country in the conditions of martial law are the main tasks of the NBU. It was established that due to the consistent and predictable position of the NBU, balanced monetary and regulatory policy, it was possible to ensure the stability of the financial system of Ukraine even in the difficult conditions of martial law. It has been proven that the introduction of restrictive measures is a necessary step to ensure the stability and security of the financial system of Ukraine in conditions of extraordinary events. It is shown that the banking system of Ukraine demonstrates the ability to function effectively, even in the extraordinary conditions of war, thanks to a high level of liquidity, sufficient capital and the ability to generate income. The main stages of monitoring the Monetary Policy Strategy of the NBU are proposed. It is shown that its main principles in the conditions of martial law are: preservation of the stability of the financial system and liquidity of banks; development and implementation of a monetary strategy that takes into account the peculiarities of the martial law; financial support to banks and the economy; restrictions and control on the foreign exchange market; readiness to take emergency measures; effective communication with the public and business community. Recommendations for improving the monetary policy have been developed, aimed at increasing its efficiency and flexibility, ensuring the stability of the financial system and supporting the economy in the conditions of martial law. It has been proven that a set of measures for analyzing and evaluating the effectiveness of monetary instruments, implementing changes to improve efficiency, revising target inflation indicators, analyzing the situation on the foreign exchange market, strengthening the communication strategy, conducting stress tests, coordinating with other branches of government, creating reserves and flexible mechanisms will make it possible to minimize the negative consequences of martial law and contribute to the faster recovery of Ukraine’s economy.

The devolution of federal reserve monetary policy strategy, 2012–24

The devolution of federal reserve monetary policy strategy, 2012–24

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.

The Feasibility of Coordinating International Monetary Policy Strategies in the Context of Asymmetric Demand Shocks

In the context of the increasing interdependence of countries due to the development of international trade, a relevant question arises as to whether it is necessary to conduct independent monetary policies for each country or whether it is advisable to coordinate these policies. This question becomes a key in the debate on optimal monetary policy strategies in open economies. The aim of this study is to analyze the impact of asymmetric aggregate demand shocks on the appropriateness of monetary policy coordination in a simple stochastic model of two interacting countries. The analysis of equilibrium states of the monetary authorities’ interaction strategies under study was carried out analytically by minimizing the loss function and solving one-period static optimization problems. The equilibrium states of macroeconomics of interacting countries under coordination of monetary policy and in cases of lack of coordination (Nash and Stackelberg equilibrium) in the presence of asymmetric, serially uncorrelated demand shocks have been analyzed. It is proven that the response of inflation to asymmetric demand shocks is smaller in the case of coordinated policy than in the case of non-cooperative policy. The loss function analysis shows that the compensation of demand shocks is found to be more costly in Nash equilibrium than in the case of monetary authority coordination policy. The analysis of the monetary authorities’ interaction strategies showed that the real exchange rate plays an important role in balancing supply and demand in the two economies.

‘Sellers’ Inflation’ and Monetary Policy Interventions: A Critical Analysis

ABSTRACT This paper analyses the phenomenon of ‘sellers’ inflation’, that is to say, the increases in consumer prices as a result of firms’ decision to increase their selling prices as much as possible in the aftermath of the war in Ukraine. This analysis focuses also on central banks’ responses to such inflationary pressures, which monetary authorities have been trying to limit with several increases in their policy rates of interest. The paper explains the major shortcomings of this monetary policy strategy and its negative consequences for a number of economic agents. The last section puts forward an alternative economic policy stance, proposing in particular a series of ‘green’ monetary policy interventions to address these inflationary pressures in the general interest for the common good.

UKRAINE’S MONETARY POLICY UNDER MARTIAL LAW

The relevance of the research is due to the change in the monetary policy regime of the National Bank of Ukraine (NBU), which consists in the transition from inflation targeting with a floating exchange rate to a fixed exchange rate as the nominal anchor of monetary policy under martial law. Such a plan to change the monetary policy regime was carefully calculated and outlined in the NBU's Monetary Policy Guidelines for the Duration of Martial Law. The timeliness and effectiveness of the NBU's monetary policy decisions enabled it to mitigate the impact of the military shock on the macro-financial stability of the national economy. The purpose of the article is to consider the theoretical and practical aspects of the NBU's monetary policy under martial law. Methodology. The study uses a systematic method of cognition to determine the sequence of application of monetary policy instruments to smooth out monetary shocks of the wartime period; an abstract-logical method to understand the future monetary policy strategy based on the abandonment of the fixed exchange rate regime and a gradual return to inflation targeting; and a statistical method to analyse the dynamics of monetary indicators of the national economy. Results. The paper presents the main principles of the NBU's monetary policy under martial law. The first shock from the war led to changes in the conduct of monetary policy and a shift to unconventional instruments of its regulation. The gradual adaptation of the economy to the new conditions determined the NBU's further steps to ease monetary policy and move to greater exchange rate flexibility. Practical implications. The practical significance of the research results is to assess the conditions for the transition from the key policy rate-based inflation targeting regime as the main monetary policy instrument to the use of foreign exchange interventions as the main operation in the foreign exchange market under martial law. Value / Originality. The originality of the article is due to the need to identify the prerequisites for the transition to a new monetary policy strategy in a wartime economy. Conclusions. The NBU's timely response to the negative phenomena associated with deteriorating inflation expectations, multiple exchange rates and pressure on international reserves helped prevent the development of a currency and financial crisis in Ukraine. Despite the active hostilities, the NBU is trying to find options that will allow it to conduct an effective monetary policy in the face of a full-scale invasion and unprecedented internal and external shocks. Internationally, Ukraine has exceeded expectations and the NBU has shown a high degree of responsibility, professionalism and creativity in the conduct of monetary policy. Increased confidence in the central bank is a valuable resource in times of martial law.

Central Banking Post Crises

The world economy has experienced the largest financial crisis in generations, a global pandemic, and a resurgence in inflation during the first quarter of the 21st century, yielding important insights for central banking. Price stability has important benefits and is the responsibility of a central bank. Achieving price stability in a complex and uncertain environment involves a credible commitment to a nominal anchor with a strong response to inflation and pre-emptive leaning against an overheating economy. Associated challenges imply that central bank communication and transparency are key elements of monetary policy strategies and tactics. Crises have emphasized the role of central banks in promoting financial stability, as financial stability is key to achieving price and economic stability, but this role increases risks to independence. Goals for central banks other than price and economic stability, complemented by financial stability, can make it more difficult for them to stabilize both inflation and economic activity.

Monetary Policy Strategies to Foster Price Stability and a Strong Labor Market

I assess monetary policy strategies to foster price stability and labor market strength. The assessment incorporates a range of challenges, including uncertainty regarding the equilibrium real interest rate, mismeasurement of economic potential, and balancing the costs and benefits associated with employment shortfalls and labor market strength. I find that the ELB remains a significant constraint, hindering achievement of the inflation objective and worsening employment shortfalls. Symmetric policy reaction functions mitigate the most adverse effects of employment shortfalls by contributing to economic stability. Make-up strategies address ELB risks. These strategies call for policy to accommodate some period of inflation above its long-run objective following an ELB episode. I also consider an asymmetric shortfalls approach to policy. This approach provides accommodation in response to weak activity while foregoing tightening in response to strong activity. While the approach can, in principle, address ELB risks by raising inflation, it performs poorly. The shortfalls approach exacerbates economic volatility, worsens employment shortfalls, and creates excess inflationary pressures. Mismeasurement is not sufficient to limit the importance of strong responses to measured slack. Overall, monetary policy can promote price stability and labor market strength by focusing on economic stability, with a strategy targeted to address ELB risks.

Unemployment-Inflation Relationship in Germany

The Federal Republic of Germany has been one of the historically remarkable countries socially and economically. In this context, one of the outstanding issues is undoubtedly the correlation between unemployment and inflation, which is at the intersection of economy and social policy. Therefore, in the study, the unemployment-inflation trade-off in Germany was examined with the help of macroeconomic data in the context of the Modified/Original Phillips Curve, which explores the unemployment-inflation relationship. The empirical study method is time series analysis, and the monthly data set covers the period from January 1992 to April 2023. According to the study's findings, no causality relationship could be detected between unemployment and inflation variables in Germany in the period, neither in the long run nor in the short run. Therefore, it shows that the German economy does not have to put up with the inflation problem in the fight against unemployment and the unemployment problem in the battle against inflation. In this respect, it would be beneficial to thoroughly examine the German labour market structure and monetary policy strategy in the literature.

Effects of Exchange Rate Variability on Coffee Export Growth in Tanzania

Exchange rate movement is perceived as a very important factor in influencing the performance of the agriculture sector. When the currency of the exporting country depreciates against the trading partners’ currencies tends to stimulate demand and improve export earnings. An increase in value of the currency against the other trading partners’ currencies (e.g. USD) tend to affect the costs of production that may affect aggregate agricultural supply. However, the linkage of the exchange rate and agricultural export growth in particular traditional exports such as coffee has never been properly and intensively documented for appropriate decision-making in Tanzania. Therefore, this study was set to assess how exchange rate variability has affected coffee export growth in Tanzania. The study made use of time series data from 1991 to 2022 using the vector error collection model (VECM). Given the influences other than the real effective exchange rate on the export of coffee growth, we discriminately incorporated inflation rate, discount rate, and money supply, as the independent variables. Yearly data (1991-2022) obtained from the Bank of Tanzania and the International Coffee Organization were used for the analysis. The results from this study reveal that the real effective exchange rate has an enormous positive impact on coffee export growth in the long run. This implies that, the depreciation of the domestic currency against USD has advantage on coffee export growth when considering the demand side as it tends to stimulate coffee demand in the rest of the world, thus leading to an increase in export volume and revenue which helps to foster coffee export growth. However, in the supply side, this depreciation should be carefully monitored as excess depreciation may end up by rising inputs prices especially those inputs imported such as fertilizers, agrochemical, aggrotech and agro machineries that may intern affect the production level. The study ends by concluding, that it is imperative for the Central Bank to carefully observer exchange rate fluctuations and implement appropriate monetary policy strategies in favour of the agriculture sector in particular exportable crops such as coffee. This will help to manage the risks and opportunities that may arise in coffee export growth associated with currency movement.

Monetary Policy Challenges and Strategies in the Globalization: An Analysis of the Federal Reserve's Approach to the Trilemma

This study explores the Federal Reserve's (Fed's) approach to the financial trilemma in the era of globalization, emphasizing the trade-offs between monetary policy autonomy, exchange rate flexibility, and open capital markets. It delves into the challenges posed by increased global financial integration and the effectiveness of traditional and innovative monetary tools. The paper advocates for the adoption of a macroprudential policy framework to enhance financial system stability without compromising policy objectives. The findings highlight the Fed's strategic use of macroprudential measures alongside conventional tools to navigate the trilemma, illustrating the importance of flexibility and innovation in central banking practices amidst global financial complexities.

The choice of monetary regimes in emerging market economies: Inflation targeting versus its alternatives

This paper examines the macroeconomic, financial, and institutional factors that affect the adoption of inflation targeting vis-a-vis alternative monetary policy strategies for 44 emerging market economies during 1990–2017. We employ a multinomial logistic regression with inflation targeting and exchange rate pegs as treatment groups, and intermediary monetary strategies as the baseline group. The main findings from our study are as follows: higher average inflation is associated with lower probability of adopting inflation targeting; while both output growth and its volatility make the adoption of inflation targeting less likely. Concerning the effects of the control variables, financial sector development, central bank independence, greater exposure to capital flows, and the level of economic development are all associated with higher likelihood of adopting inflation targeting, whereas higher public debt, trade openness, and money growth have the opposite effect. Macroeconomic conditions seem to have different impact on the choice of inflation targeting and exchange rate pegs, whereas similar institutional conditions are conducive to the implementation of both regimes. Finally, the effects of macroeconomic and institutional conditions do not depend on the type of inflation targeting.

The ECB’s Monetary Policy Review: A Post-Keynesian Twist?

ABSTRACT In 2021, the European Central Bank (ECB) decided to adjust its monetary policy strategy. Three major changes were initiated: the main objective was reformulated, but also the structure of the institution’s analyses of the economic situation and how it will communicate in the future was adjusted. Can these changes be considered as being based on a Post-Keynesian view or do they still follow the ‘New Consensus’ model largely based on standard neo-classical theory? Our main conclusion will be that the adjustments made by the ECB are not necessarily based on Post-Keynesian analysis. To justify this statement, we have developed what we consider the basic elements of a Post-Keynesian monetary policy, then we analysed what a Post-Keynesian monetary rule could be as well as the monetary policy instruments used by the ECB. Subsequently we looked at the strategy changes made by the ECB from a Post-Keynesian point of view and concluded that some of these changes can be considered as being close to Post-Keynesian theory, but other facts explain why the ECB’s monetary policy is still close to the ‘New Consensus’ model.

The Deflationary Bias of the ZLB and the FED's Strategic Response

AbstractThe paper shows, in a simple analytical framework, the existence of a deflationary bias in an economy with a low natural rate of interest, a zero lower bound (ZLB) constraint on nominal interest rates and a discretionary Central Bank (CB) with an inflation mandate. The presence of the ZLB prevents the CB from offsetting negative shocks to inflation whereas it can offset positive shocks. This asymmetry pushes average inflation below the target which in turn drags down inflation expectations and reinforces the likelihood of hitting the ZLB. We show that this deflationary bias is particularly relevant for a CB with a symmetric dual mandate (i.e., minimizing deviations from inflation and employment), especially when facing demand shocks. But a strict inflation targeter cannot escape the suboptimal deflationary equilibrium either. The deflationary bias can be mitigated by targeting “shortfalls” instead of “deviations” from maximum employment and/or using flexible average inflation targeting. However, changing monetary policy strategy risks inflation expectations becoming entrenched above the target if the natural interest rate increases.

Economic Instability and Global Market Fluctuations in 2023: Analyzing Causes, Impacts, and Policy Responses

The economic instability and global market fluctuations that will occur in 2023 have created various complex economic challenges and have far-reaching impacts. These dynamics are influenced by various factors, including monetary and fiscal policies, the impact of the COVID-19 pandemic, geopolitical conflicts, and changes in commodity prices. The impact of this instability can be seen in financial markets, macroeconomics, business and industrial sectors, and has significant socio-economic consequences. This research aims to analyze the causes, impacts, and policy responses to economic instability and global market fluctuations in 2023. The method used is a descriptive qualitative approach with data obtained from various relevant research results or previous studies. Data processing is carried out carefully to ensure accurate and in-depth analysis. The results of this research show that the combination of the impact of monetary and fiscal policies, the ongoing influence of the COVID-19 pandemic, geopolitical dynamics, and changes in commodity prices have contributed to global economic instability. This impact is manifested in financial market volatility, macroeconomic disruption, as well as impacts on business and industrial sectors. Socioeconomic consequences such as increasing poverty and income inequality underscore the need for effective policy responses. The policy responses taken include monetary policy strategies, fiscal measures, structural reforms, and international cooperation.

The communication reaction function of the European Central Bank. An analysis using topic modelling

ABSTRACT Central bank communication plays a crucial role in the conduct of monetary policy, yet the research on central bank communication, while growing, is still scarce. In this paper, we analyze the communication reaction function of the European Central Bank (ECB) through topic-based indices derived from the bank’s speeches. These indices are used as dependent variables in policy and communication reaction function models, as suggested by recent literature. The topics are extracted using Latent Dirichlet Allocation (LDA), a popular text mining algorithm for topic extraction. The ECB has recently reviewed its monetary policy strategy, which led to an increase in studies incorporating the new methods offered by text mining for analyzing the policy reaction function of the bank. We show how indices built through topic modelling can be used to study the communication reaction function of a central bank, and we examine which variables are significant for every topic communicated by the ECB.

The Devolution of Federal Reserve Monetary Policy Strategy, 2012-24

The Devolution of Federal Reserve Monetary Policy Strategy, 2012-24

The Symmetric and Asymmetric Nexus Between Monetary Policy Interest Rate and Core Inflation in Jordan

Objectives: This study investigates monetary policy's symmetric and asymmetric impacts on core inflation in Jordan. It employs linear and nonlinear autoregressive distributed lag (NARDL) models. The research also seeks to assess the relationship between the overnight deposit rate, money supply growth, and real GDP growth on core inflation and to explore potential linear or nonlinear effects. Methods: The study applies ARDL and NARDL models to estimate the relationships above. It utilizes data from the first quarter of 1998 to the first quarter of 2023. Tests for Granger causality are conducted, and the Brock-Dechert-Scheinkman (BDS) test is employed to ascertain the presence of nonlinear paths within the study variable. Robustness checks are conducted to ensure parameter stability. Results: The analysis provides compelling empirical evidence supporting a long-term relationship between the overnight deposit rate and core inflation. The Brock-Dechert-Scheinkman (BDS) test confirms the existence of nonlinear dynamics. The ARDL model reveals a linear relationship: a 1% interest rate increase leads to a 0.26% reduction in core inflation in the long run. In contrast, the Nonlinear Autoregressive Distributed Lag (NARDL) analysis unveils an asymmetric effect: a 1% increase in the overnight deposit rate decreases core inflation by 0.43%, while a 1% reduction increases it by 0.37%. Conclusions: These findings have critical implications for monetary policymakers. They underscore the importance of judiciously considering interest rate adjustments to manage inflation dynamics, acknowledging the nonlinear and asymmetric effects inherent in the relationship between the overnight deposit rate and core inflation. When crafting monetary policy strategies, policymakers must consider these nuanced dynamics to address inflation concerns effectively.

Monetary Policy Strategies to Navigate Post-Pandemic Inflation: An Assessment Using the ECB's New Area-Wide Model

Monetary Policy Strategies to Navigate Post-Pandemic Inflation: An Assessment Using the ECB's New Area-Wide Model

The Effects of Oil Price Volatility on South African Stock Market Returns

The aim of this study is to assess the response of the South African stock market returns to oil price volatility, based on the daily South African stock market index, using the GARCH-Copula modelling technique. The results of the analysis show evidence of an asymmetric impact of fluctuations in oil prices on South African stock market returns, using a copula model specification, particularly the bivariate symmetrized Joe-Clayton (SJC) copula. The results also revealed that the EGARCH process is the best univariate model to capture oil price volatility. Interestingly, this study also revealed that the tourism industry is most dependent on oil price fluctuations, due to its heavy reliance on transportation costs. The economic implications of this study also suggest that sectors affected by oil price fluctuations need specific long-term and short-term monetary policy strategies. It is recommended that in the short term, expansionary monetary policy could assist in mitigating the impact of higher oil prices, while in the long-term, policies aimed at reducing the volatility in oil prices would be of great help in alleviating its harmful effect on stock market returns.