Tight Monetary Policy Research Articles

Recession fears and stock markets: An application of directional wavelet coherence and a machine learning-based economic agent-determined Google fear index

Recession fears play a pivotal role in investment decision making and policy development aimed at reducing the likelihood of a recession and managing its impact. Using machine learning, we develop an economic agent-determined daily recession fear index using Google searches that isolates recession-related fears from overall stock market uncertainty. We study the evolving impact of recent recession fears on stock markets using directional wavelet coherence that distinguishes between positive and negative associations. Recession fears negatively impact world and G7 stock markets and trigger heightened volatility, with Japan being the most resilient. Monetary policy tightening in response to record inflation levels significantly contributes to persistent recession fears, suggesting that policymakers should consider co-ordinating responses to avoid an excessive global economic slowdown. Our methodology offers a high frequency monitoring tool that can be applied to analyse evolving relationships between variables and can be generalised to study the influence of specific events on financial markets by isolating topic-specific components from general proxies for uncertainty, attention or sentiment.

The heterogeneous reaction of green and conventional bonds to exogenous shocks and the hedging implications

Unlike most previous studies considering the yields on green bonds versus conventional bonds or the hedging ability of green bonds against downside market risk, the main purpose of this paper is to paper examine the short-term response of green and conventional bonds to the Russia-Ukraine conflict shock and the US Federal monetary policy tightening. Using daily data from August 3, 2021 to March 29, 2022, this paper conducts an event-based study (Cumulative Abnormal Returns, CAR) and then applies a hedging analysis in the context of increasing geopolitical risk and financial stress. The analysis reveals that green bonds exhibit a stronger reaction to the Russia-Ukraine conflict and the US Federal rate hike than conventional, municipal, and treasury bonds in different time frames. Compared to conventional, municipal, and treasury bonds, green bonds offer lower negative CAR responses during the event window and the [-5, +5] period, suggesting a rigidity feature. The dynamic correlation and hedging analysis indicate that green bonds, unlike the other bonds indices, have a negative dynamic correlation with both geopolitical risks and financial stress, implying a hedging ability around the conflict shock and the Federal tightening cycle. These findings enrich the existing literature on green bonds, offering a wide range of applications for investment managers and policymakers.

On investment strategy of the company adjusted to the state monetary policy

The author examines the impact of the policy of the Bank of Russia, information asymmetry and business profitability on the investment agenda of Russian public companies. The tight monetary policy of the state is a restraining factor in the economy and is caused by a reduction in corporate investment. Faced with increased funding and external sanctions, Russian companies are forced to focus on internal sources of investment financing. Using the analysis of panel data, the author substantiates that companies act in line with a precautionary motive, saving some money for subsequent financing of capital investments. Low information asymmetry makes debt financing a less expensive procedure. The tangibility of assets is an indicator or hallmark when a company evaluates the cost of raising capital. The author chose a regression model with fixed effects to prove the impact of the increase in the cost of funding on the investment opportunities of the company. The unobservable individual effect may include various indicators, in particular, the quality of corporate governance, fluctuations in financial markets. Share price growth is directly related to the return on assets. An increase in the key interest rate worsens the company’s investment prospects. To save money the company can turn to debt financing in conditions of low information asymmetry. Tangible assets can serve as collateral, and debt is a fairly inexpensive financing option, even under financial constraints. To expand investment demand in the context of the main objectives of the National Security Strategy of the Russian Federation it is necessary to link the key interest rate of the Bank of Russia to profitability in key sectors of the economy.

Coordination of monetary and macroprudential policies, land finance behavior and risk prevention in the real estate market

ABSTRACT This paper measures the real estate market risk in China by embedding the relative volatility of stock returns in the real estate industry into the Marginal Expected Shortfall Model. Subsequently, we examine the effectiveness of the coordination of monetary and macroprudential policies in preventing real estate market risk based on panel data from cities. Additionally, we investigate the impact of local government’s land finance behavior on the effectiveness of the coordination of these two policies. The results show that the tightening monetary policy can strengthen the restraining effect of macroprudential policy on real estate market risk. From the perspective of risk prevention in the real estate market, whether it is a quantitative or price-based monetary policy tool, land finance behavior can weaken the regulatory effect of the coordination of monetary and macroprudential policies. Moreover, this weakening effect is more pronounced in the regions with high vertical fiscal imbalance and intense economic competition. One of the important policy implications is that regulatory authorities should strengthen the coordination among local fiscal behavior, monetary policy, and macroprudential policy. This will enhance the effectiveness of the coordination of monetary policy and macroprudential policy to prevent risks in the real estate market.

Analyzing the Impact of Monetory Policy Shocks on Output, Inflation and Exchange Rate Dynamics of Pakistan

The major objective of this study is to analyse that how monetary policy of Pakistan had impact on output, inflation and exchange rate fluctuations during Global Financial Crisis 2008-2009 in Pakistan. Quarterly data was used for this purpose. Data spans from 1990Q1 to 2022Q4. Time varying parameter – vector auto regression model (TVP-VAR) of Jouchi Nakajima (2011) has been used for analysis. Through this model we selected the time horizons such as 2008, 2009 and 2015 mainly to study the impact of monetary policy on different selected variables. Our empirical finding indicates that monetary policy shock plays an important role in the economic dynamics of Pakistan. The impulse response of inflation is negative to tight monetary policy shock (εi↑→ p), this is in accordance with the standard economic theory. In case of Pakistan, after 1990 there is declining trend in volatility of output and a considerable reduction in business cycle fluctuations. Policy rate is more volatile during 1998. After 2000 there is decline in volatility of policy rate but in 2008-09 there is rise in interest rate because of Global Financial Crises in 2007 and 2008. The response of policy rate to inflation shock is in rising trend in 2007 and 2008. The inflation is increasing as a response to positive output shocks after 12th quarter this rising trend is also evident during 2008 where the impact of output on inflation is long term.

The Effects of Shocks on the Real Economy in Romania. A Bayesian FAVAR Approach

Abstract The last five years have marked the global economy with a series of shocks, such as the COVID-19 pandemic, the war in Ukraine, supply chain bottlenecks, the surge in inflation, and the energy crisis, whose magnitude and duration were challenging to predict. Moreover, the impact of those shocks significantly affected the accuracy of macroeconomic forecasts. Thus, assessing the effects of the shocks became extremely important and conditioned by the econometric models that can capture a large amount of information. This paper proposes a Bayesian Factor-Augmented Vector Autoregressive Model (FAVAR) to assess the effects of the most prominent shocks that recently hit the real Romanian economy. We use a high-dimensional data set of quarterly indicators from 2005Q1 to 2023Q3, covering the real sector, price indexes, sentiment indicators and financial variables. Our main results suggest that tightening monetary policy shock decreases both the real economic activity and prices, while a supply shock produces a delayed negative and persistent effect on real economic activity and on the majority of the indicators introduced in the model. The results of the uncertainty shocks are characterized by wider confidence intervals and the effects are estimated to have a lower magnitude.

The non-linear impact of monetary policy on shifts in economic policy uncertainty: evidence from the United States of America

A stochastic volatility estimation of VIX index’s latent volatility is used for the United States of America, as a proxy for the adjustments in the levels of investors’ uncertainty related to current and future economic policies. The impact of monetary policy stance on such measure is examined in the framework of the distributed lag non-linear models (DLNM). We place this analysis in the literature stream emphasizing the various sources of heterogeneity concerning investors’ expectations. The main finding is that the monetary policy does impact non-linearly the adjustments in investors’ predictions. While a tighter monetary policy does generally contribute to an increase in VIX’s latent volatility, the shape of such effect varies across different GLM and GAM specifications of DLNM. This outcome remains robust, even if: (1) we control for the global price of Brent crude and consumers’ confidence; (2) we use, instead of the stochastic framework, a Markov-switching GARCH-based estimator; or (3) we replace the monetary policy instrument with monetary policy uncertainty. We argue that accounting for its nonlinear effects on financial markets is of critical importance for the design of a monetary policy pursuing global financial stability.

Today’s Finance Markets in Conditions of Poly-Crisis and Crisis of Cost of Living

The article provides characteristics, statistics and factual material on countries connected with the current global economic crisis of the cost of living. The notion of the current poly-crisis was defined as a sum total of old and new risks in their close interaction and their adverse impact on global and national economy and finance markets. The focus was made on tightening of monetary and credit policy of national central banks in 2022–2023 in view of combating inflation, which resulted in more expensive credits, higher profitability of state treasury bonds, bankruptcy of corporations and declining standard of living of people. On the background of the global poly-crisis the author assessed macro-prudential policy of the Bank of Russia and standing of its banking system, including market of preferential mortgage with state support. Within the frames of crisis-management risks of Russian insurance and re-insurance industries were shown, as well as non-credit life insurance as a today’s driver of insurance market growth. In view of import-substitution policy an important innovation of the Moscow exchange – the informational-analytical, financial and trade terminal ‘Trade Radar’ was put forward. The author showed economic essence, trends and tools of de-dollarization policy of Russia and friendly countries, including BRICS project aiming at development of common supranational payment unit.

The long-run effects of monetary policy: The role of R&D investment in economic growth

This study examines the long-term economic effects of monetary policy, focusing on its impact on research and development (R&D) investment and firm productivity. Using data from Compustat, we analyze productivity’s response to monetary policy shocks, with an emphasis on the role of firm size, age, and leverage as indicators of credit constraints. We use high-frequency financial market data to identify monetary policy shocks through a local projections–instrumental variables (LP-IV) approach. Our findings reveal that smaller, younger, and less leveraged firms are more adversely affected by contractionary monetary policies, suggesting a significant impact on their R&D investments and subsequent productivity, particularly in the manufacturing sector. The findings also highlight that tight monetary policy has a persistent negative impact on firm productivity via reduced R&D investment, underscoring the need for policies like R&D subsidies to support long-term economic growth.

Macroeconomic impacts of monetary and fiscal policy in the euro area in times of shifting policies: A SVAR approach

This paper analyses the impacts of monetary and fiscal policy of the euro area on output and inflation between 2005 and 2022 using a structural vector autoregressive (SVAR) approach. We employ three alternative indicators of monetary policy, alongside government spending and revenue as fiscal variables to estimate the effects across different subperiods. The findings reveal that monetary policy tightening produces a negative and delayed effect on both output and inflation, with the effects differing across alternative monetary policy indicators in terms of duration and magnitude. A fiscal revenue shock is found to be inflationary, whereas a fiscal spending shock initially has a negative effect on growth that later turns positive, but is short-lived. The effects of fiscal policy shocks are more substantial than the effects of monetary policy shocks. The results also suggest that the effects may differ across subperiods, depending on the nature and intensity of the policy shifts.

Supplier concentration and debt maturity structure

PurposeThis paper takes Chinese A-share listed companies from 2007 to 2021 as research samples to investigate the influence of supplier concentration on debt maturity structure and its mechanism. It further analyzes whether the relationship between the two is different in the case of different monetary policies, collateral assets, and total debt. The research conclusion is of practical significance for enterprises to construct a balanced debt maturity structure and prevent financial risks.Design/methodology/approachThis paper adopts the empirical research method. The data came from the CSMAR database, which eliminated ST and *ST and companies with missing data, resulting in a sample of 20,328. Stata16 was used for statistical analysis.FindingsThere is an inverted U-shaped relationship between supplier concentration and debt maturity structure, and market position and trade credit play an intermediary role. In the case of tight monetary policy, fewer collateral assets, and higher total debt, the inverse U-shaped relationship is more significant.Originality/valueThis paper examines the relationship between supplier concentration and debt maturity structure from a non-linear perspective for the first time, providing theoretical support for enterprises to form a reasonable debt structure, and deepening the theoretical cognition of the relationship between supplier concentration and corporate debt maturity structure.

CEOs' hometown connections and corporate risk-taking: Evidence from China

Using hand-collected data on CEOs' hometown connections in Chinese A-share listed companies from 2009 to 2020, we find that such connections with suppliers are negatively associated with corporate risk-taking, reflected by the risk-taking behavior of CEOs with personal preference and self-interest. It is also found that the negative relationship between CEO hometown connections and corporate risk-taking is more pronounced for firms with greater economic policy uncertainty, firms in a period of tight monetary policy, firms with fewer analysts following, and firms with local CEOs, male CEOs, or CEOs without holding shares.

Climate change and the influence of monetary policy in China

ABSTRACT We investigate whether climate change affects the efficiency of monetary policy. We use temperature shocks, calculated as temperature deviations from historical average temperatures, to proxy climate change, and utilize a threshold vector autoregression model (TVAR) to estimate the impact of expansionary and tight monetary shocks on economic output under high and low regimes of temperature shocks. Our results characterize a climate change regime-dependent monetary policy. Expansionary monetary policy is less efficient and the negative impact of tight monetary policy is enhanced, when climate change is severe. The results can be explained by the climate-induced credit constraint of commercial banks. Higher temperature shocks lead to increases in banks’ non-performing loan ratios, which results in larger credit constraints of banks. Banks tend to be more prudent in credit expansion, and the bank credit channel of monetary policy transmissions is weakened.

Spillovers from US monetary policy: Role of policy drivers and cyclical conditions

We provide new evidence on the spillover effects from US monetary policy for a large group of emerging market and advanced economies, focusing on the nature of the shocks driving movements in US interest rates. With an SVAR-IV model used to identify monetary policy, demand, and supply shocks, we find that an increase in US interest rates driven by demand shocks engenders a positive spillover to economic activity in the near-term, while an exogenous tightening of monetary policy has a large negative spillover effect, highlighting the importance of the trade channel. Furthermore, spillovers from US monetary policy shocks depend on the state of the business cycle, exerting larger effects when growth is weak outside the US. Finally, tighter US monetary policy affects the left tail of the growth distribution disproportionately: the fat left tail highlights the salience of growth at risk.

Detection of financial bubbles using a log‐periodic power law singularity (LPPLS) model

AbstractThis article provides a systematic review of the theoretical and empirical academic literature on the development and extension of the log‐periodic power law singularity (LPPLS) model, which is also known as the Johansen–Ledoit–Sornette (JLS) model or log‐periodic power law (LPPL) model. Developed at the interface of financial economics, behavioral finance and statistical physics, the LPPLS model provides a flexible and quantitative framework for detecting financial bubbles and crashes by capturing two salient empirical characteristics of price trajectories in speculative bubble regimes: the faster‐than‐exponential growth of price leading to unsustainable growth ending with a finite crash‐time and the accelerating log‐periodic oscillations. We also demonstrate the LPPLS model by detecting the recent bubble status of the S&P 500 index between April 2020 and December 2022, during which the S&P 500 index reaches its all‐time peak at the end of 2021. We find that the strong corrections of the S&P 500 index starting from January 2022 stem from the increasingly systemic instability of the stock market itself, while the well‐known external shocks, such as the decades‐high inflation, aggressive monetary policy tightening by the Federal Reserve, and the impact of the Russia/Ukraine war, may serve as sparks.This article is categorized under: Applications of Computational Statistics > Computational Finance Algorithms and Computational Methods > Computational Complexity Statistical Models > Nonlinear Models

The relevance of the country and sector effect in global equity returns around COVID-19 and developed and emerging markets

This study explores the historical and current explanatory power of country classification and Global Industry Classification Standard sector classification on global equity returns in the equally weighted MSCI All Country World Index. R2 is a crucial statistical tool for risk and portfolio management professionals because it serves as a measure of how much of a portfolio's movements can be explained by factors. Its significance lies in its ability to quantify how dependent a portfolio's risk is on those factors. The country classification's adjusted R2 is dominant in global equities, driven by its dominance within emerging markets (EM). Within developed markets (DM), the country effect's slight dominance over the sector effect has decreased over time — the two have become more balanced since 2015, with the sector effect having a slightly higher adjusted R2 value. There was a drop in the R2 for all classifications during the COVID-19 pandemic. This drop was most significant in the country classification, with a sharp decline to 8.3 per cent, well below its previous historical minimum of 12 per cent, before it rebounded to its historical range. This change drove further analysis into the country effect across EM and DM, where the large drop and rebound were primarily within EM. During this time, the sector effect dropped but remained within its historical range, implying a larger loss of diversification benefit in country effect than in sector effect. The impact of Chinese stocks on country effect within EM is also investigated. In 2018, there was a large influx of Chinese companies into the index, which caused a decline in country diversification and hence a reduction in explanatory power within EM. China's rapid and strict COVID-19 response, early tight monetary policy and regulatory crackdown have since caused it to become increasingly differentiated from the rest of EM, increasing country diversification within EM and causing the accentuated rebound in explanatory power of the country effect post-COVID-19. Risk managers can use these results to validate the use of sector and country classifications in portfolio construction.

Will the establishment of city commercial banks improve resource allocation efficiency?–Concurrently on bank risk-taking channels of monetary policy in China

Improving resource allocation efficiency is an essential approach to accelerate the construction of a dual circulation development paradigm. This article takes the intensification of heterogeneous competition between local banks caused by the establishment of city commercial banks as a quasi-natural experiment. Based on urban panel data obtained by matching the China Industrial Enterprise Database and the Urban Statistical Yearbook, empirical research finds that the establishment of city commercial banks generally deteriorates resource allocation efficiency. However, after incorporating bank risk-taking channels of monetary policy into the analysis framework, tight monetary policies are conducive to alleviating the deterioration of resource allocation efficiency. Further research indicates that this mitigating effect mainly comes from enterprises with high productivity and strong financial constraints. In the context of global quantitative easing policies, the findings of this article can contribute to a deep understanding of the relationship between banking sectors and resource allocation efficiency and provide significant policy insights for further promoting resource allocation efficiency, improving the pass-through effect of monetary policies, and advancing high-quality development of the banking industry.

The transmission of U.S. monetary policy to small open economies

This paper studies the transmission of a U.S. monetary policy tightening to a set of small open economies. It uses as policy instruments Wu and Xia (2016) shadow rate, the Fed funds rate (conventional monetary policy, CMP) and changes in the Fed balance sheet (unconventional monetary policy, UMP). The main findings include: (1) the shock always reduces foreign economic activity and contributes to the emergence of a “global” financial cycle. (2) The financial channel has become more important since 2008. 3) There is evidence of an oil transmission channel. (4) Cross-country differences do not depend on their international trade volume, exchange rate flexibility or financial openness. U.S. policymakers may need to consider the feedback effects of changes in their policy stance on world demand and inflation. Small open economies should assess the type of U.S. monetary policy shock to evaluate the channels through which their economies may be affected.

Significant Policies Have the Federal Reserve Enacted to Control Inflation from the Pandemic

Since April 2021, headline and core inflation figures in the United States have been above target. The factors behind the price spikes are difficult to clarify and have been the subject of debate among policymakers and academics. Lowering interest rates makes borrowing cheaper, which potentially stimulates demand and causes inflation. Conversely, raising interest rates can decrease demand and mitigate inflation. Tight monetary policy helps curb inflation. The Federal Reserve has increased interest rates 11 times since March 2022, bringing the federal funds rate to its highest level since 2001. As interest rates rise, so do borrowing costs. Higher interest rates not only increase borrowing costs but also make saving more attractive, as individuals can earn higher returns on their savings. This change in behavior can result in less investment and consumer expenditure, further dampening economic growth. Therefore, Federal reserve need to make corresponding and correct responses to better deal with inflation. This paper will mainly discuss what economic policies the Federal Reserve has adopted in response to the inflation caused by the epidemic and will actually look at whether or not these monetary policies have actually curbed inflation.

The Australian Economy in 2023–24: Navigating a Narrow Path

AbstractThe economy grew at a moderate pace in 2022–23 as Australians adjusted to rising costs of living. The aggressive tightening of monetary policy has eased inflationary pressure, but inflation remains high. Strong labour market performance has been the brightest note in the current Australian macroeconomic landscape, although labour productivity growth was disappointing. The ongoing geopolitical conflict in Europe with its ensuing geoeconomic fragmentation, and the recent conflict in the Middle East increased global uncertainty and volatility in food and energy prices. This, together with the slowdown in China, added further downside risks to the outlook for the economy in 2023–24.