Monetary Policy Research Articles

Sustainable development goals under threat: the impact of inflation on construction projects

PurposeDespite advancements in construction digitalisation and alternative building technologies, cost overrun is still a challenge in the construction industry. The inflation rate is increasing, especially in developing countries, and is critical in cost overrun matters. It can deviate construction built-up rate components. This may thwart improving construction-related Sustainable Development Goals (SDGs). Studies concerning the impact of the inflation rate on construction-related SDGs are scarce in developing countries, including Nigeria. The study investigated the impact of inflation on Nigeria’s construction projects and their outcome on SDGs and suggested possible ways to improve achievement of construction-related SDGs and their targets.Design/methodology/approachThe researchers employed a qualitative research design. This is because of the study’s unexplored dimension. The researchers engaged 35 participants across major cities in Nigeria via semi-structured virtual and face-to-face interviews. The research utilised a thematic method for collated data and accomplished saturation.FindingsFindings reveal that the impact of inflation on construction projects, if not checked, could hinder achieving construction-related SDGs in Nigeria. This is because of the past three years of hyperinflation that cut across major construction components. It shows that the upward inflation rate threatens achieving construction-related SDGs and proffered measures to mitigate inflation and, by extension, enhance achieving construction-related SDGs. This includes a downward review of the Monetary Policy Rate, control of exchange rate volatility and addressing insecurity to restore FDIs and FPIs confidence.Originality/valueBesides suggesting possible solutions to mitigate hyperinflation on construction components to improve achieving construction-related SDGs, findings will stipulate government policymakers put measures in place through favourable fiscal and monetary policy implementation and encourage moving from a consumption to a production nation.

Fiscal Policy and Economic Stability: A Comprehensive Analysis

This piece outlines fiscal policy and how it helps in stabilizing the economy. It starts with explaining fiscal policy and emphasizing its role as an effective tool for economic management. Tax policies, government spending, and budget deficits/surpluses which make up fiscal policy are discussed in details. The article continues by discussing the influence of fiscal policy on the economy's stability, considering its ability to boost growth, curb inflation, and reduce unemployment. While the management of fiscal policy comprises of the challenges such as political concerns and coordination with monetary policy, is also examined. Case studies and examples demonstrate success and failure of those fiscal policy implementation, which have become an invaluable lesson for policy makers. The article concludes with a look into the future trends and some suggestions on sustainable fiscal policy procedures.

‘Making text talk’: The minutes of the Central Bank of Brazil and the real economy

This paper investigates the relationship between the views expressed in the minutes of the meetings of the Central Bank of Brazil's Monetary Policy Committee (COPOM) and the real economy. It applies various linguistic machine learning algorithms to construct different measures of the uncertainty contained in the minutes of the COPOM. To achieve this, we first infer the content of the paragraphs of the minutes with Latent Dirichlet Allocation (LDA). Secondly, we build an uncertainty index for the minutes with Word Embedding and K-Means. Thirdly, we create two topic-uncertainty indices. The first topic-uncertainty index is constructed from paragraphs with a higher probability of topics related to general economic conditions. The second topic-uncertainty index is built from paragraphs with a higher probability of topics related to inflation and the monetary policy decision. Then, via a Structural VAR, we explore the lasting effects of these uncertainty indices on some Brazilian macroeconomic variables. Our results show that an unexpected increase in the minutes' uncertainty leads to a depreciation of the exchange rate and a decline in industrial production and retail trade. Moreover, we show that a positive shock to the general economic conditions topic-uncertainty index leads to higher inflation, whereas a positive shock to the inflation and monetary policy decision topic-uncertainty index leads to lower inflation.

Investigating the Relationship between Monetary Policy and Stock Prices

Investigating the Relationship between Monetary Policy and Stock Prices

Conventional and unconventional shadow rates and the US state-level stock returns: Evidence from non-stationary heterogeneous panels

This study analyzes how monthly stock returns in the United States react to conventional and unconventional shadow rates from February 1994 to April 2023. The study uses a nonstationary heterogeneous panel data technique appropriate for analyzing large cross-sections and long periods. The analysis is separated into turbulent and tranquil periods. The findings suggest that, although the shadow rate is expected to align with the long-term rate, its ability to boost economic activity in the stock markets is only applicable in the short term. Despite the Federal Funds Rate (FFR) being unable to be lowered below zero bounds, the study shows results that support the effectiveness of the FFR in stimulating stock returns in the long run, particularly during crisis periods. The study also reveals that both conventional and unconventional shadow rates share a common feature, which is that they demonstrate how the stock markets can be downward-sticky in the long run with a rising shadow rate in virtually all 50 states in the U.S. The findings provide sturdy insights into the usefulness of unconventional monetary policy measures for stock market performance during crises and normal periods.

Heterogeneous impact of cost of carry on corporate money demand

AbstractTransaction cost model predicts opportunity costs should negatively affect money demand. Examining the effect of cost of carry (CC) on cash holdings at the firm‐level, rather the average effect for entire population, we find that such a pervasive negative relation does not hold in times of low interest rate with about a 10% chance of observing positive effects. Firm size emerges as the primary driver of this heterogeneity, demonstrating a hump‐shaped effect on the cash‐CC link. Our findings suggest that policymakers should track the distributional impacts of opportunity cost of money demand over time to better evaluation of monetary policy.

Climate threat and price stability: A case study of Belize

AbstractIn recent years, there have been calls for policy makers to do more to fight climate change. Indeed, there are growing concerns that climate could exert a serious detrimental impact on financial stability, and thus the wider economy. Empirically, a limited number of studies have highlighted the inflationary effects of climate‐related variables. This study is an attempt to contribute to this literature. More specifically, the article investigates the dynamic inflationary effect of climate in a case study of Belize. Results derived from quarterly data, over the period 1994–2019, and local linear projections suggest that inflation responds positively and significantly to temperature and rainfall shocks. Further disaggregation of inflation into its subindices reveals that this increase in inflation is mainly driven by the effect of climate on food, alcohol and tobacco, household, hospitality, and other goods and services inflation. The findings remain robust even when accounting for temperature and rainfall deviations from historical means. The results suggest that, while inflation control might not be a core element of monetary policy in Belize, policy makers should be aware that these climate‐related effects may have ramifications for the Belize economy.

Literature Review on Islamic Monetary Policy: Theory, Implementation and Impact

Study This study about policy Islamic monetary , which includes base theoretical , implementation in various countries, as well its impact and effectiveness . Policy Islamic monetary , which is based on principles sharia like prohibition usury , emphasis on sectors real , and principle for result , aim For create stability economy and justice socio-economic . The implementation varies in different countries, with some countries implement it system Islamic finance​ full and others using a hybrid model. Research methods used​ is review literature , which involves collection , analysis , and synthesis various source secondary like books , articles journals , and reports relevant research .​ Research result show that policy effective Islamic monetary in control inflation , pushing growth sustainable economy , and improve stability finance . However , challenges still There is in matter standardization practice between countries and integration with system global finance . This study emphasize importance innovation instrument finance sharia and improvement Work The same international For increase effectiveness policy Islamic monetary future .

The unintended interaction effect of monetary and macroprudential policies: Evidence from China’s bank-level data

We investigate the unintended interaction effect of monetary and macroprudential policies on banks’ broad credit, using Chinese bank-level data from 2005 to 2019. According to our findings, tightening both macroprudential and monetary policies simultaneously in China expands broad credit, which differs from traditional empirical findings in other countries that such policy conditions typically result in credit contraction. We reveal that the non-deposit funding channel drives the unintended surge in broad credit under the interaction of macroprudential and monetary policy.

Modern Monetary Dynamics: Bids of Money Without Banks, Money Supply Theory, Money Multiplier, and Policy Implications

This research explores modern monetary dynamics with a focus on money supply without bank intermediation, money supply theory, the money multiplier mechanism, and the policy implications arising from this phenomenon. In the contemporary financial context, the emergence of financial technology (fintech) and cryptocurrencies has changed the traditional landscape of money supply, allowing money supply to occur without the direct role of banks. This article discusses the basic concepts of money supply theory, including the factors that affect the money supply in the economy. Furthermore, this study analyzes the money multiplier mechanism, which describes how money injected into the banking system can result in a larger increase in the money supply. Using both theoretical and empirical approaches, this study assesses the monetary policy implications arising from changes in the way money supply occurs, including the challenges for monetary authorities in controlling inflation and financial stability. The results show that this transformation in money supply requires innovative and responsive policy adaptations to maintain the effectiveness of monetary policy in maintaining economic stability.

Is gold a preferable diversifier of cleaner equity risk across diverse scenarios? Evidence from multidimensional connectedness and spillover measures

The study aims to explore the risk management potential of historical (gold and crude oil) and modern (bitcoin) assets against the shocks in clean energy stocks. Specifically, the quest related to which asset(s)? In what proportion? In which market condition? and for what time preference? should be held with cleaner equity. The exploration is based on the presumptions that conventional and cleaner stocks are alike and that financial markets (assets) have an asymmetric interdependence. We also assume that the interdependence among the considered markets is driven by various events over time and distinct investment horizons. To that end, we employ a generalized vector autoregressive-based overall, time-varying, asymmetric, and frequency-based connectedness measures and DCC-GARCH model to the daily data ranging from October 15, 2014 to April 12, 2023. The spillovers across the considered markets confirm the similarity of conventional and cleaner stocks and the asymmetry hypothesis, suggesting that downside shock transmission (bad spillovers) outperforms upside shock transmission (good spillovers). The time-varying results suggest that connectedness among the considered markets is higher, and asymmetric during Brexit-2016, the COVID-19 pandemic, Russia's invasion of Ukraine in early 2022, and the monetary policy tightening of 2022 and 2023. Finally, we show that gold is a preferable diversifier of cleaner equity risk on average, during distress events, downside markets, and across all investment horizons. The study has implications for financial market participants to strategically manage the cleaner equity risk with gold in diverse market scenarios.

Trade Wars, Nominal Rigidities, and Monetary Policy

Abstract This paper shows that the outcome of trade wars for tariffs and welfare will be affected by the monetary policy regime. The key message is that trade policy interacts with monetary policy in a way that magnifies the welfare costs of discretionary monetary policy in an international setting. If countries follow monetary policies of flexible inflation targeting, trade wars are relatively mild, with low equilibrium tariffs and small welfare costs. Discretionary monetary policies imply much higher tariffs, high inflation rates, and substantially larger welfare costs. We quantify the effects of a global trade war among major economies using estimates of trade elasticities, economic size, net foreign assets, and trade openness. We find large welfare benefits of an inflation targeting monetary policy for all countries.

The Role of House Prices and Transactions in Monetary Policy Transmission: The Case of Italy

The Role of House Prices and Transactions in Monetary Policy Transmission: The Case of Italy

Uncertainty and the transmission of monetary policy via bank liquidity creation

PurposeThis paper investigates the moderating role of uncertainty in the impact of monetary policy on bank liquidity creation.Design/methodology/approachUtilizing data from Vietnam spanning 2007–2022, the paper measures uncertainty in the banking industry through the dispersion of shocks to crucial bank-level variables and considers both interest rate- and quantity-based tools of the monetary policy regime. The study regresses economic models using different econometric methods, including the generalized method of moments (GMM) estimator in the main section and the least squares dummy variable corrected (LSDVC) estimator for the robustness check.FindingsMonetary expansion enhances banks’ ability to create liquidity, affirming the existence of the bank liquidity creation channel. Further analyses suggest that monetary policy adjustments aimed at regulating bank liquidity creation may be less effective in the presence of higher uncertainty in the banking system. This observation holds for both interest rate- and quantitative-based monetary policy tools, emphasizing the functioning of the monetary policy transmission mechanism through bank liquidity creation and the mitigating effect of uncertainty.Originality/valueThis study contributes novel insights to the existing literature by presenting the first attempt to explore the dynamics of monetary policy transmission through the bank liquidity creation channel in the context of banking sector uncertainty. Moreover, our contribution extends to examining a multi-tool environment, incorporating both interest rate- and quantitative-based indicators.

Quantitative easing and correlation dynamics in the aftermath of the Great Recession: A dynamic conditional correlation with exogenous variables approach

AbstractIdentifying the effects of quantitative easing (QE) on asset return correlations is critical to assessing such policies’ impact across financial markets. In this paper, we use a dynamic conditional correlation model that allows us to measure the impact of unconventional monetary policy on time‐varying correlations. Our results suggest that QE significantly affected correlations between stocks and bonds after the Great Recession via short‐term portfolio balance effects. The findings are critical for policy‐makers and practitioners alike. Central banks should consider the impact of monetary policy on asset correlations in their cost–benefit analyses. Likewise, portfolio managers are encouraged to factor in the effects of monetary policy on correlations to optimize portfolios and reduce potential losses strategically.

The impact of macroeconomic policy on the financialisaton of the real economy: From the perspective of joint fiscal and monetary policy

The impact of macroeconomic policy on the financialisaton of the real economy: From the perspective of joint fiscal and monetary policy

Institutional Quality, Monetary Policy and Banking System Stability in Nigeria

The study used a Generalized Method of Moments to examine the effect of six IQ indices (voice and accountability, rule of law, regulatory quality, government effectiveness, corruption control and political stability and absence of violence) and MP tools (monetary policy rate, loan-deposit ratio, lending rate, logarithm of broad money supply and banking system liquidity ratio) on the Z-Score, a proxy for banking system stability. The study found that, among the six MP indices, only corruption control index has a positive and significant effect on bank stability (coefficient = 0.245124, p = 0.0042). Also, out of five MP variables, only the loan-deposit ratio has a significantly positive effect on bank stability (coefficient = 0.0070482, p = 0.0072). The effect of the other IQ and MP indicators are not significant enough for inference purposes. We conclude that IQ affects banking system stability positively and significantly. We also found that MP affects the stability of the banking system positively and significantly. We recommend, among others, that authorities should continue to pursue zero corruption in institutions and that banks should be mandated to improve on the existing anti-corruption measures. Also the Central Bank of Nigeria should continue to maintain the range of loan-deposit ratio that has existed for many years. There is the need to re-appraise other IQ and MP variables with no significant positive effect on banking system stability in Nigeria.

The Russian economic policy and its relations with China and India in the aftermath of Western sanctions (2014 - 2023)

The article delves into Russia's economic strategy in response to financial sanctions imposed by the West from 2014 to 2023, analyzing its monetary policies and capital controls. Additionally, it examines Russia's financial relations with China and India, highlighting how these nations became key allies following the sanctions due to the annexation of Crimea and the invasion of Ukraine. The article investigates the nature of the alliance formed by Russia and China highlighting the symbiosis generated at the core of this relationship and the importance of India in playing a strategic role in the economic network woven by Russia.

Examining the integration of real estate into financial assets: A critical analysis of China's regulatory framework for nonreal estate corporations

This study explores the integration of real estate into financial assets within the context of China's regulatory framework for nonreal estate corporate listed companies (NRELCs). The purpose is to assess the impact of NRELCs’ involvement in the real estate market on housing prices as influenced by monetary policy. The need for a solution is driven by the significant role of real estate in China's economic strategy and the challenges posed by speculative investments. Utilizing a mixed-method approach, this study employs empirical models to analyze data from 2007 to 2018. The key findings indicate that NRELCs’ entry into the real estate market significantly stimulates housing prices, with monetary policy acting as a critical driver. The interaction between credit expansion and NRELCs’ real estate activities exacerbates price fluctuations. Our findings highlight the necessity of controlling the financial attributes of real estate and suggest regulatory measures to curb speculative demand. The potential impact includes informing policy decisions to stabilize the housing market and promote sustainable economic growth.

Money and output asymmetry: the unintended consequences of central banks’ obsession with inflation

ABSTRACT The study re-examines the relationship between money and output for the US and the UK using quarterly data up to 2019. Modern central banks are focused on controlling inflation and adjust their monetary policy and liquidity accordingly. However, it is common practice to overlook the precise effects of those actions on other variables. Unlike prior research, which has mainly focused on the linear relationship, this paper examines the asymmetric impact of money on output. The results show that a decrease in the amount of money has a much more adverse impact on output than an increase. Globally, during COVID-19, there was an infusion of liquidity that might have been useful in the short term, but the withdrawal of that excess liquidity, as has been done currently by some major economies, may have long-term effects on those economies’ output.