Monetary Policy Research Articles

Performance Analysis of Islamic Banks Using Error Correction Model

Introduction: The analysis of Islamic banking performance is a frequent subject of discussion in various literature. One factor that makes Islamic banks an exciting object of research is their role as Sharia-based intermediary institutions and their contribution to the effectiveness of monetary policy. This study aims to analyze the impact of CAR, NPF, FDR, and BOPO on the performance of Islamic banks measured by ROA and NOM. Research Methods: This quantitative research uses secondary data from Islamic Banking Statistics covering the period from January 2015 to December 2023. The data analysis technique employed is the Error Correction Model (ECM). Results: The results indicate that out of the four variables examined, only BOPO has a significant impact on the performance of Islamic banks. Conclusion: This finding suggests that efficiency in managing operational costs is a crucial factor in enhancing the financial performance of Islamic banks. The lower the BOPO, indicating higher cost efficiency, the better the performance of Islamic banks in terms of profitability as measured by ROA and NOM.

Euro area monetary policy effects. Does the shape of the yield curve matter?

This paper investigates the effects of monetary policy in the euro area. We make three contributions to the literature. The first is to use the information from movements in the entire yield curve around monetary policy events to shed light on the efficacy of monetary policy. The second contribution is to provide a novel and easy-to-update database of surprises based on intra-day quotes of Euro Area OIS forward rates and sovereign yields of France, Germany, Italy and Spain. Our third contribution is to show that how the term structure of interest rates changes in response to conventional and unconventional monetary policy announcements matters in shaping the response of key macroeconomic variables.

Peran Pemerintah Dalam Meningkatkan Perekonomian Indonesia Pada Masa Pandemi Covid-19

Introduction/Main Objectives: The Covid-19 pandemic in Indonesia has paralyzed the Indonesian economy; many MSMEs have gone bankrupt because their income has decreased, and many companies have laid off their employees. This study aims to analyze several government policies to save the economy during the Covid-19 pandemic in Indonesia. Research Methods: This study uses qualitative data from articles, books, journals, or other related sources. Finding/Results: The results of the study show that to overcome the economic problems, the government has taken steps in the form of fiscal and monetary policies. Fiscal policies include the pre-employment card program, tax incentives, launching budget refocusing, and budget reallocation. Monetary policies such as MSME credit restructuring Bank Indonesia's rupiah stability. Conclusion: The government must make every effort to stabilize and improve the economic sector in Indonesia to improve people's welfare

Interplay of financial market performance, macroeconomic indicators and business sentiment: a comprehensive study of the Turkish economy

PurposeThe purpose of this study is to examine the long- and short-term relationships between the BIST100, RSC index, the EURO/TRY exchange rate, bank loans provided to the private sector, imports and exports, and nonperforming loans (NPLs) with the autoregressive distributed lag (ARDL) bound, Johansen co-integration and vector error correction model (VECM) causality tests. Political developments, pandemics, conflicts between countries, trade chains and general economic and financial problems that have frequently occurred worldwide in recent years have significantly affected the Turkish economy as well as all other countries. Türkiye's economy is intricately linked with global financial markets, and understanding the dynamics between domestic macroeconomic variables and external financial indicators can provide insights into the country's economic resilience and vulnerabilities to external shocks.Design/methodology/approachTwo distinct models are used in the analysis, with the Borsa Istanbul 100 (BIST100) Index and the Real Sector Confidence (RSC) Index serving as the dependent variables. This study examines the long- and short-term relationships between the BIST100, RSC index, the EURO/TRY exchange rate, bank loans provided to the private sector, imports and exports, and nonperforming loans (NPLs) with the ARDL bound, Johansen cointegration and VECM causality tests. The study uses monthly data spanning from December 31, 2002, to July 29, 2022, offering a comprehensive perspective on the dynamics of the Turkish economy.FindingsThe findings reveal significant long-run relationships between the BIST100 and the exchange rate, imports and exports. Short-run dynamics indicate the importance of changes in these variables, as well as NPLs and RSC, in affecting the BIST 100. The model captures the impact of economic indicators such as imports, NPLs and exports on RSC. In addition, it underscores a long-run equilibrium relationship, suggesting a responsive RSC to deviations. There is a strong positive relationship between BIST100 and the RSC. Causality tests reveal temporal relationships and causal links, with evidence of bidirectional causality for some variables, providing comprehensive insights into the short-term dynamics and adjustment mechanisms influencing RSC in the Turkish economic context.Practical implicationsAmidst global economic uncertainties and fluctuations, particularly in emerging markets such as Türkiye, understanding the relationships between financial market indicators and macroeconomic variables may help policymakers formulate effective monetary and fiscal policies aimed at stabilizing the economy, promoting sustainable growth and mitigating financial risks. In addition, these insights have practical implications for investors, regulators and other financial market participants seeking to make informed decisions in an increasingly interconnected and dynamic global economy.Originality/valueThis study uniquely examines a wide range of macroeconomic variables and financial indicators specific to Türkiye, including both traditional and nontraditional factors. This study also offers unprecedented insights into the unique characteristics and dynamics of the Turkish economy and provides valuable insights for businesses, investors and policymakers to consider Türkiye’s economic environment more effectively.

Testing and mechanism identification of liquidity trap in China

ABSTRACT This paper examines the existence and mechanism of China’s liquidity trap. First, a broad money supply model is reconstructed to evaluate the effectiveness of monetary policy. Based on the observed data from 1997 to 2022 and first-order difference regression results, we find that: The relationship between the monetary base and broad money exhibits two distinct stages, with 2008 as a delineating point. Pre-2008, the money creation multiplier is significant; post-2008, it becomes insignificant. Second, by examining the asset-side and liability-side gaps of the financial system, we have identified two liquidity traps. The first occurs between 2015 and 2019, caused by funds idling within the financial system. The second occurs in 2020- and is caused by recessionary expectations. Monetary policy flexibility is waning, compelling strategic decisions for Chinese government and central bank.

A multiscale analysis of returns and volatility spillovers in cryptocurrency markets: A post-COVID perspective

ABSTRACT Since the onset of the COVID-19 pandemic, leading cryptocurrencies have undergone significant price fluctuations, prompting widespread interest in the interdependence and spillover effects among cryptocurrency markets, as well as in identifying the key cryptocurrencies that drive market movements. This study contributes to the existing literature by utilising innovative vector wavelet coherence (VWC) and wavelet local multiple correlation (WLMC) frameworks to investigate the time-frequency co-movements among four cryptocurrencies (Bitcoin, Ethereum, Tether, and Binance). By exploring the co-movements across multiple time scales over a period from 01/01/2020 to 10/04/2023 through continuous and discrete wavelet coherency analysis, we identify four key empirical findings. Firstly, the returns connectedness is stronger than the volatility connectedness. Secondly, high-frequency co-movements are more erratic and correspond to positive and negative unexpected news, while low-frequency co-movements vary with changes in US monetary policy. Thirdly, Tether and Binance exhibit the weakest returns and volatility connectedness with other cryptocurrencies. Lastly, Ethereum and Tether (not Bitcoin) are the primary cryptocurrencies that account for returns and volatility movements in the market. We discuss the implications of these findings for various stakeholders in cryptocurrency markets.

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.

A computable general equilibrium model of the monetary policy implications for financial stability in South Africa

A computable general equilibrium model of the monetary policy implications for financial stability in South Africa

Stranded? The IMF in a world of rising economic nationalism

Abstract The International Monetary Fund (IMF) is entering a period of unprecedented challenge. Countries need its assistance to deal with debt distress, the post-Covid development crisis, new threats of financial instability, and the fallout of a decade of unconventional monetary policy. But the IMF faces two challenges of its own. As powerful countries ‘reset’ the rules on which the IMF’s work proceeds, it must build a new paradigm for advising its borrowers. Equally, as those same powerful countries show less willingness to cooperate with each other in international organizations, the IMF must keep them involved and working together within the institution.

Should Monetary Policy in South Africa Lean against the Wind by Targeting the Financial Cycle?

Recently, several studies have argued about the interactions of the real economy and financial system, as well as the importance of financial cycles in business cycle fluctuations. To date, there exists near consensus among central bankers, economists, and other scholars that the financial cycle is an important source of business cycle fluctuations. This has raised the question of whether monetary policy should respond to financial instability and/or imbalances. As a result, we asked the following questions: Should monetary policy lean against the wind by targeting the aggregate financial cycle in South Africa? And what is the role of monetary policy in minimizing financial imbalances and instabilities in South Africa? The present article aims to provide answers to the above-mentioned question. Through the adoption of a multiple-equation generalized method of moments and structural vector autoregressive approaches, this article simultaneously estimates and compares both the finance-augmented and the conventional Taylor rules. It is shown that the South African Reserve Bank has considered developments in the aggregate financial cycle in setting its policy rate. Overall, there is clear evidence to conclude that the South African Reserve Bank can lean against the wind by targeting the aggregate financial cycle, but only as a genuine augmentation not as a fully flagged objective. This article adds new evidence to the South African literature on the prevailing debate of whether monetary policy should respond to developments in the financial system.

Public Spending and Economic Growth in Nigeria: Assessing Recurrent Expenditure’s Neutrality and Monetary Policy Interaction

In this study, we explored the influence of public spending on economic growth in Nigeria by testing the neutrality/non-neutrality of recurrent expenditure, as well as checking for the effect of interaction of the two expenditure components with monetary policy (interest rate) to see how they would influence economic growth. Data which covers the period 1981 to 2021 were analyzed using the technique of Autoregressive Distributed Lag (ARDL) model which was selected based on the fact that our variables were stationary at mixed order of levels and first difference. From the ARDL bounds test, the study revealed that there is a long-run relationship among the variables in the model which prompts the estimation of the error correction model. From the result, the findings suggest that recurrent expenditure exerts a positive and significant effect on economic growth, thereby signifying the non-neutrality of the recurrent expenditure component on economic growth. Further, the interactive terms indicates that an interaction of recurrent expenditure and interest rate on economic growth generated a negative effect though its one-period lag yields a positive and significant effect. Also, the long-run result indicates that recurrent expenditure yielded a positive but insignificant effect, thereby indicating the validity of the recurrent expenditure in the long-run. This is further confirmed as it exerted a negative but insignificant effect on economic growth when interacted with monetary policy. The policy implication of the findings centres on the fact that recurrent expenditure can only be non-neutral in influencing the macroeconomy just in the short-run.

Monetary policy and innovation in Europe: An SVAR approach

Using quarterly data, we estimate the effects of monetary policy on innovation in the Eurozone over 2000–2021. Variations in the monetary stance may affect how firms and governments allocate resources to innovative investments. The identification of the structural shocks relies on an SVAR framework with a set of exclusion restrictions. Although characterised by the predominance of ZLB periods, conventional monetary policy shocks affect private and public R&D spending in the medium term with some initial inertia. Unconventional monetary shocks affect innovative expenditure in the short to medium term, but their impacts vanish in the longer run.

Revisiting the interest rate-investment nexus in India: fresh perspective from non-parametric analysis

PurposeIt is generally believed that business spending on capital expenditure tends to decrease as interest rates rise, and vice versa, this is not always the case. The previous literature produces inconclusive results vis-à-vis the interest rate and investment nexus. This study analyzes the responsiveness of investment to changes in high and low levels of interest rates in India through a quantile-based, non-parametric method utilizing annual data from 1980 to 2022.Design/methodology/approachThis study uses Quantile-on-quantile (QQ) technique proposed by Sim and Zhou (2015) to examine the impact of interest rate quantiles on quantiles of investment. In addition, long-term association and the direction of causality are estimated through the Cho et al. (2015) test of quantile cointegration and the Jeong et al. (2012) Granger causality in quantile (GCQ) test, respectively.FindingsThe empirical evidence validates that the linkage between investments and interest rate is not consistently negative and varies from quantile to quantile. The study finds a negative impact at median quantiles and a positive impact at extreme higher quantiles. Conversely, the impact at lower quantiles is negligible, which is also observed from quantile cointegration, indicating the presence of a statistically significant association above the median quantiles. Additionally, the study finds one interesting finding that there exists unidirectional causality from investment to interest rates in India rather than other way around.Research limitations/implicationsThe study provides significant implications for policymakers as it suggests that during extreme economic conditions, the effectiveness of traditional monetary policy tools to boost capital formation is restricted. Policymakers may consider alternative measures to stimulate investment during these time periods. The study additionally posits that the neoclassical theory of investment may not be readily applicable in emerging economies in its unaltered state, mostly due to the lack of well-developed financial markets.Originality/valueThere is a limited literature available on non-linear linkage between interest rates and investment. The present study adds to the existing knowledge by investigating how investment responds differently to fluctuations in interest rates, while incorporating the complete distribution of both the variables.

Should Developed Economies Manage International Capital Flows? An Empirical and Welfare Analysis*

The literature on the effects of country risk premium shocks has largely focused on emerging market economies. We empirically show that in developed economies, risk premium shocks explain a non‐trivial share of aggregate fluctuations and are key drivers of real activity during crises. Our empirical results and results from a two‐country New Keynesian model indicate that an increase in the risk premium leads to a reduction in aggregate output under monetary union, but not so in countries with flexible exchange rates and independent monetary policy. Model simulations suggest that managing international capital flows enhances welfare in countries under monetary union.

The new monetary policy regime under central bank’s abundant balance sheet: the case of the Federal Reserve

The new monetary policy regime under central bank’s abundant balance sheet: the case of the Federal Reserve

Monetary policy uncertainty and ESG performance across energy firms

This study investigates the relationship between monetary policy uncertainty and the Environmental, Social, and Governance (ESG) performance of energy firms. For empirical analysis this study used unbalanced panel data of 3991 firm-year observations from 35 countries covering the period from 2002 to 2021. Utilizing the Shadow Short Rate as a proxy for monetary policy uncertainty, our baseline results reveal a consistent negative association between uncertainty and ESG performance within the energy sector. To address endogeneity concerns, two-step system GMM, 2SLS, and PSM were employed. The channel analysis on the interaction between monetary policy uncertainty and eco-friendly practices indicated a positive association between the interaction and energy firms' ESG performance. Thus, strategic alignment with sustainability goals is crucial for mitigating the adverse impacts of monetary policy uncertainty and ensuring long-term ESG performance of energy firms. Policy implications suggest that regulators can contribute to economic stability by reducing uncertainty, while policymakers can incentivize sustainable practices.

An investigation into the convergence of economic growth among Indian States and the path ahead

This study offers a comprehensive examination of economic growth and convergence in the Indian States and Union Territories (U.T.) over the period from 1991 to 2020. It investigates absolute, sigma, and conditional convergence within this diverse set of states and utilizes the augmented Solow and extended Solow models to explore conditional convergence dynamics. The empirical findings reveal several significant insights. First, there is no substantial negative correlation between the initial per capita GDP ratio and the average annual growth rate, indicating the absence of absolute convergence across the Indian States and U.T. economies during the study period. These results align with those obtained from sigma convergence analysis, reinforcing the absence of widespread convergence. However, conditional convergence is observed, as evidenced by the rate of conditional convergence (coefficient of initial GDP per capita) estimated at 0.038 among the Indian States and U.T. The presence of conditional convergence implies that while initial conditions matter, other factors, including physical and human capital, population growth, and additional variables, significantly contribute to the growth and convergence of Indian regions. The study concludes that policies aimed at promoting economic growth in the Indian States should prioritize the expansion of the labor force, investments in physical and human capital, and prudent government consumption. Furthermore, fostering an environment that encourages access to new technologies and ideas, maintaining sound macroeconomic management, and increasing investments in human capital formation are essential for sustained growth. Effective resource allocation through prudent budgetary policies and heightened investments in the health sector are recommended. Incentives to reduce fertility rates and adept monetary policy management are also identified as crucial elements for ensuring stability and sustainable growth. In summary, this research underscores the importance of adopting a holistic approach to foster economic growth and convergence in the Indian States. The suggested policy measures create a conducive environment for sustained development and prosperity in this diverse and dynamic region.

Is Time an Illusion? A Bootstrap Likelihood Ratio Test for Shock Transmission Delays in DSGE Models

AbstractSeveral business cycle models exhibit a recursive timing structure, which enforces delayed propagation of exogenous shocks driving short-run dynamics. We propose a bootstrap-based empirical strategy to test for the relevance of timing restrictions and ensuing shock transmission delays in DSGE environments. In the presence of strong identification, we document how likelihood-based tests in bootstrap-resamples can be used to empirically assess short-run restrictions placed by informational structures on a given model’s equilibrium representation, thereby enhancing coherence between theory and measurement. We evaluate the size properties of our procedure in short time series by conducting a number of numerical experiments on a popular New Keynesian model of the monetary transmission mechanism. An empirical application to U.S. data from the Great Moderation period allows us to revisit and qualify previous findings in the field by lending support to the conventional (unrestricted) timing protocol, whereby inflation and output gap do respond on impact to monetary policy innovations.

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.

ECB communication sentiments: How do they relate to the economic environment and financial markets?

In this paper we examine multiple dimensions of ECB monetary policy communication by identifying its sentiment and relation with the economic environment and financial markets. We quantify communication sentiment using transcripts from official ECB communication events – press conferences, accounts and Executive Board speeches – as well as media reactions that highlight the key messages of those events. Importantly, we create distinctive lexicons for both of those communication types. We find that the overall trends in the sentiment indices for the analysed communication events closely resemble the movements of monetary policy stance as well as inflation dynamics in the euro area, both before and after the COVID-19 shock period. The communication tone generally shifts in advance of actual monetary policy actions. Using regression analysis, we find some expected, statistically significant effects of press conference sentiment on bank stock prices (information-type shock) and identify the impact of Executive Board speeches on euro area risk-free rates. Fragmentation issues among euro area member states do not seem to be negatively affected by the sentiments of the ECB’s communication. Still, policy makers should be aware that the tone of their communication events is likely to affect particular financial markets. These results are confirmed by various robustness checks.