Monetary Shocks Research Articles

Business cycle shocks according to the monetary approach The Turkish economy is a model for the period 2005-2021

The research aims to analyze the impact of fluctuations in monetary indicators on real indicators leading to business cycle shocks in Turkey. Based on the research hypothesis that the Turkish economy is affected by real business cycle shocks, positively or negatively, and varies according to the nature of the economy and the type of shock, whether monetary or real, the interrelation and interference between variables during... The cyclical movement within the economy results in reactions between variables that affect economic activity . To achieve the hypothesis of this hypothesis, the path of the direction of monetary indicators and their fluctuations, such as money supply, interest rates, and private bank credit, was traced, and their impact on the direction of flow of real indicators, such as gross domestic product, investment, and the unemployment rate. The study concluded that fluctuations in monetary indicators cause fluctuations in real indicators, creating two business cycles in The Turkish economy. The first is the result of an external shock represented by the American financial derivatives crisis in 2008 after the opening of the Turkish economy to the outside world. The second represents an internal shock due to the decline in the value of the Turkish lira in 2018. It is also noted that the impact of these monetary shocks is unequal in the real variables of output and investment. And employing according to the extent and depth of the shock occurrence, and the extent of the independence of the monetary authority

Heterogeneous consumption behaviors and monetary policy in three ASEAN economies

This paper aims to theoretically investigate how the presence of heterogeneous consumption behaviors, namely hand-to-mouth (HtM) and habit formation (HF), affects the monetary policy effectiveness and empirically explore the responses of three Association of Southeast Asian Nations (ASEAN) economies to external shocks. We employ the Bayesian methodology to undertake the Dynamic Stochastic General Equilibrium (DSGE) estimation using quarterly data. Empirical results indicate a HtM parameter of 22% in Indonesia, 34% in the Philippines, and 27% in Thailand, with the HF parameter estimated at around 50%. Given the estimated parameters, a monetary shock would have standard effects on macroeconomic variables. Besides, incorporating HtM consumers into a standard DSGE model amplifies the adverse effects of monetary shock on aggregate consumption/output growth. Also, a higher ratio of HtM consumers exacerbates the negative effects of monetary shock, but it does not influence much the adverse impacts of demand and supply shocks on macroeconomic variables.

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.

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.

Cross-country differences in the effects of monetary policy shocks on output and prices and their determinants

On the basis of a sample of 19 countries and using sign-restricted VAR and second-stage regression, this research investigates whether there exist differences in the effects of monetary shocks on output and prices between countries, and, if any, which country characteristics incur such differences. The VAR analysis shows that monetary policy shocks of the same magnitude generate differences in terms of the effects on output and prices between countries. The maximal responses of industrial production indexes to a 25-basis-point shock policy rate cut range from a decrease to an over 3% increase with an average of about 1–2% increase. Those of consumer price indexes range from 0.3% to around a 2% increase, with an average of 0.9% increase. The results from regression analysis imply that various country characteristics engender disparities in the responses to monetary policy shocks. The magnitude of the output responses to monetary policy shocks is larger in countries with a monetary policy framework closer to inflation-targeting, a more flexible exchange rate regime, more rapid population aging, and a more rigid labor market, and is smaller in countries with a more independent central bank and a more developed financial market. The size of the price responses is larger in countries with higher trade openness and a more rigid labor market, and smaller in countries with a monetary policy framework closer to inflation-targeting and more rapid population aging.

Examining business cycles and optimal monetary policy in a regional DSGE model

I construct a dynamic stochastic general equilibrium (DSGE) model consisting of geographic regions and use state level data to estimate the effects that monetary policy and financial shocks have on the four census regions of the United States. The DSGE model I use is constructed around a centralized monetary authority and financial market with regional output, labor and investment markets. I find significant heterogeneity amongst the regional structural parameters of the model, creating different business cycle dynamics for the four regions. The estimated model aligns with other economic studies that suggest that monetary shocks have a greater impact in certain geographic regions in terms of employment, inflation, wages, and consumption. Simulating the estimated model, I find that monetary policy that considers the regional variation in output and inflation can significantly lower the volatility around national output and inflation. The paper’s results suggest that regional macroeconomic conditions should be considered in monetary policy decisions.

Revisiting the effects of conventional and unconventional monetary policies

SummaryThis paper extends the discussion on the effects of the two distinctive monetary surprises in the literature. First, we show that the proxy of conventional monetary shock Granger causes the endogenous variables in the vector autoregressive model. Second, we provide evidence that the existing model can be exposed to a weak instrument problem. With our alternative model mitigating these concerns, the second monetary shock can be interpreted as unconventional monetary news in general. The estimation results show contractionary effect of the unconventional policy. We find increases in output after a positive conventional monetary surprise, suggesting an important Fed's information effect.

Monetary Integration Across West Africa: Is the Region Ripe for a Monetary Union?

This study investigates the possibility of forming a monetary union across West Africa. This was achieved by employing the structural VAR framework. Data on real GDP, inflation, and exchange rate were used to represent supply, monetary, and demand shocks from the period 1986 to 2020. The impulse response and variance decomposition results showed that shocks affecting the West African region are idiosyncratic, while the residuals of the structural VAR were used to compute the correlation coefficient. The correlation coefficient revealed that the demand and monetary shocks were symmetric across WAEMU countries and asymmetric for the rest of the region. The study suggests that the West African region is not ripe for a monetary union. However, the study opined that the WAEMU countries are the closest to forming a West African monetary union and a piecemeal approach may be adopted such that the WAEMU countries are the first to form the union, while the rest may join when they meet the convergence criteria. In essence, West African countries’ central banks need to focus on harmonizing their monetary policies and remove all barriers to factor mobility for the synchronization of shocks and for all countries to meet the convergence criteria.

Monetary policy surprises on the banking sector: The role of the information and pure monetary shocks

This paper analyzes how monetary policy surprises in Chile affects the real and financial sector separating between a pure monetary policy shock and an information shock. Using inter-day movements of futures of interest rate in the banking system, we identify an information shock when labor data is released and a pure monetary policy shock when the central bank reveals their interest rate decision, and their effects are quantified through an external vector autoregression model. Our results suggest that a pure monetary policy shock produce an appreciation of nominal exchange rate, and contractionary effects on the economy. However, an information shock does not necessarily produce adverse effects. This paper contribute to the literature in two dimensions: studying the effect of the main driver behind the central bank announcements, and their transmission to the banking sector and consequently to the real and monetary sector.

The impact of innovation orientation on strategic R&D amidst macroeconomic shocks – an event study approach

PurposeThis research investigates the impact of strategic research and development (R&D) (one led by a firm’s innovation orientation) on stock market performance during the economic disruption caused by the 2016 demonetization of high-value currency notes in India. It shows how firms’ strategic focus on innovation and integrated R&D initiatives can help mitigate shareholders’ losses and protect market value during negative macroeconomic shocks.Design/methodology/approachWe analyzed financial and administrative data from firms listed in the Bombay Stock Exchange (BSE) 500 index and used the Fama French market model with appropriate instruments accounting for possible endogeneity to identify the impact. To ensure the reliability of our findings, we conducted robustness checks with alternate event windows, estimation methods, and variable measurements.FindingsStrategic R&D plays a crucial role in building resilience against macroeconomic shocks. It effectively mitigated shareholders’ losses in the immediate aftermath of the shock, with an elasticity of abnormal returns of 7.65% on day zero, 13.1% during the first five days and 10.5% after the first fortnight. We also find that firms that are business-to-business (B2B), as well as those that are older and less leveraged, are better able to combat such a shock.Research limitations/implicationsThe study looked at one shock, namely demonetization. Future research is needed to demonstrate the generalizability of results during other macroeconomic shocks, like the COVID-19 pandemic. The study focuses on relatively near-term impacts, leaving the long-term value-creation effects of strategic R&D unexplored.Practical implicationsInnovation orientation acts as a structural enabler, allowing firms to make strategic R&D investments that mitigate losses during macroeconomic shocks. It explains that managers should avoid myopically managing R&D investments and align them with the firm’s innovation focus to enhance value creation.Social implicationsWhile the currency demonetization was widely considered to be detrimental for firms as an unannounced negative monetary shock, our research shows that firms with high levels of strategic R&D were successfully able to counteract such a shock.Originality/valueThis is the first study to examine the short-term loss mitigation impact of firms’ focus on innovation and strategic R&D. It emphasizes the role of innovation-focused strategies during economic crises.

Household Income, Portfolio Choice, and Heterogeneous Consumption Responses to Monetary Policy Shocks

AbstractThis paper quantifies the roles played by income‐level heterogeneity in the response of consumption to monetary policy shocks using U.S. household data. We show empirically that the response of consumption to expansionary monetary policy shocks is larger for high‐income households than for low‐income households. Empirical facts related to household characteristics suggest two channels: the presence of illiquid assets and heterogeneity in government transfers. Motivated by these empirical findings, we develop a model that incorporates illiquid assets and heterogeneity in government transfers to quantify the importance. Simulations based on the model indicate that the presence of illiquid assets, whose return increases in response to expansionary monetary shocks, is essential for explaining the heterogeneous consumption response.

Measuring Monetary Policy Shocks in Emerging Economies: Evidence from India

AbstractIn this paper, we provide a template for constructing monetary policy shocks for emerging economies. Our approach synthesizes financial data with a narrative analysis of central bank communication and related media coverage. We create a publicly available time‐series database of policy dates and shocks for the Reserve Bank of India (RBI). Our shocks suggest that financial markets infer information about the future path of policy rate from RBI communication. Bond and stock markets react strongly to these monetary shocks but exhibit heterogeneity across governor regimes. Finally, we use the shocks as external instruments to identify the impact on macro‐economic variables.

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.

International monetary spillovers to frontier financial markets: Evidence from Bangladesh

AbstractThis paper investigates international monetary spillovers to stock prices in Bangladesh, a frontier market that has been excluded from prior studies in the literature. Using daily stock price data for over 300 publicly traded firms in a high‐frequency event study framework, we find that contractionary monetary shocks originating from the US, euro area, and China lower stock prices, with Chinese monetary shocks having the largest impact. Contractionary shocks originating from India, on the other hand, lead to a statistically significant increase in stock returns. The positive response is driven by a small number of policy decisions. When these outlier decisions are removed from the sample, contractionary Indian monetary shocks lead to a decline in stock prices in line with spillovers from the other countries.

Exposure to Dollar, financial Openness, and the heterogeneous impact of US monetary spillover

This paper studies how country heterogeneities, especially in their (1) net exposure to dollar debt and (2) financial openness affect the propagation of US monetary shocks into peripheral advanced and emerging economies. We contribute to the understanding of how interest rate and GDP responses of emerging countries depend on both their dollar liability and financial openness, as well as the interaction between these two factors. Specifically, we find that economies with higher debt dollarization have higher interest rate responses to contractionary US monetary shocks to prevent negative balance sheet effects. We also find that GDP decreases by more for economies with high debt dollarization if their financial openness is high. Using capital control as the de jure measure of financial openness, we obtain similar results that GDP decreases by more for countries net short of dollar if capital control is low, and at the same time, GDP is higher for countries with higher capital control if they are more indebted in dollar. Combined, these imply that capital control helps dampen negative US monetary spillover, and the benefit from imposing capital control is larger for countries that are more indebted in dollar.

The Economy of Poverty-stricken Countries is Largely Dependent on the Economic Development of the United States

This case study investigates the multifaceted relationship between poverty-stricken countries and the economic development of the United States. At its middle, the survey hopes to see the value in how much nations grappling with poverty rely upon the money related prosperity and techniques of the US to help and move their own monetary conditions. The investigation spreads out against the setting of a globalized economy, where interconnectedness is a fundamental quality. The assessment uses a mixed techniques approach, solidifying quantitative examination and emotional encounters. On the quantitative front, the survey explores financial markers all through a specific time span to notice examples and models. At the same time, abstract evaluations are made through all around interviews with key accomplices, including policymakers, monetary investigators, and specialists from desperation stricken countries. This twofold method framework means to give a thorough cognizance of the various parts of the financial relationship under a magnifying instrument. The disclosures uncover a huge association between's the monetary bearing of the US and the thriving of dejection stricken nations. The audit recognizes fundamental variables like monetary agreements, new aide courses of action, and overall monetary components that basically influence this dependence. Furthermore, it reveals information into the inadequacies and impels looked by these countries because of their dependence on the cash related tirelessness of the US. In sensible terms, this assessment holds relevance for policymakers, monetary well-informed authorities, and by and large affiliations. It incorporates the principal for disheartening stricken countries to confine their money related frameworks, thusly decreasing their shortcoming to external monetary shocks. The outline sets commonsense outcomes that can prepare the improvement concerning versatile strategies, organizing nations toward certifiable money related progress that is less reliant upon the monetary sufficiency of a singular country. No matter what its liabilities, the clever appraisal sees unequivocal impediments. It highlights the unpredictability of money related affiliations, seeing that the evaluation, while broad, may not get the phenomenal nuances of individual country experiences. The rapidly creating commonly money related circumstance gives burdens in expecting broadened length considerations full affirmation. According to a social point of view, the coherent assessment snares the existences of people in destitution stricken nations. Cash related approaches and choices made by the US give fundamental weight in outlining the everyday certifiable components of those living in these countries. Understanding these parts becomes indispensable for enabling in general participation and chasing after fair money related new turn of events. To the extent that development and worth, the context oriented examination stays as a significant obligation to the ongoing composition. By offering a comprehensive assessment of monetary circumstances, it gives a foundation to extra ask for and technique improvement in the space of overall financial unevenness. The encounters got from this assessment are instrumental for scholastics, policymakers, and overall components attempting to investigate the complexities of a globalized financial scene with an eye toward empowering sensible and fair turn of events.

Macroeconomic shocks and stock market returns

ABSTRACT We examine how structural macroeconomic disturbances impact US stock market returns. Our analysis uncovers a significant negative correlation between stock market returns and both systematic and monetary shocks. Our findings indicate that monetary policy shocks exert a substantial influence on US stock market returns. Forecast error variance decomposition of stock market returns shows systematic and monetary shocks explain 95% of stock return variance. An examination of industry-level stock returns indicates industries engaged in essential goods have greater resilience to shocks, indicating a reduced sensitivity to market fluctuations.

Monetary Policy Shocks: Data or Methods?

Different series of high-frequency monetary shocks can have a correlation coefficient as low as 0.5 and the same sign in only two-thirds of observations. Both data and methods drive these differences, which are starkest when the federal funds rate is at its effective lower bound. Methods that exploit the differential responsiveness of short- and long-term asset prices can incorporate additional information. After documenting differences in monetary shocks, we explore their consequence for inference. We find that empirical estimates of monetary policy transmission from local projections and VARs are less affected by shock choice than forecast revision specifications.

Nonlinear Inflation Dynamics in Menu Cost Economies

Canonical menu cost models, when parameterized to match the micro-price data,cannot reproduce the extent to which the fraction of price changes increases with inflation. They also predict implausibly large menu costs and misallocation in the presence of strategic complementarities. We resolve these shortcomings by extending the multiproduct menu cost model along two dimensions. First, the products sold by a firm are imperfect substitutes. Second, strategic complementarities are at the firm, not product level. In contrast to standard models, the fraction of price changes increases rapidly with the size of monetary shocks, so our model implies a non-linear Phillips curve.

The Effectiveness of Conventional and Unconventional Monetary Policy in CEE countries using TVP-FAVAR models

The paper analyses the role of monetary policy in economic activity and studies the responses of the economic growth rate and inflation rate to conventional and unconventional monetary shocks in three Central and Eastern European countries: Romania, Hungary, and the Czech Republic. The research focuses on the recent evolution of the economy affected by the health crisis, military conflict in Ukraine, and high inflation. The study offers a high degree of novelty using Vector Autoregressive models with Time-Varying Parameters and common factors (TVPFAVAR). The results of the estimation are consistent with expectations and economic theory, and the models could provide clear view of the impact of monetary policy measures applied, depending on the phase of the economic cycle. The TVP-FAVAR models could give assistance to policymakers in the formulation of the most suitable monetary policy measures in the economic recovery process and maintenance of price stability.