Monetary Shocks Research Articles

Monetary Policy, Portfolio Heterogeneity, and the College Wealth Gap

This paper investigates the relationship between monetary policy and wealth inequality by college education. I first highlight the extent to which college education drives salient differences in the portfolio composition of U.S. households, and then study how this, in turn, affects households’ exposure to asset price changes following an expansionary monetary shock. This paper contributes to an evolving body of literature exploring the role of portfolio choices and, in particular, stock market participation, on the distribution of capital gains following policy shocks. I show that accommodative monetary policy substantially exacerbates the existing wealth gap between college-educated households and households without a college degree. Monetary policy is thus limited, as it cannot stimulate economic activity without widening wealth inequality. 

J.S. Mill, W. Roscher and D.H. Robertson: The Early History of the Monetary Misperceptions Hypothesis

ABSTRACT Around 50 years ago, Edmund Phelps and Robert Lucas proposed an answer to the question of why changes in aggregate nominal spending bring about output and employment effects, instead of purely proportional variations in prices. The Phelps–Lucas monetary misperception hypothesis asserted that imperfect information about the state of the economy may cause sluggish price or wage adjustment to emerge as reactions to monetary shocks in an otherwise perfectly flexible prices economy. The present paper documents how J.S. Mill, W. Roscher and D.H. Robertson addressed that issue in their respective notions of ‘general delusion’, ‘generally prevailing error’ and ‘monetary misapprehension’, formulated between mid-19th and early 20th centuries. It also discusses how their contributions were not acknowledged until after Phelps and Lucas.

The Effects of Credit Supply Shocks on Malaysia's Economy

This study has examined the impacts of credit supply shocks and other common economicshocks (aggregate demand & supply and monetary shocks) on Malaysia's macroeconomicvariables, using the Bayesian structural vector autoregressive (SVAR) model andemploying sign restrictions. The results showed that an expansionary credit supply shockpositively affected the Malaysian economy, consistent with the existing literature. Basedon the variance decomposition finding, credit supply shocks explained a significantportion of the anticipated variation in the GDP growth, inflation, and, most importantly,credit growth in Malaysia. This study further decomposed total private non-financialcorporate loans into two components: households and non-financial firms. Unlike othereconomies that have extensively researched this subject matter (US, UK, Euro Area), thegrowth rate of households and non-financial firms differed greatly in Malaysia. The empirical findings revealed considerable distinctions between these two components, indicating that different treatments or policy formulations are required rather than employing the same policy to boost or govern Malaysia's credit market.

The Effects of Credit Supply Shocks on Malaysia's Economy

This study has examined the impacts of credit supply shocks and other common economic shocks (aggregate demand & supply and monetary shocks) on Malaysia's macroeconomic variables, using the Bayesian structural vector autoregressive (SVAR) model and employing sign restrictions. The results showed that an expansionary credit supply shock positively affected the Malaysian economy, consistent with the existing literature. Based on the variance decomposition finding, credit supply shocks explained a significant portion of the anticipated variation in the GDP growth, inflation, and, most importantly, credit growth in Malaysia. This study further decomposed total private non-financial corporate loans into two components: households and non-financial firms. Unlike other economies that have extensively researched this subject matter (US, UK, Euro Area), the growth rate of households and non-financial firms differed greatly in Malaysia. The empirical findings revealed considerable distinctions between these two components, indicating that different treatments or policy formulations are required rather than employing the same policy to boost or govern Malaysia's credit market.

Monetary shocks and the analyst coverage of the firm

Contractionary monetary shocks, which are known to reduce growth and tighten lending, significantly reduce firm-level analyst coverage. The reduction in analyst coverage of high-leverage firms is almost 50% larger, and faster, than the reduction in the coverage of low-leverage firms.

Dynamic Oligopoly and Price Stickiness

How does market concentration affect the potency of monetary policy? To address this question we embed a dynamic oligopolistic game into a general-equilibrium macroeconomic model. We provide a sufficient-statistic formula for the response to monetary shocks involving demand elasticities, concentration and markups. We discipline our model with evidence on pass-through and find that higher concentration amplifies nonneutrality and stickiness. We isolate strategic effects from oligopoly by comparing our model to one with naive firms. We derive an exact Phillips curve featuring novel higher-order terms, but show that a standard New Keynesian one recalibrated with higher stickiness provides an excellent approximation. (JEL D43, E12, E21, E31, E43, E51, E52)

The Fed’s dual shocks and the housing market

The Federal Reserve has both a monetary and an informational impact on the housing market. Using high-frequency identification, we separate monetary shocks in the conventional sense from the shocks that convey the Federal Reserve’s assessment of the economic outlook. Conventional monetary contraction reduces residential investment, home prices, and returns on Real Estate Investment Trusts (REITs). In contrast, monetary contraction that conveys positive economic information shocks triggers subsequent rises in both housing prices and residential investment, in addition to larger gains for REITs. We provide novel support from the housing market for the recent emphasis on the Fed’s role as a credible assessor of the macroeconomic outlook.

The Effects of National Fundamental Factors on Regional House Prices: A Factor-Augmented VAR Analysis

Using panel data from 30 regions in China during the period 1999:01–2020:12, this paper evaluates the effects of national fundamentals affecting the movement of regional house prices by estimating a factor-augmented VAR model. We construct and examine a hypothesis that national fundamentals affecting regional house prices, such as monetary policy (short-term interest rate and M2), real output, and inflation rate, may affect regional house prices through their impacts on common factors. The empirical results show that monetary shocks (both interest rate and M2) can significantly affect regional house prices, but the effects are pretty different across regions. However, the effects of the real output and inflation rate are less important. Therefore, this study offers valuable information for regulators to improve the effectiveness of monetary policy to stabilize house markets from a regional perspective.

The Spillover Effects of Chinese Shocks on the Belt and Road Initiative Economies: New Evidence Using Panel Vector Autoregression

This paper investigates the spillover effects of Chinese real and monetary sector shocks on the Belt Road Initiative (BRI) economies. The study adopted a panel vector autoregression (PVAR) estimation technique to analyse the dynamic propagation of Chinese shocks in the real sector (gross domestic product (GDP) and trade openness (OPEN)) and monetary sector (nominal interest rate (NIR)) for a sample of 50 BRI countries from 2000 to 2017. The main results revealed that Chinese income shocks positively spill over to all macroeconomic variables except BRI countries’ consumer price index (CPI). However, the Chinese trade openness shock only has a temporary positive spillover to BRI international trade and a temporary negative spillover on its monetary policy. In addition, the Chinese monetary policy shock has a negative spillover on GDP and a positive spillover on CPI in BRI economies. Chinese shocks, however, do not constitute a significant source of variation in any interest variable. As explained by the Chinese income shock, the BRI interest rate is the highest percentage of variable variation accumulated over time. Further, the highest variation of Chinese trade shock is BRI trade openness, and lastly, the highest variation of Chinese interest rate shock is CPI in BRI economies. The beggar-thy-neighbour effect may dominate the positive trade effect and is a negative impact of the Chinese shocks. Hence, BRI economies should alleviate the adverse shocks since the upcoming rapid growth from the Chinese has disturbed the BRI economies. Our results reveal the importance of Chinese development on BRI partners’ economies and the significance of Chinese shocks in real and monetary sectors in assisting policymakers in designing international and monetary policy for BRI economies.

Foreign Exchange and Global Monetary Shocks: The Asymmetric Effects of Advanced Economies’ Quantitative Easing on Exchange Rate Volatility in Emerging Markets

This research assesses the impact of global monetary shocks stemming from quantitative easing policies in advanced economies on exchange rate volatility in emerging markets. Using panel ARDL (Autoregressive Distributed Lag) model, an asymmetric effect is detected showing that increases in quantitative easing have a significant impact on exchange rate volatility, whereas subsequent tapering does not. Moreover, the Fragile Five economies experience spikes in exchange rate volatility that are more than double what is detected in other emerging markets. Finally, the impact of foreign exchange intervention to offset the effect on volatility is significant across emerging markets and is, once again, larger in the Fragile Five economies. The results are supported using panel VAR (Vector Autoregression) estimations.

Shocks versus Menu Costs: Patterns of Price Rigidity in an Estimated Multisector Menu-Cost Model

Abstract Sectoral heterogeneity matters for monetary policy. Using CPI microdata, we estimate for 227 products a time-varying menu-cost model to investigate the quantitative relevance of this heterogeneity. We find a substantial degree of cross-sectoral heterogeneity in all structural parameters. Heterogeneity in the Calvo component of the pricing friction is, however, the main source of heterogeneity in price rigidity. Cross-sectoral heterogeneity amplifies the output effect of a monetary shock by a factor of about 2.5, compared to a single-sector model estimated with mean moments. Heterogeneity in the Calvo parameter plays a key role in this amplification.

The Neo-Fisher Effect: Econometric Evidence from Empirical and Optimizing Models

This paper assesses the presence and importance of the neo-Fisher effect in postwar data. It formulates and estimates an empirical and a New Keynesian model driven by stationary and nonstationary monetary and real shocks. In accordance with conventional wisdom, temporary increases in the nominal interest rate are estimated to cause decreases in inflation and output. The main finding of the paper is that permanent monetary shocks that increase the nominal interest rate and inflation in the long run cause increases in interest rates, inflation, and output in the short run and explain about 45 percent of inflation changes. (JEL E12, E23, E31, E43, E52)

English

The study explores the impacts of systematic and nonsystematic monetary policy shocks and how they affect the monetary transmission process in Nigeria from 1986 to 2020 using quarterly data. The objective of the study was to improve the understanding of the systematic and non-systematic monetary shocks and how they affect the monetary transmission process in Nigeria. Data on variables such as monetary policy rate, all-share index, exchange rate, private sector credits, and inflation rate were used to investigate the impact of these shocks on monetary transmission channels. The study adopted methods such as unit root, historical decomposition as well as a non-linear Autoregressive Distributed Lag (NARDL) framework to carry out this investigation. The results showed that both the systematic and nonsystematic shocks influenced interest rate and expectations channels, while the negative systematic shocks influenced the credit channel. However, these shocks had no significant influence on exchange rate and asset price channels. The study was concluded by recommending that these channels should be well managed to avoid negative systematic and nonsystematic shocks to improve the monetary transmission process and foster a sound financial system in Nigeria.   Key words: Monetary policy, monetary transmission mechanism, systematic monetary shocks, nonsystematic monetary shocks, non-linear ardl, historical decomposition.

ESTIMATING THE REAL SHOCK TO THE ECONOMY FROM COVID-19: THE EXAMPLE OF ELECTRICITY USE IN CHINA

Quantifying the shock to the economy from the COVID-19 pandemic is difficult. Although this shock is easily linked to financial markets as a sort of monetary shock, few studies have been done on its effect on the real economy. This study takes a particular economic perspective, focusing on electricity uses in various sectors of the economy. We propose a novel method for comparing electricity use in 2019Q1 and 2020Q1, based on which we derive the degree of the real shock to some important economic sectors from COVID-19. In our theoretical framework, demand for energy and its influencing factors are related to the total scale of the economy, i.e., the gross domestic product. Using suitable empirical methods, we obtain certain marginal effects and then calculate the corresponding ratio as the real shock from COVID-19. The ratio between these marginal effects reveals the need for a balance between stocks and the corresponding differences in the economy. In our cases, the electricity use in various economic sectors plays a role in both stocks and the differences. We find that, although manufacturing and consumption are affected, the services are more vulnerable to the shock from the COVID-19 pandemic. Our findings offer implications for policymakers.

Instrumental Variable Identification of Dynamic Variance Decompositions

Macroeconomists increasingly use external sources of exogenous variation for causal inference. However, unless such external instruments (proxies) capture the underlying shock without measurement error, existing methods are silent on the importance of that shock for macroeconomic fluctuations. We show that, in a general moving-average model with external instruments, variance decompositions for the instrumented shock are interval-identified, with informative bounds. Various additional restrictions guarantee point identification of both variance and historical decompositions. Unlike structural vector autoregression analysis, our methods do not require invertibility. Applied to US data, they give a tight upper bound on the importance of monetary shocks for inflation dynamics.

A reformulation of the bank lending channel under multiple prudential regulations

The Basel-III accord introduced multiple prudential regulations, sparking concerns that their simultaneous imposition may have unexpected effects on bank lending and its response to monetary shocks. This paper reformulates the bank lending channel (BLC) from a credit creation perspective and examines its changes under different prudential regulations. The traditional BLC predicts an increase in bank lending in response to expanding reserves. We find that such a relation only holds when liquidity requirements constrain banks. When capital requirements become binding and raising new capital is not an option, a reserve expansion may have no effect or may adversely impact bank lending. The simultaneous imposition of multiple regulations complicates the BLC by making it a nonlinear and non-monotonic process, with a strong dependence on bank-specific characteristics and the underlying economic condition. Prudential regulations may hinder the effectiveness of quantitative monetary operations, especially during financial distress.

Estimating Structural Shocks with the GVAR-DSGE Model: Pre- and Post-Pandemic

This paper investigates the possibility of using the global VAR (GVAR) model to estimate a simple New Keynesian DSGE-type multi-country model. The long-run forecasts from an estimated GVAR model were used to calculate the steady-states of macro variables as differences. The deviations from the long-run forecasts were taken as the deviation from the steady-states and were used to estimate a simple NK open economy model with an IS curve, Philips curve, Taylor rule, and an exchange rate equation. The shocks to these equations were taken as the demand shock, supply shock, monetary shock, and exchange rate shock, respectively. An alternative model was constructed to compare the results from GVAR long-run forecasts. The alternative model used a Hodrick–Prescott (HP) filter to derive deviations from the steady-states. The impulsive response functions from the shocks were then compared to results from other DSGE models in the literature. Both GVAR and HP estimates produced dissimilar results, although the GVAR managed to capture more from the data, given the explicit co-integration relationships. For the IRFs, both GVAR and HP estimated DSGE models appeared to be as expected before the pandemic; however, if we include the pandemic data, i.e., 2020, the IRFs are very different, due to the nature of the policy actions. In general, DSGE–GVAR models appear to be much more versatile, and are able to capture dynamics that HP filters are not.

Dynamic characteristics of China's inflation: a two-country DSGE model based on a multi-level vertical industrial structure

We establish a two-country DSGE model with a vertical production chain to study the inflation dynamics in China. By introducing multiple layers of price stickiness and shadow economy production to the vertical industrial chain, our model helps to explain dynamic characteristics of inflation. In our model, shocks can not only affect inflations by passing down the production chain through cost channels, but also in the reverse way due to the intermediate demand effect and the investment costs effects. After calibrating and estimating the parameters, the simulation results show that more than 90% of inflation fluctuations in China can be attributed to domestic shocks, among which the domestic monetary shock and final sector technology shock are the most influencing factors in explaining China’s inflation dynamics.

Monetary policy and wage inequality in South Africa

The distributive consequences of monetary policy have been researched only recently and almost entirely in advanced economies. This paper sheds light on the effect of conventional monetary policy shocks on the wage distribution in South Africa, where inequality – mostly driven by the segmented labour market – remains a large issue. Impulse response functions estimated from local projections show that the wage distribution significantly worsens in response to monetary shocks. Wages in the top half of the distribution, that benefit from unanticipated expansions, are less responsive to surprise contractions, remaining protected by skill-biased technology and strong labour unions.

SPILLOVERS OF GLOBAL LIQUIDITY AND MONETARY POLICY DIVERGENCE FROM ADVANCED ECONOMIES TO VIETNAM

This paper studies the spillovers of global liquidity and monetary policy divergence from advanced economies to Vietnam. Applying the structural Bayesian Vector Auto-Regressive model with Sims–Zha prior distribution, we find that unconventional monetary policy shocks of major central banks led to a reduction in inflation and short-term interest rate as well as an appreciation of local currency in Vietnam. However, market liquidity provided by surge in the cross-border credit flow led to a temporary upward pressure on inflation, interest and foreign exchange rates. Both types of global liquidity caused an insignificant effect on stock price which evidence the dominance of traditional interest rate and bank-lending over asset price channels in Vietnam. When disintegrating the effects among the monetary shocks from the US, European Union and Japan, the empirical result reveals some evidence of contradictory effects. Accordingly, GDP decreased after Fed’s asset purchase while it slightly increased following the same action from European Central Bank. Quantitative easing shocks also caused a depreciation in USD and Euro, resulting in a decrease in foreign exchange rate but large-scale asset purchase from the Bank of Japan is translated into an upward trend in the exchange rate.