Monetary Stance Research Articles

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.

Asymmetric effects of macro policies on women’s and men’s incomes. An empirical investigation of the eurozone crisis in a gender perspective

We study how macro policies affected women’s and men’s incomes during the financial crisis in Europe. We consider the monetary stance, proxied by benchmark interest rates, and the fiscal stance, measured by the variation in public expenditures and public revenues, and investigate how they are associated to women’s and men’s labor and capital incomes, using microdata for 27 European countries between 2008 and 2016. We individualize household-level data by considering four scenarios of intra-household sharing of resources. We also explore how and to what extent macro-policies affect the distribution of labour incomes for men and women by applying a conditional quantile regression approach. Results highlight that the ECB’s expansionary policies had a positive effect on both labor and capital incomes for both men and women, while austerity policies had a mixed impact. Reductions in public expenditure had the effect of reducing labor incomes for both men and women, particularly at the median of the wage and labor distributions. In contrast, increases in public revenues benefited capital incomes, for all income quantiles.

Global liquidity spillovers in the Asia–Pacific region: policy-driven versus market-driven effects

This research investigates the spillovers of global liquidity to Asia–Pacific countries, focusing on the contradictory effects of policy-driven liquidity created by monetary stances in advanced economies and market-driven liquidity generated by the private banking sector. Our findings stand in sharp contrast to previous studies, showing that shifts in macro-financial indicators in Asia–Pacific economies are predominantly influenced by market-driven shocks rather than those of policy-driven liquidity. Specifically, liquidity shocks associated with surges in cross-border credit flows, especially those denominated in US dollars, drive up asset prices and have boosting effects on inflation and economic output. A positive shock to market liquidity also results in an appreciation pressure on domestic currencies and a short-term rise in interest rates. However, excess liquidity shocks caused by the Bank of Japan’s adjustments in shadow short rates and balance sheets have a negative effect on inflation and bring about temporary depreciation pressure on Asian currencies. Surprisingly, we find that Asian responses to financial easing associated with the Fed’s monetary policy change are not well-pronounced.

Estimating shadow policy rates in a small open economy and the role of foreign factors

Shadow monetary policy rates (SMPRs) are useful to evaluate the monetary stance when interest rates are at their lower bounds and unconventional policies are implemented. We present a methodology to estimate an SMPR for the case of a small open economy based on a structural dynamic factor model, which allows to consider the impact of foreign monetary conditions on domestic ones and identify their respective role for the domestic monetary stance. An application to Chile shows that unconventional policies drove the estimated domestic SMPR to negative levels during crisis episodes, with an important role for foreign factors. Alternative specifications that neglect small open economy dimensions yield noisy and less robust results, and imply very different conclusions about the level and drivers of the estimated SMPR.

Monetary stance and favorableness of the monetary policy in the media: the case of Vietnam

PurposeThis paper analyzes the effects of the monetary stance on the media's favorable (or otherwise) attitude to the State Bank of Vietnam's (SBV) monetary policy using monthly data from 2011 to 2021. Monetary stance is a multivariate index based on the growth rates of money supply and domestic credit. A large set of articles published in five Vietnam daily newspapers are utilized to construct a view of the media's favorableness to the monetary policy.Design/methodology/approachThis paper uses hand-collected data from 211 articles published in five newspapers from December 2011 to September 2021 in order to examine the relationship between the monetary stance and the media's favorableness to monetary policy. Following the studies of He and Pauwels (2008) and Xiong (2012), the authors constructed a multivariate stance index to capture most of the important changes in the SBV's monetary policy stance.FindingsThe study's main findings are that a change in monetary stance from easing to neutral/tightening, or from neutral to tightening, is greatly appreciated by the media. The study's findings are robust, especially in terms of alternative measures of the media's favorableness and monetary policy variables.Research limitations/implicationsThese findings have important policy implications for implementing SBV's monetary policy.Originality/valueThe main contribution of this paper is that the authors are the first to study the nexus of multivariate monetary stance and the media's favorableness to a central bank's non-inflation-targeting mandate. In particular, the study’s findings confirm that the SBV's multivariate monetary stance affects the media's favorableness, whereas the effect of inflation is statistically insignificant.

Monetary Condition Index: Empirical Evidence from Pakistan

The study focuses on assessing the Monetary Condition Index (MCI) in Pakistan, which measures the tightness or easiness of the country's monetary policy. It analyzes the impacts of interest rates and exchange rates on inflation and GDP growth, using time series data from 1975 to 2020. Monetary Condition Index is calculated by using time series data, employing annual data set from 1975 to 2020. Two different methods are applied to find the weights of interest rate and exchange rate, the one is the Principal Component Analysis and the other is co-integration method employing the Autoregressive Distributed Lag model. The research aims to provide valuable insights for policymakers, planners, and economists to optimize monetary policies and understand the transmission mechanism in the economy. The study also explores the historical impacts of interest rates and exchange rates, with potential implications for other economies. The Monetary Condition Index is introduced as a useful policy locator and an indicator of the monetary policy stance. Additionally, the research seeks to validate the MCI's reliability as a policy indicator and address certain research gaps related to its effectiveness, dynamics, and generalizability. The study concluded that the MCI is sensitive to variations, and its calculation and methodology are essential. The monetary stance in Pakistan remained tight from 2017 to 2020, representing the highest trend in history. However, the effectiveness of using interest rate tools to control inflation in Pakistan was questioned, suggesting that changes in monetary policy tools might be necessary to achieve the objectives of the State Bank of Pakistan in line with Islamic economics principles.

Research on the Two-way Influence of US Monetary Policy Since the COVID-19 Pandemic

Based on the novel coronavirus outbreak, the global economy has been strongly impacted, resulting in a worldwide economic recession. This paper mainly studies the orientation and target changes of the US monetary policy, adopts the method of dialectical analysis and data empirical analysis to study the two-way influence of the Fed monetary stance, and shows that implementation of monetary policy has an obvious two-way influence on the economy, that is, monetary policy will inevitably cause the imbalance between inflation and unemployment rate. Expansionary monetary policy can reduce unemployment and stimulate the economy meanwhile, it will lead to the accumulation of inflation. The tightening of monetary policy will lead to unemployment and economic recession while easing inflation. Excessive accumulation of negative consequences of monetary policy will result in a deeper economic crisis, which will become the main factor affecting the change of monetary policy direction. This shows that the monetary stance orientation of the Federal Reserve is based on the balance of advantages and disadvantages of its two-way effects, and the timely change of monetary policy orientation is the key to mitigating the negative effects caused by monetary policy.

The Asymmetric Volatility Spillover and Dynamic Correlation Across Equity Markets in China and The United States

This paper aims to study the volatility spillover effects as well as the dynamic conditional correlation between stock market returns in China and the U.S. Firstly, the analysis uses a vector autoregression with a bivariate BEKK-GARCH model to capture the asymmetric volatility transmissions between the two markets during the sample of 1996-2019. Then a VAR-DCC-GARCH model is employed to estimate the dynamic conditional correlation between these two market returns. Finally, linear regression and Granger Causality test are conducted to further explore the effect of the U.S policy rates on such correlation. In order to account for the U.S monetary stances during the unconventional period, a combination of Fed fund rates and Shadow rates developed by Wu and Xia (2016) is used as policy rates. The main empirical results suggest (1) evidence of unidirectional volatility spillover from the U.S. to China market; but no spillover from China to U.S; (2) the dynamics of the conditional correlations from the VAR-DCC-GARCH model exhibit increases in correlation between the stock returns of China and U.S after 2008 financial crisis and recent trade war; (3) a linear regression shows that there is negative relationship between U.S policy rates and the dynamic conditional correlation, with the correlation coefficient r=-0.62. Granger Causality test suggests that the U.S policy rates do cause the change of the conditional correlation but not the other way around.

Exchange rate misalignment and external imbalances: What is the optimal monetary policy response?

How should monetary policy respond to excessive capital inflows that appreciate the currency and widen the external deficit? Using the workhorse open-macro model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, and solve for the optimal targeting rules under cooperation. The optimal monetary stance is expansionary if the exchange rate pass-through (ERPT) on import prices is complete, contractionary if nominal rigidities attenuate ERPT. Excessive capital inflows, however, may lead to currency undervaluation instead of overvaluation for some parameter values. The optimal stance is then invariably expansionary to support domestic demand.

Differential impacts of fiscal consolidation policies under alternative monetary regimes: evidence from Indian economy

The study tried to examine the effects of fiscal consolidation policies under alternative monetary stances in Indian economy. Using structurally adjusted vector autoregression (SVAR) we found that both Monetary and Fiscal-policies interact in cooperative as well as competing manner depending on the type and timing of shocks. Although fiscal policy enjoys a certain degree of superiority, the potency of monetary policy has not waned away. In terms of effectiveness, the study found that the fiscal policy is a better tool of economic stabilisation in the short run but in long and medium run it may harm growth. A consolidation program aimed at infusing fiscal prudence was found to have differential impacts on economic growth depending on whether such a policy is undertaken in an expansionary or contractionary monetary regime. Ironically the fiscal-policy was found to have more influence on inflation than monetary policy pointing towards the fiscal theory of price level; FTPL.

Information spillovers of US monetary policy

We examine the international impact of the information content in US monetary policy. When the Federal Reserve tightens monetary policy, it reveals not only a tightened monetary stance, but also optimism about the economy, raising global output and asset prices as a result. Using a panel dataset of fifty-eight countries over the period 1994–2020, we disentangle “information shocks” from pure monetary shocks and show that (i) while tightening shocks are contractionary for the global economy, the information inherent in a tightening announcement can have expansionary effects; (ii) monetary and information shocks tend to offset each other, softening the net spillovers to the world economy; and (iii) the information inherent in monetary easing lowers output and asset prices. US monetary announcements can thus reveal optimism or pessimism with consequences for global economic activity.

Bearish Vs Bullish risk network: A Eurozone financial system analysis

This paper studies the extreme risk spillover between 183 Eurozone financial institutions (such as banks, insurances, diversified financial, real estate firms) over the period 2005–2020. Employing the Granger causality test across quantiles, we are able to investigate the tail risk interdependence between financial firms under extreme (downside and upside) conditions. Thanks to this framework, we can understand and estimate the risk spillover effect, in different propagation mechanisms, during bad and good conditions. Our findings show a heterogeneous effect between risk spillovers depending on the level of risk considered, highlighting how bearish conditions play an important role in the sectoral propagation of risk spillover. We document the presence of the “shift-contagion” effect. Finally, we investigate the risk-monetary policy nexus. Our findings provide new insights into the impact of the monetary stance on financial stability, documenting the double strategy played by the European Central Bank, namely the “leaning against the wind” and the “modified Jackson Hole consensus” approach.

Unexpected money growth, nonfinancial firms as large shareholders and investment-cash flow relationship: Evidence from Vietnam

This paper uses a sample of listed firms to raise questions as to how unexpected money growth affects firm-level investment in Vietnam, resembling tightening monetary policy impact. We find that most results that hold true in other countries also apply to Vietnamese firms during the years of our study. In particular, we find that higher cash flows are associated with higher investment when the assumption of tightening monetary policy is conducted, which is stronger in firms with external financial constraints. We also examine the impact of non-financial firm ownership and find that its presence reduces the investment impact of tightening monetary policy for affected firms. These results imply that the impacts of changes of the monetary stance on corporate investment seem to differ in a way that depends on cash flow and firm ownership characteristics.

Special Difficulties in Forecasting GDP in the Pandemic Situation (2020–2021) : Is there a Keynesian resurgence?

Why was it extremely difficult to forecast GDP worldwide, especially in the years of 2020-2021? Mainly because a double shock hit both the aggregate demand and supply sides, and it had substantially changed the known behaviour of key participants. Reactions of households and firms became largely unpredictable. The IMF projections of April 2020 had to be revised sharply. It appears the world economy could recover from the biggest output drop since World War II only with the help of extensive public spending schemes. We ask if one can speak of a new wave of Keynesian policies. How long this present overwhelmingly loose fiscal and monetary stance can last? One cannot tell. There are visible threats, for instance in the inflationary environment.

Monetary Stance and Favorableness of Monetary Policy in the Media: The Case of Viet Nam

Monetary Stance and Favorableness of Monetary Policy in the Media: The Case of Viet Nam

Exchange Rate Misalignment and External Imbalances: What is the Optimal Monetary Policy Response?

How should monetary policy respond to capital inflows that appreciate the currency, widen the current account deficit and cause domestic overheating? Using the workhorse open-macro monetary model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, solve for the optimal targeting rules under cooperation and characterize the constrained-optimal allocation. The answer is sharp: the optimal monetary stance is contractionary if the exchange rate pass-through (ERPT) on import prices is incomplete, expansionary if ERPT is complete – implying that misalignment and exchange rate volatility are higher in economies where incomplete pass through contains the effects of exchange rates on price competitiveness.

Limits to Public Debt in a Diamond-Type OLG Model of Involuntary Unemployment under Inflexible Aggregate Investment

Governments in advanced countries are currently striving to combat the disastrous economic effects of the shortage of energy supply by providing generous public subsidies to households and firms. As a result, the deficits of federal governments are further increasing after the explosion of public debts due to SARS-CoV-2 related government expenditures and collapsing tax revenues. Unemployment rates in many advanced countries while recedingdue to extremely expansionary fiscal and monetary stances remain significant. Thus, the question arises as to whether, in the face of involuntary unemployment, limits to public debt can and/or ought to be respected, or simply disregarded. It is the aim of this research to answer this question within the scope of a Diamond-type overlapping generations (OLG) model of involuntary unemployment under inflexible aggregated investment. It is found that limits to public debt to output ratios exist; and their numerical values are calculated. Moreover, a debt threshold pops up whereby larger public debt diminishes output growth. In fact, the numerical value of the debt threshold is found to be close to World Bank estimates.

The Macroeconomic Stabilization of Tariff Shocks: What is the Optimal Monetary Response?

In the wake of Brexit and the Trump tariff war, and a general weakening of the political support for free trade, central banks have been faced with the need to reconsider the role of monetary policy in managing the economic effects of unexpected hikes in tariffs and trade costs. Although tariffs induce a slowdown with rising inflation like supply shocks, their distortionary effects on production and relative prices distinguish them from standard supply disturbances, and thus motivate a different monetary response. This paper studies the optimal monetary stabilization of tariff shocks using a New Keynesian model enriched with elements from the trade literature, including global value chains in production, firm dynamics, and comparative advantage between traded sectors. We find that, in response to tariff shocks, the optimal monetary stance is generally expansionary: central banks support activity at the expense of further aggravating short-run inflation—contrary to the prescription of the standard Taylor rule. If the tariff is imposed unilaterally by a trading partner, currency depreciation partly offsets the effects of tariffs on relative prices, without completely redressing the effects of the tariff on the broader set of macroeconomic aggregates. Remarkably, the country issuing a dominant currency can shelter its economy from the adverse effects of a selective tariff war on comparative advantage.

A modern approach to monetary and fiscal policy

This paper puts forth a systematic approach to teaching fiscal-monetary interactions that follows the view of one of the fathers of the Fiscal Theory of the Price Level (FTPL), Eric Leeper. The main advantage of this setup is its simplicity, which makes it particularly suited for undergraduates and non-specialists. It relies on a two-graph device to show that fiscal and monetary policies always get determined simultaneously and that their effects on the economy always depend on one another’s behavior. It is straightforward to see that in a conventional monetarist world (Regime M), the central bank succeeds in controling inflation so long as the fiscal authority does its job of ensuring that public debt does not grow too much. By contrast, in an alternative fiscal-dominant regime (Regime F), fiscal policy determines the price level (and inflation) in the short run, and the optimal monetary stance is holding the policy rate constant, since if the central bank otherwise tries to fight back fiscally determined inflation, it will worsen fiscal sustainability and increase future inflation.

HOW FAR FISCAL DOMINANCE MATTERS FOR A DEVELOPING ECONOMY

Abstract. The growing public debt that intensifies with a frequency of economic crises grasps a high rating in the current economic debates. There is an urgent need for implementing an effective policy regime targeted at handling the public debt problem. The fiscal dominance policy, usually practiced to ensure strong recovery and growth, has a strict guideline for identifying a degree of fiscal expansion and monetary accommodation. Given a dilemma between growth and debt burden, the government should mobilize the most effective policy instrument targeted at the highest fiscal multiplier and does not cross a debt-to-GDP threshold ratio. Following an effective practice of fiscal management, this instrument is associated with public investment. The paper aims to assess the magnitude of the public investment multiplier by following a stable growth path limited by a prescribed debt limitation for a developing economy. To achieve the goal, we use an elaborated New Keynesian model, which besides an active fiscal and monetary stances, also includes a high share of non-Ricardian households, the separability in preferences between private and government consumption, a low level of public investment efficiency, and the substantiated degree of nominal and real rigidities. The obtained present value cumulative output multiplier for public investment grasps the point 2.0 in maximum over two years of the impulse response function. The multiplier effect proves to be high enough to offset temporary public debt growth and maintain a sustainable growth path over the long run. The verified measure of fiscal dominance contradicts an active monetary stance and, among other things, has to be counterbalanced by an appropriate efficiency and productivity of public investment and degree of price stickiness. Keywords: fiscal policy, monetary policy, fiscal-monetary interaction, fiscal dominance, fiscal multiplier, DSGE modeling. JEL Classification O47, E63, H63, D58 Formulas: 1; fig.: 2; tabl.: 0; bibl.: 21.