Money Growth Research Articles

Business cycles in Ethiopia under alternative monetary policy rules

PurposeThe purpose of this paper is to compare business cycle fluctuations in Ethiopia under interest rate and money growth rules.Design/methodology/approachIn order to achieve this objective, the author constructs a medium-scale open economy dynamic stochastic general equilibrium (DSGE) model. The model features several nominal and real distortions including habit formation in consumption, price rigidity, deviation from purchasing power parity and imperfect capital mobility. The paper also distinguishes between liquidity-constrained and Ricardian households. The model parameters are calibrated for the Ethiopian economy based on data covering the period January 2000–April 2015.FindingsThe main result suggests that: the model economy with money growth rule is substantially less powerful or more muted for the amplification and transmission of exogenous shocks originating from government spending programs, monetary policy, technological progress and exchange rate movements. The responses of output to fiscal policy shocks are relatively stronger under autarky which appears to confirm the findings of Ilzetzki et al. (2013) who suggest bigger multipliers in self-sufficient, closed economies. With regard to positive productivity shock, however, the model with interest rate feedback rule generates a decline in output and an increase in inflation, which are at odds with conventional empirical regularities.Research limitations/implicationsThe major implication is that a central bank regulating some measure of monetary stocks should not expect (fear) as much expansion (contraction) in output following currency devaluation (liquidity withdrawal) as a sister central bank that relies on an interest rate feedback rule. As emphasized by Mishra et al. (2010) the necessary conditions for stronger transmission of interest-rule-based monetary policy shocks are hardly existent in emerging and developing economies targeting monetary aggregates; hence the relatively weaker responses of output and inflation in the model economy with money growth rule. Monetary policy authorities need to be cautious when using DSGE models to analyze business cycle dynamics. Quite often, DSGE models tend to mimic the proverbial “crooked house” built to every man’s advise. Whenever additional modification is made to an existing baseline model, previously established regularities break down. For instance, this paper documented negative response of output to technology shock. Such contradictions are not uncommon. For example, Furlanetto (2006) and Ramayandi (2008) have also found similarly inconsistent responses to fiscal and productivity shocks, respectively.Originality/valueUsing DSGE models for research and teaching purposes is not common in developing economies. To the best of the author’s knowledge, only one other Ethiopian author did apply DSGE model to study business cycle fluctuation in Ethiopia albeit under the implausible assumption of perfect capital mobility and a central bank following interest rate rule. The contribution of this paper is that it departs from these two unrealistic assumptions by allowing international risk premium as a function of the net foreign asset position of the country and by applying money growth rule which closely mimics the behavior of central banks in low-income economies such as Ethiopia.

Impact of Monetary Policy on the Economic Growth of a Developing Country: An Empirical Study on Bangladesh Economy

Monetary policy plays a significant role in the economic growth of a developing country like Bangladesh by influencing the cost and availability of credit, inflation control and balance of payment. The current improving GDP growth of Bangladesh is the contribution of different components of monetary policy. This paper aims at identifying the impact of monetary policy on the overall economic development of Bangladesh. The purpose of the study is to develop a cause and effect relationship between the monetary policy and different economic factors that lead to economic growth of Bangladesh. To conduct this research data of last 20 years from 1997-2017 were collected. Primary data from 57 respondents from different commercial banks were collected to conduct this study. Different economic variables that affects a country’s GDP such as- inflation rate, employment rate, lending rate, borrowing rate, export-import growth rate, broad money growth rate, FDI rate in percent of GDP were used for this study. Both descriptive and inferential statistics were used in analyzing the data. Multivariate analysis technique like Exploratory factor analysis using SPSS version 20.0 was performed to identify the factors that influence the overall economic performance of Bangladesh. Multiple regressions were run to identify the relationship between monetary policy and the economic development of Bangladesh. The results show that factors like consumption, investment, government net expenditure and net export significantly affects the GDP growth of Bangladesh. The study also identifies that the monetary policy of Bangladesh has significant impact on these mediating factors. The research brings an important insight regarding the socio-economic development of Bangladesh by ensuring proper implication of the monetary policy. If the central bank and policy makers focus on the above significant factors Bangladesh will see more robust economic growth in the near future.

Inflation Targeting in Iran

Inflation targeting in various forms has been adopted by a number of countries as a framework for making monetary policy more coherent and transparent and for increasing the credibility of monetary policy. Despite the language, referring to inflation target as the primary objective of monetary policy, central bankers always make room for short-run stabilization objectives, particularly with respect to output and exchange rate. Inflation targeting, in most cases, reduces the role of intermediate targets, such as exchange rate or money growth rate.
 Experience of other countries that have adopted inflation targeting as a monetary framework reveals that the success of the policy depends on not only the transparency of the operation but also on the budgetary discipline. Indeed, the central banks that have become more transparent, more independent, more coherent, and more accountable and more credible have been more successful.
 The controversy among economists on the expenses of inflation targeting has attained particular attention during the past decades .While opponents believe that inflation targeting takes place at the expense of output shortfalls (Cechetti and Ehrmann 1999), proponents (Mishkin 2000, Jonas and Mishkin 2003) believe that inflation targeting promotes investment and economic growth. This paper tries to address the question of whether the performance of inflation targeting in Iran has been successful. Based on a monetary model, using exogenous variables such as official exchange rate, budget deficit, foreign exchange obligation account, and balance of payments, the results suggest that the effects of inflation targeting on the real output is trivial, supporting the natural rate hypothesis.

A Study on the Dynamic Behaviour of Headline Versus Core Inflation: Evidence from India

This article attempts to understand the dynamic response of core inflation and headline inflation to macroeconomic variables in the context of India. First, core inflation is calculated using the conventional exclusion measure (excluding food and energy components) and the statistical measure (asymmetrical trimmed mean, weighted median and exponential smoothing approach) by taking the monthly Consumer Price Index y-o-y inflation data from January 2012 to June 2018. Next, the study performed the comparative analysis to understand the dynamic response of both core inflation and headline inflation to different demand and supply shocks through Structural Vector Autoregressive Technique, Impulse Response Function and the Forecast Error Variance Decomposition. The findings suggest that trimming 20 per cent of the highly volatile components from the overall inflation can serve as a better proxy for the underlying medium and long-term trend in the headline inflation. Furthermore, the comparison made between headline inflation and core inflation shows that the key drivers for core inflation is the demand-side components such as real money growth, whereas headline inflation is mostly driven by the supply-side components in the context of India. The variations in core inflation are mainly observed because of the change in monetary policy decisions, hence making core inflation an important part the policy decision making. Core inflation indicates the underlying demand pressure, which can help policymakers to set adequate key policy rates to target overall inflation.

The Impact of Uncertainty Money Growth on the Economic Growth of South Asian Countries during 2004-2016

Political culture, as a part of public culture and a group of beliefs, virtues, norms and approaches with views to the political area, is one of the basic issues which has been paid attention and the subject of many researches, especially since the second half of the 20th century. The topic of this article is studying Afghanistan political culture as well as answering the question of which impacts it has had on Afghanistan political participation during the after-2001 years. Also, in this research, by using an analytic-descriptive method, at first, the definition of political culture and its features in Afghanistan are presented and then, the occurred changes in the indexes of Afghanistan political coopetation in the recent decades are studied too. Political culture, as the system of empirical beliefs, symbols, virtues and the norms, which are regarded as the foundation of political action and the political behaviours of the public people, parties and the government officials is one of the basic issues which has been considered and studied by many experts of politucal area for the recent era. The continuity and strength of any any kinds of cooperations depends on the society political culture origin as it is a very important factor for defining the political social identity of the public members and determining their views, virtues and norms toward politics and authority. Moreover, in this study, at first,the level of changes in the last-two-decade political culture of Afghanistan society is discussed and then its impact on political participation is analysed through explaining the tie between beliefs and behaviours as well as a case study over the political cooperarion increase.

Global liquidity, money growth and UK inflation

This paper uses tools from the classical theory of inflation for UK Consumer Price Inflation from 1970Q1 to 2017Q4. In particular, we adopt augmented Phillips curve type equations within a linear and regime-switching framework where regimes are governed by previous inflation rates. Our non-linear models show that a monetary explanation of inflation is prominent during periods of high inflation. However our models imply that during periods of high inflation, The Bank of England should monitor monetary conditions in conjunction with monetary policy stance; as these can help dampen inflation persistence.

Structural Policy: Towards a New Investment Model of Economic Growth

The article examines structural policy as a tool for developing a new economic growth model in Russia. The author considers the conditions of economic growth based on increased investment. The purpose of the article is to determine the current characteristics of the Russian economy structural dynamics by the components of GDP and basic sectors. The basic sectors of the current investment structure have been assessed — processing sector and transactional and raw materials sector — and the directions for further development have been specified. The research methodology consists of: structural analysis of GDP and sectoral dynamics; the received and applied “structural formula” of assessing the contribution of the system elements to economic growth; formulated simple optimization models and a numerical optimization method (gradient projection method). The method of empirical and statistical estimates has also been used. Optimization models have made it possible to demonstrate the solution to the problem of distributing investments between the sectors with a target function for maximum profit and minimum risk. The analysis of growth and the conditions for economic growth obtained by the model-analytical method — in terms of the rate of change in oil prices and the exchange rate — allowed us to empirically show periods of growth and recession in the economy. They depend on the growth rate of oil prices and the devaluation of the rouble. This approach, with further use of econometric models linking macroparameters, will make it possible to evaluate the effect of changes in structural parameters on economic growth. The overall result of the study is as follows: the intensification of investments is insufficient to organize the investment model of economic growth in Russia. The stimulation of gross consumption and a change in the structure of investments are required. It is necessary to reduce the gap between the sectors by risk mitigation. External factors affecting the economic growth in Russia (oil prices, currency inflows) must be eliminated by changing the structure, including the sensitivity increase of its elements to macroeconomic policy instruments, and differentiating sectoral policy measures considering the positive impact on the contribution of GDP components and sectors of money growth and inflation.

The Impact of Exchange Rate on Inflation: A Case Study of The Gambia(1978-2016)

This paper focuses on developing stylized facts about the inflationary process in The Gambia, focusing particularly on the relationship between the exchange rate regime and the sources of inflation. It also examines several variables which policymakers believed have affected the level of inflation in The Gambia. The type of data used in this paper includes the time series data set which is collected from the period 1978-2016. Augmented Dickey-Fuller (ADF) test is used to examine whether a variable is integrated of which was proposed by Dickey and Fuller (1979). This paper employed the order of integration to test for stationarity and it was found out that both inflation and interest rates were stationary at levels. On the other hand, exchange rate and GDP were non-stationary at levels. In addition, Johansen co-integration test is used to explore the presence of a long-run relationship among the series. Findings show that there is no long-run relationship between the variable exchange rate and Inflation. Using annual data from 1978-2016, it was found that money growth and exchange rate change factors typically related to fiscal influences are far more important in countries with floating exchange rate regimes than in those with fixed exchange rates. Mitigating inflation has been a top agenda for every country that wants to achieve sustainable economic growth in which The Gambia is no exception. More especially, The Gambia being a small open economy exposed to other countries and price shifts in the world economy have a direct impact on The Gambian economy.

State-Run Banks, Money Growth, and the Real Economy

Within countries, individual state-run banks’ lending correlates with prior money growth; similar private-sector banks’ lending does not. Aggregate credit and investment growth correlate with prior money growth more where banking systems are more state-run. Size and liquidity differences between state-run and private-sector banks do not drive these results; further tests discount broad classes of alternative explanations. Tests exploiting heterogeneity in political pressure on state-run banks associated with privatizations and elections suggest a command-and-control pseudo-monetary policy channel: changes in money growth, perhaps reflecting political pressure on the central bank, change banks’ lending constraints; political pressure actually changes state-run banks’ lending. This paper was accepted by Tomasz Piskorski, finance.

The effects of monetary policy on input inventories

Abstract This paper explores both the long-run and short-run effects of monetary policy on input inventories in a search model with monetary propagation and two-stage production. Inventories arise endogenously due to search frictions. In the long run, we analytically show that an increase in the money growth rate has hump-shaped real effects on steady-state input inventory investment, input inventory-to-sales ratio as well as sales. These effects are driven by both the extensive and intensive margins in the finished goods market. We then calibrate the model to the US data to study the short-run effects of monetary policy. We first show that our model can reproduce the stylized facts of input inventories quite well and then find that input inventories amplify aggregate fluctuations over business cycles.

Monetary rules in a two-sector endogenous growth model

We study the balanced growth paths and their stability features of a monetary two-sector endogenous growth model with physical capital and human capital accumulation. The demand of money is motivated on the ground of a fractional cash-in-advance constraint on consumption expenditures and on those in the investment in physical capital. We consider, in sequence, two monetary rules implemented by the Central Bank. First, we assume that the latter pegs the money growth rate and then the nominal interest rate according to a Taylor feedback rule. When the Central Bank pegs the money growth rate, there emerges a unique balanced growth path which turns out to be indeterminate for a low amplitude of the liquidity constraint and/or for a low enough intertemporal elasticity of substitution in consumption even under the hypothesis that the cash-in-advance constraint applies uniquely on consumption expenditures. On the other hand, when the monetary policy is implemented according to a Taylor feedback rule, an unintended liquidity trap equilibrium may coexist with multiple interior Taylor equilibria. If, on the one hand, the liquidity trap equilibrium is bound to be locally determinate; on the other hand, the Taylor interior equilibrium may become locally indeterminate provided the cash-in-advance constraint applies also on the investment in physical capital good and under a physical capital intensive human capital good. A global analysis is performed in which we show that the Taylor equilibrium and the liquidity trap one are connected through a heteroclinic orbit.

Money Growth Variability and Output: Evidence with Credit Card-Augmented Divisia Monetary Aggregates

We reexamine the effects of the variability of money growth on output, raised by Mascaro and Meltzer (1983), in the era of the increasing use of alternative payments, such as credit cards. Using a bivariate VARMA, GARCH-in-Mean, asymmetric BEKK model, we find that the volatility of the credit card-augmented Divisia M4 monetary aggregate has a statistically significant negative impact on output from 2006:7 to 2019:3. However, there is no effect of the traditional Divisia M4 growth volatility on real economic activity. We conclude that the balance sheet targeting monetary policies after the financial crisis in 2007-2009 should pay more attention on the broad credit card-augmented Divisia M4 aggregate to address economic and financial stability.

Monetary impacts and overshooting of energy prices: the case of the U.S. coal prices

The objective of this paper is to analyze the impacts of monetary policy on determination and dynamics of coal prices in a closed economy setting in the USA. Economic theory tells us that if a change in macroeconomic policy has raised (lowered) the real interest rate above (below) its long-run equilibrium level, then coal prices should fall below (rise above) their long-run equilibrium path. Likewise, an unanticipated increase in the expected long-run rate of money growth increases the coal prices in the long-run equilibrium path and in turn the current coal price. Finally, when there is a change in the level of money supply, the price of coal initially overshoots its long-run equilibrium. Empirical time-series analysis confirms that coal prices react to monetary policy in the long run, i.e., monetary policy has a non-neutral impact on coal prices. Long-term adjustment is more pronounced for coal prices than for manufactured goods and services. In the short run, the degree of immediate adjustment or overshooting for coal prices in response to monetary policy shocks is, surprisingly, lesser than for manufactured goods and services.

Do sterilized foreign exchange interventions create money?

The growth of official foreign reserves in emerging Asian countries over recent decades has been extensive but its effects on the money market appear to be well sterilized in that decreases in interest rates or acceleration of credit growth have not been registered. We analyze the effect of foreign exchange intervention on components of the banking system’s balance sheet for 19 emerging economies that pursued an independent interest rate policy and did not maintain an exchange rate peg. The sample includes six Asian countries (India, Indonesia, Korea, Malaysia, the Philippines, and Thailand). We apply a vector autoregressive technique to quarterly data for the period 2001Q4 to 2016Q1. For the sample as a whole, we find that money stock tends to expand in response to an increase in the foreign reserves of the central bank. For the Asian countries in particular, we conclude that external transactions have contributed to money growth acceleration despite sterilization that succeeded in stabilizing interest rates.

Monetary Financing with Interest-Bearing Money

Recent results suggesting that monetary financing is more expansionary than bond financing in standard New Keynesian models rely on a duality between policy rules for the rate of money growth and the short-term bond rate, rather than a special role for money. We incorporate two features into a simple sticky-price model to generalize these results. First, that money may earn a strictly positive rate of return, motivated by recent debates on the introduction of central bank digital currencies and the introduction of interest-bearing reserves. This allows money-financed transfers to be used as a policy instrument at the effective lower bound, without giving up the ability to use the short-term bond rate to stabilize the economy in normal times. Second, a simple financial friction generates a wealth effect on household spending from government liabilities. Though temporary money-financed transfers to households can stimulate spending and inflation when the short-term bond rate is constrained by a lower bound, similar effects could be achieved by bond-financed tax cuts. So our results do not provide compelling reasons to choose monetary financing rather than bond financing.

Money, Inflation and Output in Nigeria and South Africa: Could Friedman and Schwartz Be Right?

ABSTRACTThis study examines the non-linear relationship between money, inflation and output with respect to the Friedman and Schwartz hypotheses that monetary policy affects prices in the long-run but not in the short-run, and influences output in the short-run but not in the long-run. The study examines the case of Nigeria and South Africa for the period 1970–2016 using the ARDL approach. The study proved that Friedman and Schwartz were right that money growth influences output in the short-run and not in the long-run. This suggests monetary policy is neutral in the long-run; however, the findings of this study cast some doubts on their popular view that money growth affect prices in the long-run but not in the short-run. This study shows that money growth actually affects prices both in the short and long-run. Thus, it is only the long-run dimension of the second hypothesis that is valid; the short-run view of the hypothesis is invalid for both Nigeria and South Africa. In fact, the significant estimates of money growth on inflation in both countries prove that inflation is everywhere a monetary phenomenon (both in the short and long run).

On the Optimal Inflation Rate with Capital Externality

This short note is to show that the strong non-superneutrality of monetary policy in Brunnermeier and Sannikov (2016) does not hold if taking into account the pecuniary externality of capital. Higher money growth rate leads to a higher level of capital but not higher growth rate of the economy at steady state.

Housing, liquidity risk, and monetary policy

There is increasing recognition that the effects of monetary policy are not symmetric across different sectors in the economy. For example, in recent empirical work, Givens and Reed (2018) focus exclusively on the capital goods sector and find that the impact of monetary policy on residential investment is more than twice as high as the behavior of fixed investment at the aggregate level. Why are the effects of monetary policy on residential investment so impactful compared to the overall capital sector? Further, what role do financial intermediaries play in promoting housing which is a significant component of personal wealth in the United States? To address the importance of housing for wealth accumulation, we study a model in which housing is traded across generations of individuals. Following Diamond and Dybvig (1983), individuals face stochastic liquidity preference shocks which impede housing accumulation. Intermediaries arise to help insure individuals against such idiosyncratic risk. However, inflation also limits the extent of risk-sharing. In this manner, the model follows recent contributions which emphasize that shocks to discount rates contribute to wealth inequality. Moreover, in contrast to one-sector monetary growth models, we demonstrate that it is important to disaggregate fixed investment between the residential and non-residential sectors to determine the effects of money growth. In particular, monetary policy will have asymmetric effects across the components of the overall capital stock.

Monetary policy options for managing resource revenue shocks when fiscal policy is laissez-faire

This study examines the implications of alternative monetary policy regimes to deal with resource revenue shocks when fiscal policy is laissez-faire—that is, when the government spends all resource revenue windfalls contemporaneously. A three-sector dynamic stochastic general equilibrium model is used. The model features key structural characteristics of resource-rich developing economies, such as the Dutch disease, limited international capital mobility, credit constrained consumers, and limited labour mobility. The model is calibrated to match a typical resource-rich developing economy. Three alternative monetary policy regimes are considered: a flexible exchange rate, a crawling peg, and a money growth target. The policy evaluation exercise indicates that a flexible exchange rate with inflation targeting regime is the best among the policy options considered. Specifically, this option yields a meager 0.16 percent loss in welfare terms, compared with higher levels of welfare losses associated with a crawling peg with partial domestic absorption (0.17 percent), and a money growth target with full sterilization (0.26 percent).

MONEY SUPPLY VOLATILITY AND THE MACROECONOMY

This paper extends the ongoing literature on the macroeconomic effects of money supply volatility. We use monthly data for the USA and a bivariate, Markov switching, structural vector error correction model that is modified to accommodate generalized autoregressive conditional heteroscedasticity-in-mean errors to isolate the effects of money growth volatility on output growth. The model allows us to study how monetary uncertainty affects economic growth across different macroeconomic regimes.