Monetary Policy Research Articles

Main business profits at risk? Examining the financialization conundrum

We examine the impact of financialization on the profitability of firms’ main business activities and the role of monetary policy. Using evidence from Chinese A-share listed firms from 2008–2019, we reveal that financialization leads to a significant reduction in firms’ main business profits. The negative effect remains robust after testing for robustness and addressing endogenous concerns. We also find that expansionary monetary policy exacerbates this effect, and it is more pronounced when firms hold more short-term financial assets and in state-owned firms. Our findings suggest that enterprises shall strategically reassess investment priorities towards long-term operational sustainability and value creation, while mitigating excessive financialization tendencies.

Does official development assistance (ODA) cause the Dutch disease in developing countries

PurposeThis paper aims to investigate whether official development assistance (ODA) inflows to developing countries (lower-middle and low income) can cause the symptoms of Dutch disease or not.Design/methodology/approachThis study applies the methodology of dynamic panel data estimation with a one-step system generalized methods of moment (GMM) for the sample of 59 developing countries from 2001 to 2019.FindingsThe results indicate that ODA (as a percentage of gross domestic product (GDP)) rises by 1%, the real effective exchange rate (REER) appreciates by 0.252%. This finding reveals that these selected developing countries have faced the symptoms of Dutch disease. The countries with the higher ODA ratio have a higher effect of the Dutch disease, and the managed floating exchange rate regime is the lowest impacted, when compared to the fixed and flexible exchange rate.Practical implicationsThe selected countries are recommended to use ODA inflows right and efficiently. These ODA inflows should be invested in productive sectors or support for production rather than in consumption. The managed float exchange rate regime is applied to reduce the symptom of Dutch disease for the selected countries. The good cooperation of monetary and fiscal policies is important to absorb the huge ODA inflow and sterilize the adverse effects of the disease.Originality/valueThe paper contributes to the literature and empirical of the Dutch disease. An adverse effect of the huge ODA inflow to the developing countries appreciated of the real exchange rate and caused the symptom of the dutch disease.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-12-2022-0777

Nonseparability of credit card services within Divisia monetary aggregates

Abstract We use the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) framework and Vector Autoregressive (VAR) to investigate the usefulness and relevancy of monetary services, augmented to include credit card transaction services. We use the new credit-card-augmented Divisia monetary aggregates in the models to further the existing research on their usefulness and relevancy. In this research, we compare three different monetary aggregates within the New Keynesian framework: (1) the aggregation-theoretic “true” monetary aggregate, (2) the credit-card-augmented Divisia monetary aggregate, and (3) the simple sum monetary aggregate. We acquire the following primary results. (1) The credit-card-augmented Divisia monetary aggregate tracks the theoretical (true) monetary aggregate, while simple sum does not. Although this result would be expected from the theory in classical economic models, the result is not an immediate implication of the theory in New Keynesian models and therefore needs empirical confirmation. (2) Under the recursive VAR framework, the credit-card-augmented Divisia monetary aggregate serves as a preferable monetary policy indicator compared to the traditional federal funds rate. (3) On theoretical grounds, we find that the separability condition for existence of a monetary aggregator function could fail, if credit card deferred payment services were excluded from the monetary services block, unless all markets are perfect.

Monetary policy and equity returns: The role of investor risk aversion

AbstractThis article examines the role of investor risk aversion in the transmission of monetary policy to stock returns based on U.S. data. Our results show that following an expansionary monetary policy shock, investor risk aversion falls, leading to a decrease in the equity risk premium and an increase in equity returns. Moreover, the returns of high‐beta stocks increase much more than those of low‐beta stocks. Finally, we investigate the mechanism through mutual fund flows. We find that high‐beta funds attract greater inflows in response to lower interest rates, and there is a positive relationship between fund returns and flows. Our findings have policy implications for financial stability.

Monetary policy transmission under pandemic uncertainty: Effect on banks' risk and capital adjustments

AbstractThis paper investigates the effects of monetary policy on the simultaneous adjustments in asset portfolio risk and capital of banks amidst the uncertainty of the COVID‐19 pandemic, focusing on the 12 largest economies from 2018 Q1 to 2021 Q4. Results indicate that banks show lower portfolio risk and capital levels when the monetary policy stance is eased. However, amid heightened pandemic uncertainty, the risk‐reducing effect of monetary policy on banks amplifies, while bank capital levels remain unchanged. Heterogeneity analyses reveal that banks with higher levels of diversification and herding are more responsive to interest rates amid pandemic uncertainty, exhibiting lower risk exposure in their asset portfolios. Banks in countries adopting negative interest rate policies also tend to assume greater asset risk to accommodate the intended stimulus of monetary policies.

Re-examining China and the u.s.’s respective green bond markets in extreme conditions: Evidence from quantile connectedness

This study explores the role of green bonds in mitigating risks during extreme conditions, considering China and the US’ robust green bond markets and global risk events. It analyzes the interconnectedness of green bonds with other sectors like conventional bonds, equities, crude oil, and monetary policy. Using the quantile connectedness approach, it reveals how stabilized green bond markets in both countries act as hedges during extreme situations. By examining time-varying spillover effects, it identifies commonalities and differences in linkages between green bond markets and other sectors. These findings endorse green bonds’ integration into finance and hold implications for enhancing portfolio management and risk models.

Revisiting fiscal deficit sustainability and revenue-expenditure nexus in India

The COVID-19 epidemic has brought to the emergence of fiscal sustainability as an exceptionally challenging issue for both emerging and advanced economies. In this context, it is imperative to assess the sustainability of fiscal deficit in India for the Central and State level for the period 1970–71 to 2021–2022 and 1973–74 to 2021–22, respectively. Furthermore, the study also seeks to establish the cause-and-effect relationship between government expenditure and revenue. The application of Gregory-Hansen cointegration test supports sustainability of fiscal deficits for Central and State governments individually. Additionally, the ARDL model for cointegration indicates that both governments exhibit "weak" sustainability of the fiscal deficit. Finally, the Toda-Yamamoto Granger non-causality test provides evidence in favour of the "spend-tax hypothesis" for both governments. In this backdrop, the present study posits that it is essential for governments to implement fiscal consolidation and prudent fiscal policies in order to reduce the magnitude of the budget deficit, optimise the execution of monetary and exchange rate policies, and foster development driven by the private sector. This approach is crucial to ensure long-term fiscal sustainability and economic stability in India, especially aftermath of the COVID-19 pandemic.

Pandemic shocks and macroprudential policy

Abstract We introduce an extended borrower–saver DSGE (Dynamic Stochastic General Equilibrium) model, where classifications of occupations are split further into two subcategories, according to whether their occupation is directly “affected” by a pandemic shock. We find that, contrary to the standard literature, during a pandemic shock an increase in the Loan-to-Value (LTV) ratio can increase social welfare and make all four agent types (borrowers affected, borrowers non-affected, savers affected, and savers non-affected) better off. Countercyclical optimal LTV rules are shown to increase social welfare, with savers gaining at the expense of borrowers, including those mostly affected by the pandemic. An interest rate mortgage subsidy to those worst affected (“affected” mortgage borrowers), in coordination with stricter monetary and LTV policy, are shown to increase both social welfare and the welfare of borrowers and savers affected by the pandemic.

Macroeconomic Determinants of the Gap between Domestic and International Gold Prices in Vietnam

This research investigates the factors influencing the disparity between domestic gold prices (SJC gold and 9999 gold) and global gold prices in Vietnam from January 2011 to December 2023. Using the Autoregressive Distributed Lag (ARDL) model, we identify key macroeconomic determinants impacting this price spread, including interest rates, oil prices, and consumer demand. Our findings reveal that higher interest rates are associated with larger price spreads, suggesting that monetary policy plays a significant role in the domestic gold market. Oil prices exhibit a negative relationship with the price spread for 9999 gold, indicating that rising oil prices tend to align domestic gold prices more closely with global trends. Consumer demand notably affects the SJC_Global price spread but not the 9999_Global spread, reflecting the different market dynamics of finished goods versus raw materials. Additionally, the error correction terms in both models indicate a robust mechanism for long-term equilibrium, demonstrating the Vietnamese gold market’s resilience. These insights highlight the need for policymakers to reconsider existing regulations, such as Decree 24, to ensure a stable and efficient gold market. The study concludes that while the Vietnamese gold market exhibits sustainable practices, regulatory revisions are necessary to support both market growth and community development. Future research should consider additional macroeconomic variables and the impact of regulatory changes over time to further understand the dynamics of gold price disparities in Vietnam.

A Bayesian vector-autoregressive application with time-varying parameters on the monetary shocks–production network nexus

ABSTRACT Transmission channels from monetary shocks might be identified by studying the features of the production network. The main aim of this paper is to provide insights about the role of production network into the propagation of monetary policy shocks in G7 economies. Time-varying Bayesian vector-autoregressions were built to compute impulse response functions of output to monetary policy shocks in these countries. Panel Auto-Regressive Distributed Lag Bound Approach based on Mean-Group estimator was used to assess the long and short-run connections between production network structure and various shocks associated to monetary policy in the period 2000–2018 and during the Great Recession (2007–2009). The results show that upstreamness is more significant than downstremness in the period 2000–2018, while the financial sector significantly contributed to the spread of various monetary shocks during the Great Recession.

55th Konstanz Seminar on Monetary Theory and Policy 2024

55th Konstanz Seminar on Monetary Theory and Policy 2024

Does local government debt management affect cross-border M&As? Evidence from China

The rapid expansion of government debt exacerbates systemic risks and tightens the credit transmission channels of monetary policy, posing a severe threat to the healthy development of firms. Existing literature mainly examines the impact of government debt on corporate financing behavior, innovation, and total output. Using data from a sample of Chinese A-share listed firms covering the period from 2001 to 2022, we investigate the impact of local government debt management on corporate cross-border mergers and acquisitions (M&As). Our analysis reveals that effective local government debt management promotes cross-border M&As by alleviating corporate financing constraints, intensifying market competition, and enhancing corporate risk-taking capacity. The findings offer fresh insights into achieving the dual objectives of risk prevention and stable growth through local government debt management and provide significant implications for boosting the high-quality development of the real economy.

Unveiling the Dynamics: Exploring the Relationship between Emerging Stock Market Prices and Macroeconomic Factors through ARDL Analysis

This study investigates the interaction between stock prices and prices in other markets using a panel ARDL model. Analyzing data from January 2004 to December 2022 for 19 emerging market countries, the study explores the impacts of gold prices, exchange rates, inflation rates, and interest rates on stock prices. The results indicate a long-term negative relationship, except for gold, between the variables. The effects are generally insignificant in the short run, except for gold's negative impact. The global financial crisis of 2008 negatively affected emerging market stock markets in both the short and long term. In the short run, the COVID-19 pandemic negatively impacted stock market returns, which turned positive in the long run. This study highlights the importance of sound monetary policies focused on price stability and fiscal policies aimed at reducing government dominance in financial markets to foster long-term growth in stock markets.

CBDCs, regulated stablecoins and tokenized traditional assets under the Basel Committee rules on cryptoassets

Purpose This paper examines the impact of Central Bank Digital Currencies (CBDCs), regulated stablecoins and tokenized traditional assets on the cryptocurrency market, following the guidelines set by the Basel Committee. This study aims to analyze the implications for secure storage, cross-border transfers and necessary investments. Design/methodology/approach The paper uses a policy analysis approach to assess the potential effects of the Basel Committee’s regulations on CBDCs, regulated stablecoins and tokenized traditional assets. It explores their impact on the cryptoasset market, strategies of central and commercial banks, payment systems and risk management. Findings The adoption of CBDCs, regulated stablecoins and tokenized traditional assets is expected to grow rapidly in the coming years. It raises concerns about secure storage, cross-border transfers and required investments. Central banks are likely to introduce CBDCs and authorize stablecoin issuance, aiming for efficient monetary policies and risk management. Basel III regulations may lead to asset tokenization by banks, reducing asset size and increasing fee-based income. Originality/value This paper provides insights into the potential impact of the Basel Committee's regulations on CBDCs, regulated stablecoins and tokenized traditional assets. It contributes to the understanding of the evolving cryptoasset market and the strategies of central and commercial banks in adopting these technologies. The findings offer valuable information for policymakers, regulators and market participants in navigating the changing landscape of digital assets.

Financial therapy for the Russian economy

Subject. The article addresses the monetary policy, balance of payments of Russia, securities market. Objectives. The aim is to assess the investment potential of the Russian economy, the banking system stability. Methods. The study employs methods of statistical analysis. Results. The paper shows that in the Russian economy, investment financing sources exceed the costs of net acquisition of non-financial assets. Opportunities to attract foreign investment by the middle of 2023 were largely lost. At the same time, there is an exponential growth in debt on loans from the non-financial sector, and an increase in the volume of intraday loans provided by the Bank of Russia. Conclusions. The nature of monetary policy is critical for Russia's economic development in the face of international sanctions.

Does Central Bank Transparency Matter for Inflation: Role of Inflation Targeting

This paper examines the relationship between central bank transparency and inflation for six inflation targeting (IT) and ten non-inflation targeting (non-IT) Asian economies. The propensity score matching and panel regression model are employed in the study. The empirical analysis shows that IT enhances central bank transparency. Further, we find that central bank transparency in IT significantly lowers inflation, suggesting that countries promoting greater monetary policy transparency can have a better advantage of experiencing low inflation. Our findings have policy implications for central banks in developing economies that are grappling with low transparency.

Impacto macroeconómico de la dolarización en el Ecuador durante el período 2006-2023

The macroeconomic impact is crucial for determining the well-being of a country. Analyzing variables such as Gross Domestic Product (GDP), inflation, unemployment, investment, and foreign trade allows for an assessment of a nation's economic health and financial stability. This article aims to analyze the impact of dollarization in Ecuador between 2006 and 2023. Adopted in 2000 to stabilize the economy and attract foreign investment; dollarization presented monetary and fiscal policy challenges. Authors like Cachanosky and Alvarado highlight the challenges in fiscal control and the relationship between exports and external income. The study employs a quantitative methodology, with regression analysis and time series based on data from the Central Bank of Ecuador. The results show moderate GDP growth and gross investment, as well as fluctuations in liquidity and credit to the private sector, along with persistent inequality in income distribution. The conclusions indicate that while dollarization has contributed to stability, it has limited the country's monetary autonomy. Additionally, dependence on external factors, such as U.S. monetary policy, has affected Ecuador's economic stability. The importance of diversifying the economy, promoting policies that foster sustainable and equitable growth, and reducing vulnerability to external fluctuations is emphasized.

Relationship between Public Expenditure and Inflation

Effective management of inflation remains one of the arduous tasks for managers of global economies. Inflation remains a macroeconomic indicator whose management outcomes have the potential to decide the electoral fortunes of elected governments and determine the purchasing power of household incomes. The purpose of this research was to assess how a steady increase in public expenditure could impact inflationary levels. The quantitative approach to scientific inquiry was adapted and used in the research. Specifically, the cross-sectional design formed the basis of the research. Data required for the research were obtained mainly from secondary sources. These included textbooks, peer-reviewed articles published in journals and grey literature. Other sources were Google Search Engine, including Netcials, MacroTrends, and databases of the World Bank and Bank of Ghana, among other significant sources. Respective data on Ghana’s annual GDP values from 1960 through 2020, annual inflation data from 1965 through 2020, changes in annual inflation rates from 1965 through 2020, and annual public expenditure values from 1983 through 2020 were collected and used in the research. Descriptive statistics and regression models were used to describe the research variables and to evaluate their behaviour over the stated time frame on inflation. The study revealed lax monetary policy as the root cause of consistently high inflationary rates over considerable periods and remained a strong contributor to the weak purchasing power of national fiat currencies. Further, relative price distortions away from their economic equilibrium are not healthy for the economy, while disinflationary policies adapted for implementation should be contingent on the causes of inflation. The single largest cost of inflation to consumers is the erosion of income, whereas higher tax rates are not the panacea for the challenges of mounting public expenditure and public debts. Respective inflation rates recorded in Ghana during 2012 (7.13%) and 1995 (59.46%) remained the lowest and highest from 1993 through 2020. Fiscal periods 2017 through 2020, 2009 through 2012, and 2005 through 2008 recorded the respective best (9.33%), second-best (11.46%) and third-best (13.32%) annual average inflation rates. With the exception of 2013 through 2016, the performance of the Ghanaian economy in relation to annual average inflationary control witnessed improvements during the second political and administrative terms compared to the first terms. However, the best annual average inflation rate over an eight-year period during the Fourth Republic was recorded from 2009 through 2016 (13.45%). Findings from the research revealed a positive and significant relationship between public expenditure and inflation (coefficient value = 1.2004653; p = 0.004, p < 0.05). Public expenditure accounted for 21.30% of the variation in inflation rate from 1983 through 2020. Results from the statistical output validated the significant influence of public expenditure on inflationary hikes, the need for monetary and fiscal policies related to inflation control to be strategically reviewed and strengthened to improve implementation outcomes, and the potential of rising public expenditure to undermine the rigidity and robustness of economic fundamentals through an unexpected surge in inflationary levels. The findings underscored the need for managers of various global economies to be keen on “economic” public expenditure to the neglect of profligate public expenditure, so the socio-economic derivatives from investments in public infrastructure would strongly add to, rather than subtract from, national development and growth efforts. The fundamental objective of MPC should be pivoted around three cardinal functions: the creation of maximum employment, moderation of long-term interest rates and ensuring price stability. Excessive public expenditure requires careful consideration by economies that whet their national development appetite with increased public infrastructure projects.

Monetary policy communication shocks and the macroeconomy

AbstractUsing high‐frequency identification, we provide evidence that Fed communication surprises have larger macroeconomic effects than surprise actions. Three ingredients are central to show this: structurally distinguishing between Fed actions and communication, controlling for the Fed information effect, and including the surprise measures directly in a vector autoregression (VAR) system instead of using them as instruments. We also compare the macroeconomic effects of Fed communication surprises relating to varying horizons into the future. Fed communication with a two‐year horizon appears most powerful during the effective lower‐bound period, consistent with theoretical predictions regarding Fed forward guidance.

Chanakya's Economic Doctrine: Insights from the Arthashastra

This paper delves into the intellectual depth of Chanakya's economic doctrines, as presented in his seminal work, the Arthashastra. By exploring Chanakya's perspectives on agriculture, trade, taxation, and Monetary policy, this paper not only aims to illuminate the economic principles that shaped ancient Indian society but also underscores their enduring relevance in contemporary times. This significance is particularly highlighted when considering the historical context, socio-economic conditions, and Chanakya's pragmatic governance approach.