Money Supply Shocks Research Articles

Understanding the Inflationary Process in the GCC Region: The Case of Saudi Arabia and Kuwait

This paper investigates the factors that affect inflation in the GCC region by examining the inflationary processes in Saudi Arabia and Kuwait. The paper utilizes a model that accounts for foreign factors affecting inflation, such as trading partners' inflation and exchange rate pass-through effect, as well as domestic influences. The analysis concludes that, in the long run, higher inflation in trading partners' countries is the main driving force for inflation in the two countries, with significant but lower contributions from the exchange rate pass-through effect and oil prices. Demand and money supply shocks affect inflation in the short run.

Understanding the Inflationary Process in the GCC Region: The Case of Saudi Arabia and Kuwait

This paper investigates the factors that affect inflation in the GCC region by examining the inflationary processes in Saudi Arabia and Kuwait. The paper utilizes a model that accounts for foreign factors affecting inflation, such as trading partners' inflation and exchange rate pass-through effect, as well as domestic influences. The analysis concludes that, in the long run, higher inflation in trading partners' countries is the main driving force for inflation in the two countries, with significant but lower contributions from the exchange rate pass-through effect and oil prices. Demand and money supply shocks affect inflation in the short run.

The effects of macroeconomic factors on South African agriculture

Significant research efforts have been devoted to understanding the effects of macroeconomic factors on the agriculture sector. Analysing the sources of volatility in the industry is critical for designing appropriate policies to stabilize agricultural markets, reduce poverty and increase economic growth. Agriculture is a competitive sector with prices that are more flexible than those in nonagricultural sectors. This article uses annual data over the 1957–2004 period and a vector error-correction model in investigating the dynamic effects of exchange rates, money supply and other macroeconomic variables on the agricultural sector in South Africa. Overall, real exchange rates, interest rates, inflation and money supply (M3) shocks have significant and persistent impacts on agricultural output, prices received by farmers and farm input prices. M3 and interest rate shocks tend to put agriculture in a cost-price squeeze. Agricultural price movements are a source of macroeconomic instability in the country. Real exchange rate shocks shift relative prices in favour of agriculture in the long-run, thereby, boosting farm incomes and accelerating poverty reduction in the country.

The cost channel of monetary transmission–revisited

This article empirically re-examines the importance of the cost channel of monetary transmission–the effect of money supply shocks on the costs of production and supply, as opposed to the traditional effect on demand. Unlike Barth and Ramey (2002), this article identifies the response of industry-level wages to money supply shocks by assuming long-run monetary neutrality. The pervasive findings of a positive response of real wages to money supply shocks in this study provide even stronger support for the cost channel than Barth and Ramey (2002).

What Causes The Asymmetric Effects Of Monetary Policy: Size or Sign of Money-Supply Shocks?

Recent research has moved from the question of whether the effects of monetary policy are asymmetric to the question of why. This paper sheds some light on the nature of these asymmetries by focusing on two distinct types: sign asymmetry (monetary expansions have different effects than monetary contractions) and size asymmetry (large monetary shocks have different real effects than smaller monetary shocks). Using quarterly data from the 1964–2004 period, money-supply shocks and their effects on output, consumption, and investment are estimated for a panel of 12 OECD countries. The paper's findings support both types of asymmetries.

Commodity Prices, Money and Inflation

The influence of commodity prices on consumer prices is usually seen as originating in commodity markets. We argue, however, that long run and short run relationships should exist between commodity prices, consumer prices and money and that the influence of commodity prices on consumer prices occurs through a money-driven overshooting of commodity prices being corrected over time. Using a cointegrating VAR framework and US data, our empirical findings are supportive of these relationships, with both commodity and consumer prices proportional to the money supply in the long run, commodity prices initially overshooting their new equilibrium values in response to a money supply shock, and the deviation of commodity prices from their equilibrium values having explanatory power for subsequent consumer price inflation.

The asymmetric effects of monetary shocks: the case of Turkey

This paper examines whether there is an asymmetry in the effects of positive versus negative and small versus big money supply shocks, and whether the effects of the shocks on output and prices vary over the business cycles in the case of Turkey. Negative shocks to money are found to have greater output and smaller price effects compared to the effects of positive shocks, irrespective of the initial state of the economy. It is also found that monetary shocks of different size affect output growth and inflation rates proportionately. These findings can be interpreted as evidence for the view that the short run aggragate supply curve is convex in such a country like Turkey.

The liquidity effect across the short end of the term structure

Because the Federal Reserve is constantly responding to developments in the economy, it has been difficult to come up with convincing estimates of the effects of exogenous shifts in money supply on interest rates. This study uses exogenous, well-identified reserve supply shocks to estimate how money supply shocks that last one day impact short-term interest rates. The results imply that the one-day liquidity effect is substantial, and that it impacts 30- and 90-day private-sector credit markets more than the expectations theory of the term structure predicts. The effect on public debt is smaller and statistically insignificant, implying that reserve supply shocks widen the gap between interest rates on public and private debt.

Does Bank Lending Affect Output? Evidence from an Emerging Market

Bank-level data is aggregated to test whether changes in bank loan supply affect output. Money demand shocks, money supply shocks and loan supply shocks are used as instruments. Using these shocks as an instrumental variable, we find that shocks to loan supply have large and statistically significant effects on the supply of bank loans, but money demand and supply shocks have statistically insignificant effects on output.

The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: A Quantitative Investigation

This paper studies dynamic-optimizing model of a semi-small open economy with sticky nominal prices and wages. The model exhibits exchange rate overshooting in response to money supply shocks. The predicted variability of nominal and real exchange rates is roughly consistent with that of G-7 effective exchange rates during the post-Bretton Woods era. The model predicts that a positive domestic money supply shock lowers the domestic nominal interest rate, that it raises output and that it leads to a nominal and real depreciation of the country`s currency. Increases in domestic labor productivity and in the world interest rate too are predicted to induce a nominal and real exchange rate depreciation.

Inflation and the Distribution of Relative Prices: The Role of Productivity and Money Supply Shocks

This paper examines the role of aggregate productivity and money supply shocks in determining the relationship between inflation and the distribution of relative commodity prices. I estimate a restricted VAR that includes aggregate variables and individual commodity prices and compute the cross-sectional distribution of the dynamic responses of commodity prices to these aggregate shocks. The findings indicate that both shocks lead to positive correlation between inflation and the dispersion of relative prices and that the response of prices across commodities is not uniform, even in the long run.

Durable goods and the forward-looking theory of consumption: Estimates implied by the dynamic effects of money

In this paper, we analyze the effects of money on the market for durable goods. Using quarterly US data, we estimate the dynamic responses of the price and quantity of durable goods and housing to money supply shocks, assuming only that money is neutral in the long-run. We then match these responses to those predicted by an equilibrium model of the markets for durable goods; the model relies on the standard theory of intertemporal consumer choice and the trade off between durable and non-durable goods. We find that money has important dynamic effects on the markets for durable goods, and that the theory provides a reasonable framework for interpreting these responses for plausible parameter values.

Durable Goods and the Forward-Looking Theory of Consumption: Estimates Implied by the Dynamic Effects of Money

In this paper, we analyze the effects of money on the market for durable goods. Using quarterly US data, we estimate the dynamic responses of the price and quantity of durable goods and housing to money supply shocks, assuming only that money is neutral in the long-run. We then match these responses to those predicted by an equilibrium model of the markets for durable goods; the model relies on the standard theory of intertemporal consumer choice and the trade off between durable and non-durable goods. We find that money has important dynamic effects on the markets for durable goods, and that the theory provides a reasonable framework for interpreting these responses for plausible parameter values.

Cross‐Country Variation in the Liquidity Effect: The Role of Financial Markets

This paper examines cross-country variation in the liquidity effect – the negative response of interest rates to money supply shocks – focusing on the role of financial factors in explaining this variation. We estimate the liquidity effect for each of 21 countries using VAR models in which money supply shocks are restricted to be neutral in the long-run, then regress the estimated liquidity effect on financial market variables across countries. We find that financial factors play an important role in determining the magnitude of the liquidity effect, and that this evidence is most consistent with generalised versions of limited-participation models.

Inflation and the Distribution of Relative Prices: The Role of Productivity and Money Supply Shocks

This paper examines the role of aggregate productivity and money supply shocks in determining the relationship between inflation and the distribution of relative commodity prices. I estimate a restricted VAR that includes aggregate variables and individual commodity prices, and compute the distribution of the dynamic responses of commodity prices to these aggregate shocks for each forecast horizon. The findings indicate that both shocks lead to positive correlation between inflation and the dispersion of relative prices, and that the response of prices across commodities is not uniform, even in the long-run.

Endogenous Growth with Nominal Frictions

This paper analyzes monetary business cycles in the framework of a two-sector endogenous growth model with nominal frictions, which stem from overlapping wage contracts. When the accumulation of human capital is considered as home production, it almost insulates the market sector from money supply shocks. Though small, the impulse responses of market output, investment, and paid hours of work are contrary to those observed both in models with exogenous growth and in the data. Both problems are resolved if the production of human capital is considered a market activity, too. This case also provides a better description of the data than a benchmark model with exogenous growth. The additional channel of intertemporal substitution provided by human capital accumulation however, does not introduce greater persistence of monetary shocks.

On the Relevance of Open Market Operations

This paper reexamines the role of open market operations for short-run effects of monetary policy. Money demand is induced by a cash constraint, while the central bank supplies money exclusively in exchange for securities, discounted with a short-run nominal interest rate. We consider a legal restriction for open market operations by which only government bonds are eligible, whereas private debt is not accepted as collateral for money. Supply of eligible securities is bounded by assuming fiscal policy to ensure government solvency. The model provides an endogenous liquidity premium on noneligible assets and liquidity effects of money supply shocks regardless whether prices are flexible or set in a staggered way. Nominal interest rate policy is always associated with a uniquely determined price level and rational expectations equilibrium. It is further shown that an intuitive equivalence principle between money supply and interest rates arises in this case.

An Examination of the Asymmetric Effects of Money Supply Shocks in the Pre–World War I and Interwar Periods

We test whether monetary shocks had asymmetric output effects before World War II. Ball and Mankiw (1994) show that expectations of persistent inflation under fiat money can explain why negative monetary shocks had larger effects than positive shocks after World War II. Consistent with this explanation, we find such asymmetry in the interwar period following the abandonment of the gold standard and before it, when agents arguably anticipated this development. We find no monetary asymmetry before World War I, which is consistent with Ball and Mankiw (1994), because under a credible gold standard, agents do not expect persistent inflation.

Estimating the liquidity effect in post-reform Chile: do inflationary expectations matter?

In this paper, we estimate the dynamic effects of domestic money supply shocks in Chile over its post-reform era. We analyze Chile since inflationary expectations could be very sensitive to changes in the money supply, given past inflationary experience. In the context of a VAR model containing both Chilean and US variables, we identify money supply shocks using long-run monetary neutrality and block exogeneity restrictions. Our findings suggest that in Chile over the period from 1977 to 1998, unexpected domestic money supply shocks have had a positive impact on interest rates, in the short-run, and a negative impact on real money balances. This differs markedly from the estimated responses of the US. The findings are consistent with the notion that, at least in Chile, inflationary expectations are very sensitive to news about the nominal money supply, possibly due to high inflationary uncertainty and the lack of credibility of monetary reforms. Our results are generally robust to alternative model specification and identifying restrictions.

The Fed's Effect on Excess Returns and Inflation is Much Bigger Than You Think

Author(s): Goto, Shingo | Abstract: We find that between 20 and 25 percent of the negative covariance between excess returns and inflation is explained by shocks to monetary policy variables. The finding is robust to changes in the monetary policy rule that have occured during the 1966-1998 period. The result contradicts the theory that money supply shocks induce a positive correlation between inflation and returns. Our findings also cast doubt on models that explain the negative correlation in a money-neutral environment (Boudoukh, Richardson, and Whitelaw (1994)), and on models that account for this correlation as being due solely to money demand shocks (Fama (1981), Marshall (1992)). We argue that contractionary monetary policy lowers excess stock market returns through various channels. Furthermore, if the Fed has some private information about future inflation, then a contractionary monetary shock will be followed by an increase in inflation, in the short run. The combined effect is a negative inflation/excess returns correlation. The results lend support to the argument that if asset pricing models are to capture the observed negative correlation, they must incorprate monetary policy effects.