Policy Shocks Research Articles

The long-run effects of monetary policy: The role of R&D investment in economic growth

This study examines the long-term economic effects of monetary policy, focusing on its impact on research and development (R&D) investment and firm productivity. Using data from Compustat, we analyze productivity’s response to monetary policy shocks, with an emphasis on the role of firm size, age, and leverage as indicators of credit constraints. We use high-frequency financial market data to identify monetary policy shocks through a local projections–instrumental variables (LP-IV) approach. Our findings reveal that smaller, younger, and less leveraged firms are more adversely affected by contractionary monetary policies, suggesting a significant impact on their R&D investments and subsequent productivity, particularly in the manufacturing sector. The findings also highlight that tight monetary policy has a persistent negative impact on firm productivity via reduced R&D investment, underscoring the need for policies like R&D subsidies to support long-term economic growth.

The impact of fiscal shocks on economic growth and income inequality in Ghana: is there a trade-off?

PurposeThe study examines the impact of fiscal policy shocks on economic growth and income inequality in Ghana. This has become necessary because of the interdependence between growth and income inequality and the role fiscal policy plays in this relationship in the development process of a country. Thus, a study that investigates how government expenditure shock and tax revenue shock influence the relationship between economic growth and income inequality could assist policymakers to adopt the best policy mix to ensure income equity and sustained economic growth in Ghana.Design/methodology/approachIt employs sacrifice ratio from structural VAR model using quarterly time series data from 1996 to 2019 on Ghana.FindingsOur results show that government expenditure shock impacts economic growth, exchange rate and education positively and significantly in the long run. Also, tax revenue shock has a positive impact on income inequality, economic growth and education. The findings further show that there exists a trade-off between economic growth and income inequality in the long run.Originality/valueThe relationships between fiscal policy shocks, economic growth and income inequality have been extensively discussed among scholars. Understanding how these three macroeconomic variables are determined and their interrelationships are crucial for policymakers. This is because fiscal policy aids in both economic growth and income inequality. In the empirical literature, the emphasis has been on independently estimating the growth effects of fiscal policy or the distribution effects of fiscal policy, leaving out the existence of possible trade-off between economic growth and income inequality following a fiscal shock. To the best of our knowledge, no empirical study has been done on Ghana to empirically examine the trade-off between economic growth and income inequality as we do in this paper.

The ripple effect: How trade policy shocks impact innovation of Chinese firms

AbstractThis article examines how trade policy shocks impact firm innovation indirectly through information sharing across firms. Using a unique dataset of Chinese firms between 2000 and 2013, we identify connections between firms by exploiting spillover effects of antidumping. Empirical results show that antidumping has negative spillover effects on firm innovation through information exchanges across firms in market or product networks. Trade restrictions on extensive and intensive margins work as important channels through which the networks impact firm innovation. Our findings provide new empirical evidence on indirect effects of antidumping on firm innovation and better understanding on channels of trade policy shocks.

Can new urbanization pilot policies promote green technology innovation in cities: Empirical evidence from China.

The development of urbanization has brought new challenges to the ecological environment, and the promotion of green technology innovation and development is widely recognized as an essential method to achieve cities' economic benefits and environmental protection. This paper examines whether the new urbanization pilot policies (NUP) increase green technology innovation (GTI) from both theoretical and empirical perspectives. This paper examines the impact of new urbanization on GTI by analyzing data from 285 cities in China between 2010 and 2021, using the multi-period DID model with the implementation of NUP as an exogenous policy shock. The study results indicate that NUP significantly affects GTI, and the conclusion still holds after the parallel trend test, placebo test, and other robustness tests. Heterogeneity analysis shows that the NUP significantly enhances GTI in low environmental pollution, non-resource-based, Medium-sized, and Central Region cities. The test of moderating effect shows that NUP has a "linkage effect" with the government's environmental attention, financial investment in innovation, and regional talent pooling. The findings of this paper provide empirical evidence and decision-making reference for promoting NUP and sustainable development of cities.

Missing growth and economic fluctuations: Empirical evidence from Korea

We compute missing growth due to imputation practices in Korea by applying the market share approach of Aghion et al. (2019) and investigate its contribution to the trend and the cyclicality of measurement errors in official inflation and GDP. We find that missing growth is strongly procyclical and that it correlates significantly to an oil shock and a monetary policy shock. The procyclical missing growth, together with the significant correlation with a monetary policy shock, provides additional difficulties in identifying the slope of the Phillips curve from officially measured statistics. Furthermore, missing growth complicates the policy tradeoff between inflation and output stabilization in the face of cost-push shocks, calling for a greater emphasis on inflation stabilization.

Global Spillovers from Fed Hikes and a Strong Dollar: The Risk Channel

We study the international transmission of US monetary policy shocks and a strong US dollar. We show that monetary tightening is linked to a higher risk premium, only in emerging markets, measured by deviations from uncovered interest parity. An appreciation of the US dollar, on the other hand, does not lead to higher risk premia anywhere, even though countries' currencies depreciate vis-a-vis the dollar. Our interpretation is that monetary policy shocks are a better proxy for global financial conditions than the exchange rate movements that may be capturing more fundamental shocks.

Monetary policy and wealth inequality

AbstractThis thesis examines how monetary policy shocks affect wealth inequality in Australia. I analyse how a monetary policy shock, through asset price responses, affects household balance sheets and wealth inequality measures. I find that contractionary monetary policy reduces the wealth gap, but also disproportionately increases the wealth share of the most affluent Australians. This is driven largely by the response of house prices to an increase in the central bank's policy rate. I use a novel methodology to overcome the data limitations that usually impede studies of wealth inequality, and I produce results with implications for central bankers and policymakers. My results are robust to numerous lag specifications, modelling techniques and identification strategies.

Estimating the importance of monetary policy shocks for variation in the U.S. homeownership rate

Being a homeowner is one of the tenets of the American dream. In general, relative to renting, people see homeownership as a path to wealth through the usual appreciation of the house prices and the forced savings through mortgage payments but also a path to financial stability through more stable and predictable housing costs (Young et al., 2023).

Global Spillovers of China's Monetary Policy

AbstractSpillovers from China's monetary policy have become increasingly obvious with China's growing importance in the global economy and its close economic and trade ties with the world. This study establishes a proxy structure vector autoregression model to investigate the magnitude and transmission channel of spillovers from China to global and regional economies, taking advantage of high‐frequency changes in asset prices in the financial markets to identify monetary policy shocks. The analysis reveals that China's monetary policy can affect the global economy by influencing international trade and commodity prices but there is no evidence of China's monetary policy affecting global financial variables. Tightness in China's monetary policy can cause a decline in world output whereas expansion in monetary policy can support global trade and output. This study also finds that the response of emerging Asian economies to China's monetary policy shock was nearly twice that of developed economies, while the transmission path did not change. The results of this study are consistent with the stylized fact that China's monetary policy plays an important role in the global trade and commodity cycle, although it does not drive the global financial cycle.

Monetary policy shock and corporate innovation: Evidence from China

This paper investigates whether and how monetary policy shock (MPS) affects corporate innovation using a large sample of 3,082 Chinese listed firms over the period 2007–2019. We provide robust evidence that firms increase their innovative activities when faced with MPS. Further analyses show that firms in competitive industries or with less market power are more inclined to increase innovation in the event of MPS, and that the influence of MPS on corporate innovation is more pronounced for firms with more growth opportunities or better financial conditions. We also find that firms tend to increase innovation to a larger extent in expansionary periods than in contractionary ones.

THE EFFECTS OF MONETARY POLICY SHOCK: EVIDENCE FROM SYSTEMICALLY IMPORTANT ECONOMIES

In the paper, we explore the effects of monetary policy shock on the economic growth in systemically important countries such as the US, the Euro Area and China and their impact on Ukraine. Thus, the war in Ukraine and the rise of key policy rates by central banks to curb inflation have had a significant negative impact on economic activity. There has been both a significant decrease in trade activity and a slowdown in the services sector growth, which was the main engine of global economic growth at the beginning of 2023. Based on the vector autoregression model results, we demonstrated a slight initial decline of GDP growth with following stabilization in response to the rise of key policy rates in the US. In China, this decline is much bigger and constitutes 11% after the shock. In the Euro Area, we also observe a similar pattern as in the US with an initial decline up to 2% and a further return to equilibrium. Analyzing the results of the forecast error variance decomposition, we should note that GDP fluctuations in systemically significant economies are mainly explained by their own fluctuations. The key policy rate’s contribution ranges from 1% in the US to 11% in China. At the same time, economic growth in China is less vulnerable to inflation fluctuations, in the Eurozone we observe the most sustained one among the considered economies. In addition, the study shows that the key policy rate in the United States has a positive effect on the one in Ukraine.

MONETARY POLICY DYNAMICS IN NIGERIA: EMPIRICAL EVIDENCES FROM BAYESIAN VECTOR AUTOREGRESSION WITH STOCHASTIC VOLATILITY

In this paper, we examine the dynamics of monetary policy in Nigeria with Bayesian approach to a vector autoregression (VAR). We construct and estimate Bayesian Vector Autoregression with Stochastic Volatility (BVAR-SV) model and extract important policy inputs from the model. Nigeria economy is unstable and it is a known fact that changes to monetary policy affects performance of some macroeconomic variables. The BVAR has the ability to capture sudden changes and nonlinearities arising from the interaction among macroeconomic variables and associated shocks. The study uses monthly data during the period 2003M01 till 2023M12 with three macroeconomic variables namely; inflation rate, money supply, and interest rate. A Markov Chain Monte Carlo algorithm that allows for Bayesian estimation and prediction is employed. Results show that there is strong evidence of monetary policy playing a significant role in explaining the dynamics of interest rate while the impulse responses for the variables to a monetary policy shock do change significantly over time. Also, the monetary policy exert less significant influence in terms of money supply and inflation than interest rate in explaining the dynamics in of monetary policy. It is recommended that BVAR should be also be extended to other macroeconomic variables to examine the effects on monetary policy dynamics.

A novel dynamic grey multivariate prediction model for multiple cumulative time-delay shock effects and its application in energy emission forecasting

Energy emission systems are often influenced by external information and policy shock. However, conventional grey models ignore the existence of the impact of multiple shock events and cumulative time-delay effects, which are crucial for achieving accurate forecasts. From a dynamic perspective, we aim to establish a multivariable grey prediction model considering the impact of multiple shock events, namely MSGTDM(1,N) model. Specifically, to accurately describe the impact of different types of external shocks on the system, three kinds of nonlinear dynamic shock functions are designed, including growth dynamic shock function, decline dynamic shock function, and slope dynamic shock function. Based on this, multi-dimensional instantaneous shock utility terms and cumulative time-delay utility terms are constructed to accurately measure shock effects. And Whale Optimization Algorithm is employed to determine the optimal parameters of the shock functions through comprehensive comparative analysis. The findings affirm the MSGTDM(1,N) model's higher predictive accuracy and validity. Consequently, the forecast results of China's carbon emissions from coal and natural gas consumption in 2022–2025 provide a reliable basis for adjusting the energy structure and implementing the “dual-carbon” policy effectively.

Deciphering the black-box of monetary policy transmission in South Asia

Purpose ─ This study aims to identify the role of the bank capital channel by investigating how monetary policy affects bank lending through its influence on bank equity capital, in the transmission of monetary policy.Method ─ The study employs panel vector autoregression (pVAR) to investigate the complex relationship between monetary policy shocks, bank capital, and lending behavior. Results ─ The main findings are as follows: 1) The study finds evidence of both the bank lending and bank capital channels in South Asia. The analysis reveals a Granger causality between changes in bank capital position and policy rate adjustments, indicating a dynamic interplay between these variables. 2) The findings suggest, although direct effects of capital position changes on bank lending appear negligible, a nuanced examination uncovers the moderating influence of capital position changes on the impact of policy rate fluctuations on lending behavior. 3) The study suggests that healthier banking systems weaken the bank lending channel in South Asia.Implications/Significance ─ The study is significant because it sheds light on the mechanism involved in the interplay between monetary policy, bank capital, and lending, providing valuable insights for policymakers and future research directions.

Comprehensive intellectual property ability and firm productivity: A quasi-natural experiment based on national intellectual property demonstration advantage firm policy in China.

Intellectual property is crucial for the development of firms. At the micro level, firm comprehensive intellectual property ability involves abilities about intellectual property creation, utilization, protection, and management. In order to develop the comprehensive intellectual property ability of firms, the China National Intellectual Property Administration began to implement the national intellectual property demonstration advantage firm (NIPDAF) policy in 2013. Based on this exogenous policy shock, using data from listed companies from 2011 to 2020 as the research sample, the time-varying DID method is used to test the impact of the NIPDAF policy intended to cultivate comprehensive intellectual property ability on firm productivity. The results show that after policy implementation, the total factor productivity of NIPDAFs increased by about 3.3% compared to the control group. This finding is robust after a series of tests. Furthermore, the NIPDAF policy promotes firm productivity through stimulating technology innovation, improving investment efficiency, and enhancing competitive advantage. In addition, the NIPDAF policy has a more significant incentive effect on the total factor productivity of non-state-owned enterprises, firms in the eastern region, and firms in patent intensive industries.

External financial and monetary policy shocks: Do they matter for Korean macroeconomy?

Given Korea's status as a small, open economy, it exhibits a pronounced sensitivity to external shocks. Consequently, this article seeks to elucidate the impact of external financial and monetary policy shocks on the fluctuation of critical macroeconomic variables within Korea. Employing Bayesian estimation alongside the impulse response function for empirical analysis, the findings reveal that external financial and monetary policy shocks precipitate declines in exports, output, employment, real wages, consumption, investment, and imports. Conversely, these shocks are associated with increases in both the price level and inflation, highlighting the multifaceted effects of external pressures on the domestic economic landscape. Further, through forecast error variance decomposition, this study demonstrates that, relative to shocks stemming from productivity, terms of trade, and real exchange rate variations, external financial and monetary policy shocks exert a considerably milder impact on the fluctuations of Korea's key macroeconomic variables. This insight suggests a potential area for enhancement in the existing Korean literature on this topic, advocating for the integration of these findings to enrich understanding and analysis. In summary, by delving into the nuanced effects of external shocks on Korea's economy, this article contributes valuable perspectives to the discourse, suggesting avenues for further research and policy formulation. The integration of these results into the broader body of Korean economic literature could significantly augment current understandings and interpretations of Korea's economic dynamics in the face of global financial and monetary turbulence.

The asymmetric response of sovereign credit default swaps spreads to risk aversion, investor sentiment and monetary policy shocks

This paper investigates the determinants of sovereign credit default swaps spreads in the case of European countries. More specifically, it purposes to yield insight into how sovereign credit default swaps spreads respond to changes in investor sentiment, risk aversion, and monetary policy shocks during different market states. Using monthly data from May 2009 to December 2021 and running the quantile regression model, we show that risk aversion, investor sentiment and monetary policy affect the sovereign credit risk changes, and their effects vary across countries and markets states. More importantly, Risk aversion and monetary policy display the major asymmetric role in explaining CDS premia. However, limited asymmetric explanatory power is shown for investor sentiment. Furthermore, our findings demonstrate that the recent European debt crisis has significantly shaped the sensitivity of the sovereign credit risk spreads to the studied determinants. The findings of this study are helpful for investors in forecasting sovereign European credit spreads and hedging the countries default risk.

The Specific Impact of Monetary Policy on Macroeconomic Fluctuations

The stability of monetary policy is crucial for overall economic stability, as both excessive tightening and excessive easing may lead to increased economic fluctuations and financial risks. This paper incorporates zero-interest-rate constraints and monetary policy shocks into a general equilibrium model to discuss the specific impact of monetary policy on macroeconomic fluctuations. The study reveals that when the economy reaches the zero lower bound of interest rates, the overall instability and vulnerability of the macroeconomy significantly increase. Even minor shocks can then result in severe fluctuations. In such circumstances, corresponding monetary policies can be employed to maintain the stability of the financial system. Additionally, effective coordination between monetary policy and macroprudential policy should be emphasized to minimize the losses from adverse shocks.

Macroeconomic impacts of monetary and fiscal policy in the euro area in times of shifting policies: A SVAR approach

This paper analyses the impacts of monetary and fiscal policy of the euro area on output and inflation between 2005 and 2022 using a structural vector autoregressive (SVAR) approach. We employ three alternative indicators of monetary policy, alongside government spending and revenue as fiscal variables to estimate the effects across different subperiods. The findings reveal that monetary policy tightening produces a negative and delayed effect on both output and inflation, with the effects differing across alternative monetary policy indicators in terms of duration and magnitude. A fiscal revenue shock is found to be inflationary, whereas a fiscal spending shock initially has a negative effect on growth that later turns positive, but is short-lived. The effects of fiscal policy shocks are more substantial than the effects of monetary policy shocks. The results also suggest that the effects may differ across subperiods, depending on the nature and intensity of the policy shifts.

Debt vulnerabilities and house price responses to external shocks

This paper investigates whether the responses of house prices to external shocks, including US monetary policy and global geopolitical risk shocks vary, depending on country-specific vulnerabilities. We find that the responses of emerging market economies’ housing prices to both US monetary policy shocks and geopolitical risk shocks are higher in magnitude and duration than those of advanced economies. We also demonstrate that emerging market economies’ housing price responses to both shocks are much more robust in more vulnerable economies. In contrast, advanced economies’ responses are relatively less affected by debt level.