Policy Stance Research Articles

The spillover of shadow interest rate to the excess returns in emerging markets

Purpose - This study focuses on the monetary policy transmission of the U.S. on the excess returns in emerging markets by estimating the impacts of changes in the shadow interest rate in the U.S. on the Barclays Benchmark EM FX Trend Excess Return Index (FXERI) and the Barclays Cross Asset Trend Index – EM FX ER (CRASERI). Methods - To account for the spillover effects of the macroeconomic and financial variables, this study employs a bivariate VARMA–AGARCH approach. This study employs 206 daily observations, from February 22, 2002, to July 5, 2019 sourced from The Barclays database and the Reserve Bank of New Zealand Findings - This study finds that the shocks in shadow interest rates will decrease the Barclays Benchmark EM FX Trend Excess Return Index (FXERI) and the Barclays Cross Asset Trend Index – EM FX ER (CRASERI) in the short term. The results of VARMA–BEKK–AGARCH model show that changes/shocks in shadow interest rates will reduce the excess returns in the financial markets of emerging countries in the long term. Implication - The study reveals that a high-interest rate policy could be used as a tool by the FED to prevent excessive returns on emerging countries' financial markets Originality - This study contributes to the existing literature by addressing the issue of whether the monetary policy stance of the U.S. after the Global Financial Crisis (GFC) can be recognized as the primary source of the currency excess returns and multiple-asset class excess returns for emerging countries.

The Risk Management Approach to Macro-Prudential Policy

Macro-prudential authorities need to assess medium-term downside risks to the real economy, caused by severe financial shocks. Before activating policy measures, they also need to consider their short-term negative impact. This gives rise to a risk management problem, an inter-temporal trade-off between expected growth and downside risk. Predictive distributions are estimated with structural quantile vector autoregressive models that relate economic growth to measures of financial stress and the financial cycle. An empirical study with euro area and U.S. data shows how to construct indicators of macro-prudential policy stance and to assess when interventions may be beneficial. JEL Classification: G21, C33

Are All Politics National? County-Level Social Contexts and Inequality Remediation Attitudes, 2006 to 2012

Despite growing economic inequality in recent decades, public support for government intervention to address it has been stable. A substantial literature has documented the individual-level demographic, social, and political characteristics that are associated with the extent to which individuals favor government intervention to reduce inequality. However, less work has examined how the local social environments that individuals are embedded in shape attitudes regarding inequality remediation. Using data from the General Social Survey (2006–2012) and other data sources, the authors examine whether local economic and social characteristics are associated with individuals’ support for government intervention to address income inequality in the United States during the Great Recession. Specifically, the authors link restricted General Social Survey data with place-level identifiers to county-level data on local income inequality, racial segregation, and partisan leanings. Broadly, the authors find that although individual-level conditions and year fixed effects are strongly correlated with perceptions about inequality remediation, most local-level characteristics were not strongly nor significantly associated with individual attitudes regarding government intervention to address inequality. These findings suggest that individuals formulate policy stances regarding inequality on the basis of national messaging rather than on observations within their own communities.

On the History of Formation of Modern Taiwan Stance on the Rights to Maritime Features and Area in the South China Sea

The article highlights the history of formation of the official Taiwanese discourse on the problems of territorial affiliation and legal claims to the islands in the South China Sea. Two leading political parties of Taiwan (Guomindang and DPP) have substantial differences in their approach to the sovereignty on the features in SCS and “historical rights” to the sea. Details are given about reasons for emergence and disappearance of the concept of "historical waters" in the Taiwanese law, which allegedly should have been subject to the jurisdiction of the Republic of China. Taiwan's activities on the two features in the SCS aimed at demonstrating their "effective occupation" are highlighted. Official stance of different administrations and its changes are considered in detail. While sharing the same approach to the status of Taiping island, Guomindang and DPP disagree on affiliation of all other land features in the SCS. When considering the interpretation of the notorious "U-shaped line" by Taiwanese politicians, a conclusion is made about the actual proximity of the foreign policy stances of the PRC and the Guomindang, which are based on the idea of the common Chinese identity, revealed by significant part of the Taiwan inhabitants. As for the approach of DPP to the problem of SCS, the determining factor here is the Taiwanese identity of its supporters. This further complicates the situation: the DPP, on the one hand, proclaims sovereignty over all SCS facilities to demonstrate unity with PRC on the issue of China's territorial integrity, on the other hand — pragmatically recognizes the impossibility of actual exercising its nominal sovereignty over the disputed territories. Thus an obvious contradiction between theory and practice in the Taiwanese policy is revealed. The nuances of Taiwanese attitude to the award of the Hague Tribunal on the Philippines vs China case are elucidated. The reasons of the tribunal’s refusal to provide status of island to the biggest feature in Nansha group are determined.

Monetarna politika ECB u vreme pandemije

This paper aims to point out the monetary policy measures that the European This paper aims to point out the monetary policy measures that the European Central Bank has taken since the outbreak of the COVID-19 crisis. In the Eurozone, at the start of the COVID-19 crisis, financial conditions deteriorated sharply, potentially threatening to worsen the economic outlook, deepen market fragmentation, jeopardize monetary policy transmission, encourage a downward inflationary trajectory, weaken prices and undermine public and private stability. Aware of the new situation of the ECB, it responded quickly and efficiently with coordinated and ambitious measures to alleviate the perceived financial and economic difficulties. To maintain a flexible monetary policy stance, the ECB adopted an interim non-standard measured COVID-19 Asset Purchase Program (PEPP) to mitigate and improve financial conditions and restart an earlier Asset Purchase Program (APP) aimed at inflation expectations. At the same time, other measures have been strengthened and expanded, such as Targeted Long-Term Refinancing Operations (LTROs, TLTRO III, and PLTRO) aimed at providing liquidity ampleness to the real sector and collateral standards. The implementation of the adopted measures has influenced the stabilization of the economic and financial system of the EU and improved lending to corporate and household banks.

Stock Returns and Monetary Policy Stance

This paper investigates the structural relationships between monetary policy and stock returns. We build an asset pricing model incorporating a standard monetary policy rule into a consumption-CAPM framework. Our model quantitatively explains the negative risk premium of expansionary monetary policy. It also suggests that (expansionary) monetary policy beta is negatively related to covariances of returns with output gap and inflation. In addition, related to the premise of its stabilization role, a hawkish monetary policy stance predicts rises in future consumption growth and inflation. These results are consistent with empirical evidence. Furthermore, we provide theoretical predictions on how the slope of the Phillips curve and the response parameters of monetary policy affect the cross-section of returns.

U.S. Monetary Policy Spillovers to Emerging Markets: Both Shocks and Vulnerabilities Matter

Using a macroeconomic model, we explore how sources of shocks and vulnerabilities matter for the transmission of U.S. monetary changes to emerging market economies (EMEs). We utilize a calibrated two-country New Keynesian model with financial frictions, partly-dollarized balance sheets, and imperfectly anchored inflation expectations. Contrary to other recent studies that also emphasize the sources of shocks, our approach allows the quantification of effects on real macroeconomic variables as well, in addition to financial spillovers. Moreover, we model the most relevant vulnerabilities structurally. We show that higher U.S. interest rates arising from stronger U.S. aggregate demand generate modestly positive spillovers to economic activity in EMEs with stronger fundamentals, but can be adverse for vulnerable EMEs. In contrast, U.S. monetary tightenings driven by a more-hawkish policy stance cause a substantial slowdown in activity in all EMEs. Our model also captures the challenging policy tradeos that EME central banks face. We show that these tradeoffs are more favorable when inflation expectations are well anchored.

Lebanon and the Syrian Civil War: Sectarian Perceptions and Positions

ABSTRACT This paper analyses the role of sectarian identity in foreign policy making by bringing sub-state sectarian actors into foreign policy studies. The paper takes Lebanon and the Syrian Civil War as a case study through a close scrutiny of the emergence and the consolidation of foreign policy orientations, preferences and behaviour of the Maronite, Sunni, Shia and Druze leaders in Lebanon. By doing so, it asks how sectarian groups behave as sub-state foreign policy actors in countries where society is divided along sectarian identities and how sectarian identities matter in terms of the definition of the self and the other and the ally and the enemy in weak states. It further questions to what extent sectarian groups can be considered as sub-state foreign policy actors with their own perceptions based on their identities. Building its main findings on various fieldworks in Lebanon conducted in 2016 and 2017, interviewing leaders of major sects; this study concludes that in the absence of a cohesive foreign policy stance in a weak state, the role of sectarian identity in defining self and other becomes central for understanding the foreign policy choices of sectarian leaders faced with an existential challenge.

Does Fiscal Stance affect Public Expenditure: Evidence from Kenya

The purpose of this paper is to examine the effect of fiscal policy stance on public expenditure in Kenya while underpinned by the; Theory of fiscal policy, Peacock-Wiseman hypothesis and Wagner’s Law of increasing state activities. The methodology used was time series modelling involving the following steps; firstly, employing descriptive statistic analysis. Secondly, diagnostic testing involving stationarity test, cointegration test and Granger causality tests. Thirdly, time series modelling was done using VECM and VAR models. Finally, post-diagnostic tests involving serial correlation test and heteroscedasticity test. The research indicates that there is a negative relationship between fiscal policy stance (budget deficit) and public expenditure but fiscal stance through tax has a positive relationship with public expenditure. Fiscal policy stance and public expenditure are cointegrated as shown by the Johansen cointegration test but there is no short run causality between them as indicated by the Wald test statistics. The study is limited to fiscal policy stance and public expenditure in Kenya while considering selected macroeconomic factors. The research findings are vital to policy makers. Fiscal policy stance indirectly affects public expenditure through economic growth and macroeconomic factors. This implies that fiscal policy stance does not have a strong direct effect on public expenditure as supported by the theory of fiscal policy that contends that policy makers could have a lower incentive to pursue public interests as compared to their personal interests.

The Direction and Intensity of China’s Monetary Policy: A Dynamic Factor Modelling Approach*

The recent update of the People’s Bank of China’s monetary policy framework establishes a corridor system of interest rates. We employ a dynamic factor modelling approach to derive an indicator of China’s monetary policy stance. The approach is based on the notion that co‐movements in several monetary policy instruments have a common element that can be captured by a single underlying, unobserved component. To clarify and interpret the derived index, we employ a baseline dynamic stochastic general equilibrium (DSGE) model that can be solved analytically and allows tracing of the expansionary and contractionary on‐and‐off phases of Chinese monetary policy.

Adverse Supply Shocks and the Financial Response: An Empirical Study of Pakistan

The present paper has examined the role of monetary policy in mitigating the adverse supply shocks (i.e. rise in oil prices). A typical monetary policy is regarded as the stabilizing policy and it is responsible to safeguard an economy in the emergence of any negative shock from the external world. Pakistan's economy has been vulnerable to oil price fluctuations and it has often faced the long run negative impact, for instance the negative effects of 2008 commodity crises which were mainly because of the abrupt rise in oil prices. The monetary policy of Pakistan usually follows the tight policy stance as a response to such adverse supply shocks but the question always remain, how effective is it in mitigating those negative effects? In this regard, the present study has explored the effectiveness of monetary policy stance in Pakistan. In order to achieve the underline objective, this study has used the Shutdown Methodology in Structural Vector Autoregressive (SVAR) models on the quarterly data from 1992 to 2016. The results from the underline model have revealed that the monetary policy of Pakistan has a limited effectiveness on its main target variables of economic output and general price level.

Economic policy and confidence of economic agents – a causal relationship?

Abstract The purpose of this paper is to study whether innovations in monetary and fiscal policy are a leading indicator of future business and consumer confidence and reverse applying the panel Granger causality analysis to two periods in the history of the euro area: before and after the start of the Great Recession. The results show that Granger causality interaction between the confidence of economic agents and the stance of monetary policy (measured by the shadow rate) is stronger than between the former and the fiscal policy instruments. The European Central Bank (ECB) shadow rate innovations Granger caused business and consumer confidence in both periods, but also indicators of confidence Granger caused the shadow rate. No such feedback could be established between two fiscal policy instruments (government expenditure and revenue growth) and the indicators of confidence. Government spending and revenues Granger caused business confidence in the first subperiod, but not in the second subperiod when the causality reversed. The government revenues Granger caused consumer confidence in the first subperiod, while government expenditures in the second subperiod. Consumer confidence Granger caused government spending in the first subperiod.

Income Inequality and State Parties: Who Gets Represented?

AbstractRecent studies of representation at the national and state levels have provided evidence that elected officials' votes, political parties' platforms, and enacted policy choices are more responsive to the preferences of the affluent, while those with average incomes and the poor have little or no impact on the political process. Yet, this research on the dominance of the affluent has overlooked key partisan differences in the electorate. In this era of hyperpartisanship, we argue that representation occurs through the party system, and we test whether taking this reality into account changes the story of policy dominance by the rich. We combine data on public preferences and state party positions to test for income bias in parties' representation of their own co-partisans. The results show an interesting pattern in which underrepresentation of the poor is driven by Democratic parties pushing the more liberal social policy stances of rich Democrats and Republican parties reflecting the particularly conservative economic policy preferences of rich Republicans. Thus, we have ample evidence that the wealthy, more often than not, do call the shots, but that the degree to which this disproportionate party responsiveness produces less representative policies depends on the party in power and the policy dimension being considered. We conclude by linking this pattern of influence and “coincidental representation” to familiar changes which define the transformation of the New Deal party system.

High-Frequency Estimates of the Natural Real Rate and Inflation Expectations

We propose a new method of estimating the natural real rate and long-horizon inflation expectations, using nonlinear regressions of survey-based measures of short-term nominal interest rates and inflation expectations on U.S. Treasury yields. We find that the natural real rate was relatively stable during the 1990s and early 2000s, but declined steadily after the global financial crisis, before dropping more sharply to around 0 percent during the recent COVID-19 pandemic. Long-horizon inflation expectations declined steadily during the 1990s and have since been relatively stable at close to 2 percent. Our estimates are available at whatever frequency we observe bond yields, making them ideal for intraday event-study analysis---for example, we show that the natural real rate and long-horizon inflation expectations are not affected by temporary shocks to the stance of monetary policy.

Tracking the Characteristics of Economic Growth Vulnerability to COVID-19: A Preliminary Analysis

In response to the global expansion of COVID-19, governments around the world have implemented social distancing measures resulting in an unprecedented fall in economic activity. Consequently, the economic growth forecasts for 2020 have been adjusted downward in most countries, yet the magnitude of the decline has been different. In this article, we examine the economic vulnerability to COVID-19 -measured as the change in GDP growth forecasts for 2020- and its determinants for a sample of 194 countries. We identify the characteristics of the external sector and macroeconomic policy stance that are associated with an increase in economic vulnerability during the pandemic.

The dangers of performative scientism as the alternative to anti-scientific policymaking: A critical, preliminary assessment of South Africa's Covid-19 response and its consequences.

At the onset of the Covid-19 pandemic South Africa was praised for decisive political leadership based on scientific advice and the strictness of the measures it imposed to limit domestic spread of the virus. This paper critically examines the South African response through two conceptual frameworks. The first frames an optimal policy response as a solution to an intertemporal welfare-optimisation problem. The need for governments to balance epidemiological considerations and public health measures with the negative consequences of non-pharmaceutical interventions to limit transmission is particularly acute in developing countries. The second considers the use of scientific evidence and expertise through the lens of scientism – undue deference to science. The South African government erred towards drastic action in the face of predictions by some scientific advisors of a catastrophe, but initially without a clear, public long-term plan. Its lockdown has caused serious economic and societal harm across a range of measures. But these costs have not been matched by proportional benefits in health system preparedness or, based on evidence three months into the epidemic, a definitive improvement in expected long-term epidemic outcomes. This failure, and the questionably confident basis for the original lockdown decision, has been obscured by the government’s performative scientism – a public performance of deference to science – even in the absence of transparent decision-making. One consequence was a slower correction of strategy than merited by evidence of limited benefits and high costs of the lockdown. Another was an unwillingness to admit and explain errors after the fact. The latter, combined with the convincingness of the initial performance undermined the behavioural dimension of policy – leading to beliefs among citizens that confounded efforts by the state to adapt its policy stance through reopening schools, reducing the stringency of clinical guidelines and resuming various economic activities while nevertheless observing basic social distancing precautions.

The effect of televised candidate debates on the support for political parties

During campaigns for legislative elections, a large portion of the general public follows televised debates between the front-running candidates. How can the candidates use the public interest in the debates to increase the support for their party? In this article, we argue that especially challenger candidates can improve the public perception of their valence qualities, such as personal integrity, leadership, and competence, and can - as a result - raise the support of their party. We expect that the perceived policy stances of the candidates matter less. Building on televised debate experiments during the German Federal Elections of 2009 and 2013, we analyse the effect of the debates on party vote and in how far this relationship is mediated by changes in valence and policy evaluations of the candidates. Results show that changes of candidate valence, but not changes in policy perceptions, of the social-democratic front-running candidates mediate the vote intention for the party. Respondents who perceived the candidates more competent, empathetic and have integrity as a result of the debate are more likely to vote for the candidate's party. Our analysis further reveals, however, that this valence effect is not long-lasting and does not carry-over to vote intention briefly before the election.

U.S. monetary policy and income inequality in small open economies

We examine the impact of changes in U.S. monetary policy stance on income inequality of open economies. Using a Heterogeneous Agents New Keynesian model with price and wage rigidities, we show that in an expansionary (contractionary) monetary shock by Fed increases (decreases) income inequality in open economies. This impact is much higher in inflation targeting regime than in pegged exchange rate regime. We also find that while the impact of U.S monetary shock on inequality in pegged exchange rate regime is critical function of wage rigidity in the economy, it is independent of wage rigidity in inflation targeting economies. Our analysis indicate that in presence of hand to mouth households, an increase in wage flexibility certainly reduces welfare in in a pegged exchange rate economies. Our empirical estimates confirm our model prediction. More precisely, the estimates produce robust evidence that 100 basis point increase in Fed Fund Rate lower income inequality in open economies by nearly 0.15% over two years.

Sovereign Risk, Public Investment and the Fiscal Policy Stance

Of the different types of government outlays, since the 2000s public investment has been the main variable of adjustment during recessions in advanced and emerging economies. These contractions (expansions) have been associated with relatively medium-high (low) sovereign spreads, especially in advanced economies. To rationalize these issues, we develop a model of fiscal policy and sovereign default, with corporate default risk. Policymakers must decide between the provision of an unproductive public good and public investment, weighting their respective net benefits in terms of short-term stabilization and debt sustainability. In our model, investment follows a countercyclical stance only in the case of low levels of debt and moderate negative shocks, and otherwise contracts during recessions. The policy stance, along with the mix between different outlays, is determined by how sovereign risk responds to adverse economic shocks.

Heterogeneous beliefs, monetary policy, and stock price volatility

In this paper, I build a two-agent New Keynesian model in which households with subjective and objective beliefs about capital gains from stock prices exist. The former type of households constructs their beliefs about expected capital gains by Bayesian learning from observed growth rates of stock prices. In a homogenous agent model with only subjective beliefs, the effect of the interest rate on stock prices tends to be unrealistically strong. I show how the presence of heterogeneity improves second moments of stock prices with realistic moments of business cycle properties. This quantitative improvement in stock price behaviors allows me to conduct a realistic analysis of how the stance of monetary policy affects stock price volatilities. Strong inertia of monetary policy provides the stability of stock prices. This is because the near-term real interest rate has dominant effects on stock prices under the presence of subjective beliefs since the presence limits the forward-looking nature in pricing stocks. However, because output depends on the expected path of the real interest rate in the forward-looking manner, strong monetary policy inertia does not necessarily provide stabilities of stock prices and output at the same time.