Policy Reaction Research Articles

Monetary Policy Reactions and Deficit Financing in Nigeria

The study used secondary data which was obtained from the World Bank development indicators and Central Bank Statistical Bulletin between 1981—2022. The Auto-Regressive Distributive Lag (ARDL) was adopted for regression analysis, the variables adopted as independent variables are Domestic debt financing, foreign debt financing, External Reserves, and Exchange rate while real gross domestic product (RGDP) is the dependent variable. The study revealed that both Exchange rate and foreign debt financing have no significant effect to economic growth in Nigeria while Domestic debt financing and external reserves have a significant effect to economic growth. The study therefore concluded that domestic debt financing and external reserves have an unstable effect in the economy (asymmetric effect), this is due to inconsistency in its application in the country. From the research undertaken, we recommend that domestic debt should be channeled into economic activities that will stimulate growth and increase productivity. There should be a deliberate attempt to monitor the usage of domestic debt to avoid capital flight. The government should put a stop on foreign debt financing because it doesn’t have an effect on the nation’s economy. There should be a deliberate plan to increase the external reserves since it serves as the critical channel of financing developmental programmes and augment deficits in most cases.

Monetary policy reaction function in emerging economies: an empirical analysis

Monetary policy reaction function in emerging economies: an empirical analysis

Asset prices, regime switches, and monetary policy: evidence from China

ABSTRACT This paper develops a regime-switching DSGE model that can capture time-varying volatilities in economic activity and monetary policy. The model is then used to study regime switches in macroeconomic dynamics and monetary policy in China. The results suggest a better fitness of the regime-switching model than conventional constant-parameter models. We also find notable differences in macroeconomic dynamics and monetary policy reactions between high and low volatility regimes. Further counterfactual analysis suggests that, at least in an environment with regime-switching volatilities, the optimal reaction of monetary policy involves responses to asset price variations. The findings of the paper shed new light on the regime-switching properties of the economy and the optimal choice of monetary policy within this context.

Monetary policy reaction function: A Bayesian analysis for the BRICS.

This study estimates the monetary policy reaction function (MPRF) in a Dynamic Stochastic General Equilibrium (DSGE) framework using Bayesian analysis for the emerging economies. DSGE models are suitable for the policy analysis because of their simplicity and prominent role of forward-looking variables. This is a pioneer study investigating the combined effects of credit spreads, fiscal imbalances, and monetary autonomy on interest rates for BRICS member countries. Using real data for the period 1970-2021, the posterior estimates confirm that both credit spread and fiscal imbalance significantly contribute to fluctuations in output, inflation, and interest rates in all the sample economies. The estimates show that fluctuations in the inflation rate are due to supply shocks. The empirical estimates also reveal that fiscal imbalances shock significantly affect output in Brazil, India, and South Africa, whereas, based on real data inflation and interest rate are significantly affected by fiscal imbalance shocks in China and South Africa. Yet, the findings suggest that the effects of various shocks on output and interest rates vary across countries.

Monetary Policy Reaction to COVID-19 and Their Economic Impact in Central America and the Dominican Republic

Monetary Policy Reaction to COVID-19 and Their Economic Impact in Central America and the Dominican Republic

Macroeconomic effects of carbon transition policies: An assessment based on the ECB’s New Area-Wide Model with a disaggregated energy sector

We assess the macroeconomic effects of carbon transition policies aimed at mitigating climate change in the euro area. To this end, we augment the ECB’s New Area-Wide Model (NAWM) with a framework of disaggregated energy production and use, which distinguishes between “dirty” and “clean” energy. Our central transition policy is that of a permanent increase in carbon taxes, which are levied as a surcharge on the price of dirty energy, combined with a price-preserving fall in fossil resource supply. Our findings suggest that increasing carbon taxes to an interim target level consistent with the transition to a net-zero economy entails a transitory rise in inflation and a lasting, albeit moderate decline in GDP. We show that the short and medium-term effects depend on the monetary policy reaction, the path of the carbon tax increase and its credibility, while expanding clean energy supply is key for containing the decline in GDP. Undesirable distributional effects can be addressed by appropriately redistributing the fiscal revenues from the carbon tax increase across households.

A multiresolution analysis of NeoFisher effects in industrialized economies: Have monetary policy dynamics being misconstrued in the west?

Central Banks in major industrialized economies have struggled to keep inflation within their target ranges since the global financial crisis. The periods of missing inflation and deflation experienced in the post-crisis era have led to doubts about the traditional Fisher effect as a crucial component of the policy reaction function. We explore the NeoFisherian theory, which suggests an alternative causal relationship between the policy rate and inflation. We focus on the USA, UK, and EU and apply wavelet coherence analysis to examine the time–frequency lead–lag comovements on data spanning from January 2007 to March 2023. Our findings indicate increasing NeoFisherian dynamics, notably post-2013 taper tantrum, implying that Central Banks in industrialized economies have misunderstood monetary policy dynamics.

Hawkish shift in Ghana’s central bank’s monetary policy reaction function: a fiscal connection

ABSTRACT This study examines Ghana’s central bank’s monetary policy under Ghana’s inflation-targeting (IT) monetary policy regime since 2002. We find that Ghana’s central bank pursued a passive monetary policy under the unofficial IT monetary policy regime and hence cannot explain the decline in Ghana’s inflation rate during this period. We also find that Ghana’s central bank switched its monetary policy from passive to active under the official IT monetary policy framework, and hence cannot also explain Ghana’s rising inflation rate observed during this period. We provide evidence suggesting that Ghana’s central bank’s policy change might have been influenced by fiscal factors.

Monetary Policy Strategies to Foster Price Stability and a Strong Labor Market

I assess monetary policy strategies to foster price stability and labor market strength. The assessment incorporates a range of challenges, including uncertainty regarding the equilibrium real interest rate, mismeasurement of economic potential, and balancing the costs and benefits associated with employment shortfalls and labor market strength. I find that the ELB remains a significant constraint, hindering achievement of the inflation objective and worsening employment shortfalls. Symmetric policy reaction functions mitigate the most adverse effects of employment shortfalls by contributing to economic stability. Make-up strategies address ELB risks. These strategies call for policy to accommodate some period of inflation above its long-run objective following an ELB episode. I also consider an asymmetric shortfalls approach to policy. This approach provides accommodation in response to weak activity while foregoing tightening in response to strong activity. While the approach can, in principle, address ELB risks by raising inflation, it performs poorly. The shortfalls approach exacerbates economic volatility, worsens employment shortfalls, and creates excess inflationary pressures. Mismeasurement is not sufficient to limit the importance of strong responses to measured slack. Overall, monetary policy can promote price stability and labor market strength by focusing on economic stability, with a strategy targeted to address ELB risks.

Better than not starting? Research university project of Turkey

ABSTRACT Initiatives to build research universities to have world-class universities, the creator and the disseminator of scientific knowledge in knowledge-based economies, are among the most important policy reactions in higher education systems. With an increase in demands on greater accountability, transparency, and efficiency, studies investigating the excellence initiatives of different countries are growing in number. However, the literature on the Research University Project of Turkey is still in the infancy stage. We, therefore, conducted a quasi-experimental study to evaluate the effect of research university project using six-year panel data between 2015 and 2020. Results from the difference-in-differences analysis showed that the research university initiative of Turkey was not successful in differentiating research universities from non-research universities even if the research universities have not lost the quantitative superiority over non-research universities. However, the result also revealed a possible spillover effect of the initiative on non-research universities by the policy intervention that may have created institutional competition and an isomorphic science production pattern to become a research university.

Fed and ECB reaction functions during quantitative easing: Three phases of monetary policy, both conventional and unconventional

Studying monetary authority response to macroeconomic imbalances using the interest rate as a proxy variable for monetary policy became ineffective after the financial crisis, when central banks exhausted the effective capacity of interest rates by reaching the zero lower bound (ZLB). In an effort to analyse the unconventional response deployed by central banks, we present and estimate a modified reaction function that uses money supply as the operational instrument of monetary policy for the Federal Reserve and the European Central Bank, and we verify its utility as an explanatory instrument for the behaviour of the two monetary authorities. By applying our strategy, it is feasible to identify both monetary policy reaction with regard to the economic situation as well as other possible monetary authority concerns regarding governments’ fiscal behaviour and the evolution of asset markets, regardless of the monetary policy applied at any given time.

The communication reaction function of the European Central Bank. An analysis using topic modelling

ABSTRACT Central bank communication plays a crucial role in the conduct of monetary policy, yet the research on central bank communication, while growing, is still scarce. In this paper, we analyze the communication reaction function of the European Central Bank (ECB) through topic-based indices derived from the bank’s speeches. These indices are used as dependent variables in policy and communication reaction function models, as suggested by recent literature. The topics are extracted using Latent Dirichlet Allocation (LDA), a popular text mining algorithm for topic extraction. The ECB has recently reviewed its monetary policy strategy, which led to an increase in studies incorporating the new methods offered by text mining for analyzing the policy reaction function of the bank. We show how indices built through topic modelling can be used to study the communication reaction function of a central bank, and we examine which variables are significant for every topic communicated by the ECB.

Inflation targeting, exchange rate and output gap in Central and Eastern European countries

This paper aims at empirical assessment of monetary policy relationships in Central and Eastern European countries (Czechia, Hungary, Poland, Romania), which practise the monetary regime of inflation targeting. Using quarterly data for the period of 2004-2019, the authors examined the relationship between the output gap, nominal and real exchange rate misalignment, consumer price inflation and the central bank policy rate, using the panel vector autoregression (PVAR) model. According to estimates, the central banks of the CEE-4 countries react with an increase of their policy rate to the output gap and inflation, as implied by the Taylor rule. At the same time, a monetary reaction to nominal (real) exchange rate misalignment is lost in the estimates for the post-crisis period of 2010-2019. An increase of the central bank rates does not seem to have unfavourable output effects, while the nominal exchange rate is likely to depreciate with three to five quarter lags. However, there is evidence of the price puzzle when monetary tightening is followed by a counterintuitive increase in the inflation rate. In full accordance with the New Keynesian framework, inflation depends on the output gap, while being expansionary in the real sector. Evidence of the exchange rate pass-through (ERPT) to inflation is mixed. This article provides insights into the average monetary policy reaction function and its macroeconomic effects in the CEE-4 countries, with the value added in that following the Taylor rule does not guarantee effectiveness in tackling inflation in the presence of the price puzzle. Based on the estimated exchange rate effects on the output gap and inflation, deliberate currency appreciation resulting from the central bank foreign exchange interventions and/or fiscal austerity measures can be helpful for such a disinflation that minimises output losses.

Monetary Policy Reaction to Geopolitical Risks: Some Nonlinear Evidence

Monetary Policy Reaction to Geopolitical Risks: Some Nonlinear Evidence

On the numerical structure of local and nationwide government spending multipliers: what can we learn from the Greek crisis?

ABSTRACT It has been recognised that the fiscal multiplier is a function of structural features of the economy and policy reaction parameters. Moreover, the debate on the magnitude of the multiplier along the business cycle has also been the subject of disputed debates. On these grounds, we look at the Greek case by calibrating a NUTS-2 interregional general equilibrium model using data for distinct states of the Greek economy during the development of the recent crisis. Whether this matters for local and nationwide multipliers depends on qualitative differences in the numerical structure of the model. As governments have to decide how to conduct fiscal policy, our results on the Greek case provide insights to policymakers on the reach of their actions in a spatially integrated system.

Effectiveness and conduct of macroprudential policy in Indonesia in 2003–2020: Evidence from the structural VAR models

The paper examines the effectiveness of macroprudential policy in Indonesia and policy reactions to economic developments. Using the structural vector autoregression and data on the regulatory LTV ratio, we investigate the policy effectiveness in controlling credit growth and real property prices along with the effects on economic activity. We find that the LTV-based policy in Indonesia is effective in taming credit growth in the medium run. It, however, is not the case with real property prices whose response to policy changes is counterintuitive and resembles the price puzzle found in the studies on monetary policy. Moreover, our results lend moderate support to the effect of LTV policy on economic activity, especially in the non-COVID-19 sample. We also show that the LTV policy in Indonesia is conducted in an active and circumspective way. In a series of robustness checks, we demonstrate that the results hold when the ordering of variables is changed, alternative proxies for macroprudential policy, output gap, and financial conditions are employed, or the sample is limited to the non-COVID-19 period.

Re-Examining the South African Reserve Bank’s Policy Reaction Function Using the NARDL Model

The 3–6 percent inflation target is a policy rule used by the South African Reserve Bank (SARB) to fulfil its statutory obligation of ensuring a low and stable inflation environment and its policy reaction function assesses how the Reserve Bank responds to deviations of inflation from its target. We rely on nonlinear autoregressive distributive lag (NARDL) models to estimate the asymmetric preferences which the Reserve Bank has to inflation deviations during rising and falling episodes of inflation. Using quarterly data spanning from 2002:q1 to 2021:q4, we estimate the policy reaction functions using 7 disaggregated measures of inflation to capture the heterogeneity in the formation of price expectations. We further segregate our data into two sub-periods, corresponding to the pre-crisis and post-crisis era, as a robustness exercise. Overall, our findings indicate that in the post-crisis era the SARB (i) has become more responsive to inflation, output fluctuations and exchange rates and (ii) has responded more aggressively to rising inflation than falling inflation.

Estimating fiscal multipliers for North Macedonia: a structural vector error correction model

The aim of this research is to evaluate the effectiveness of fiscal policy as a means of influencing output in North Macedonia. We apply a VEC model, and use quarterly data for the period 2000q1-2019q4. Our findings suggest that the possibility of fiscal policy to be used as a short-term stabilization tool was limited by the turbulent early phase of transition and several IMF arrangements; the exchange rate peg; and the scarcity of financial resources. The results of the baseline model suggest that a government spending shock is more effective as a stabilization fiscal tool in Macedonia, compared to a tax shock, although fiscal multipliers smaller than one suggest that the effectiveness of fiscal policy in boosting output is limited. The findings confirm the importance of structural characteristics, suggesing that not accounting for monetary policy reaction and debt dynamics will result in an overstatement of fiscal multipliers. In
 particular, the results suggest that the “crowding out” effect of fiscal policy due to interest rate pressure is absent and that monetary policy is accommodating an expansionary fiscal policy. The results of our investigation suggest that an increase in government expenditures will induce a significant increase in taxes. Moreover, although an increase in spending/taxes will result in a short-lived increase/decrease in public debt, as a priori expected, we find a long-equilibrium relationship between government spending and taxation suggesting that debt sustainability is not an issue in the case of Macedonia.

A monetary policy reaction function through Taylor rule vision: evidence from Tunisia

A monetary policy reaction function through Taylor rule vision: evidence from Tunisia

Leveraging Multiyear, Geospatial Social Media Data for Health Policy Evaluations: Lessons From the Philadelphia Beverage Tax.

Public reactions to health policies are vital to understand policy sustainability and impact but have been elusively difficult to dynamically measure. The 2021 launch of the Twitter Academic Application Programming Interface (API), allowing for historical tweet analyses, represents a potentially powerful tool for complex, comprehensive policy analyses. Using the Philadelphia Beverage Tax (implemented January 2017) as a case study, this research extracted longitudinal and geographic changes in sentiments, and key influencers in policy-related conversations. The Twitter API was used to retrieve all publicly available tweets related to the Tax between 2016 and 2019. Twitter. Users who posted publicly available tweets related to the Philadelphia Beverage Tax (PBT). Tweet content, frequency, sentiment, and user-related information. Tweet content, authors, engagement, and location were analyzed in parallel to key PBT events. Published emotional lexicons were used for sentiment analyses. A total of 45 891 tweets were retrieved (1311 with geolocation data). Changes in the tweet volume and sentiment were strongly driven by Tax-related litigation. While anger and fear increased in the months prior to the policy's implementation, they progressively decreased after its implementation; trust displayed an inverse trend. The 50 tweeters with the highest positive engagement included media outlets (n = 24), displaying particularly high tweet volume/engagement, and public personalities (n = 10), displaying the greatest polarization in tweet sentiment. Most geo-located tweets, reflecting 321 unique locations, were from the Philadelphia region (55.2%). Sentiment and positive engagement varied, although concentrations of negative sentiments were observed in some Philadelphia suburbs. Findings highlighted how longitudinal Twitter data can be leveraged to deconstruct specific, dynamic insights on public policy reactions and information dissemination to inform better policy implementation and evaluation (eg, anticipating catalysts for both heightened public interest and geographic, sentiment changes in policy conversations). This study provides policymakers a blueprint to conduct similar cost and time efficient yet dynamic and multifaceted health policy evaluations.