Restrictive Monetary Policy Research Articles

Prices, markups and wages: inflation and its distributive consequences in Spain, 2021-2023

This article analyses the recent inflationary experience in Spain (2021-2023), focusing on the functional income distribution, the evolution of markups and real wages, and the economic policies implemented. We rely on the conflict theory of inflation and touch upon recent debates on of sellers' inflation. Using the Observatory of Firms’ Margins, we confirm an increase in aggregate markups. Nevertheless, the main factor explaining price increases is firms' pass-through of higher input costs to protect their profits. The direct effect of markup increases has been quantitatively less important, and that of unit labour costs negligible. Therefore, inflation has had huge distributional consequences and there is space for non-inflationary wage increases. While fiscal and regulatory measures have effectively curbed the inflation rate having an expansive effect, restrictive monetary policy is inappropriate and costly.

Restrictive monetary policy – an obstacle to foreign direct investment

This article examines some acute problems of Foreign Direct Investment (FDI), Monetary Policy and Inflation. Following a long declining trend, global FDI flows decreased in 2023 and remaining below the indicator of 2007, that is pre-global financial crisis level. According to international organizations, FDI flows were negatively affected by high interest rates, unfavourable financing conditions and situation on capital markets. The article considers the role of restrictive monetary policy alongside the theoretical aspects of global inflation. The author argues that the drop in international investment, in particular, can be attributed to Restrictive Monetary Policy in many countries. Restrictive Monetary Policy seems to underestimate the inflationary role of imperfect competition, the rise of prices for imported energy and food, the fluctuations of currency rates as well as expectations of the micro-level participants. The article provides certain economic recommendations to Russia’s regulators on Monetary and FDI Policy. In future the Bank of Russia may gradually move from Restrictive Monetary Policy to Expansionary Monetary Policy to provide stimulus for FDI. Also, this article summarizes the process of predicting future condition of the world economy in applying Kondratieff’s approach. The author concludes that it is necessary to continue studying the long wave theory with the aim of its further use in forecasting the events in Russia and worldwide.

Deposit Channel of Monetary Policy in European Countries

Abstract This paper focuses on the first link of the monetary transmission mechanism – interest rate channel. It forks on two subchannels: credit vein and deposit vein. We will investigate the second one, i.e. the impact of the discount (also key, reference) rate of a central bank on the deposit policy of commercial banks. Deposit channel is a very rarely treated as a separate line of the monetary policy from the credit channel. On the basis of VAR analysis of monthly data over several-years period on the banking system of Ukraine, Poland, and Montenegro we found out a tendency of the discount rate to impact banks’ deposit rates changes with some lag of time. The tightest liaison between these indicators is observed during the periods of discount rate stability and sloping down. However, sensitivity of banks‘ deposit rates is lost when the discount rate is rapidly increased during the periods of restrictive monetary policy. It was defined that the essential reason for such picture is an extra liquidity of the banking system. On the one hand, it symbolizes the soundness of banking system, while from the other it makes more difficult for a central bank policy to absorb extra liquidity from the market to reduce pressure on prices. The paper contains some thoughts for increasing effectiveness of restrictive monetary policy in such periods.

Labour market tightness in the post-COVID-19 era

Since 2020, the labour market in advanced economies has shown resilience against successive supply-side shocks. High job vacancy rates and historically low unemployment, despite a recent weakening of economic growth, imply a lower sensitivity of the labour market to changes in the business cycle, underscoring the need to re-evaluate labour market tightness, as it could increase the risks of wage-price spirals and more restrictive monetary policy. Ιn the present paper, we analyse the degree of labour market tightness and its implications for wages, inflation and monetary policy in two large open economies, the US and the euro area, and in a small open economy, Greece, that has undergone substantial labour market reforms, to explore whether post-pandemic labour market developments have common or idiosyncratic features. We find that policy support measures to address the pandemic and the energy crisis have decoupled unemployment from cyclical fluctuations, with the gap narrowing in 2023. Labour market tightness in the post-pandemic era has mainly been driven by a robust increase in labour demand, while labour supply has reverted to or exceeded pre-pandemic levels in the US, the euro area and Greece. Real compensation per employee lags labour productivity levels in all three economies, whereas it remains below its pre-pandemic level in the euro area and Greece. This suggests that the economies in question could tolerate some further catch-up in real wages in the short term without experiencing inflation.

Monetary policy shocks and firm investment decisions: Evidence from China

This paper investigates how unexpected monetary policy changes affect corporate investment decisions in China. Using monetary policy shocks estimated with a sophisticated technique, we show that Chinese public firms significantly change their investment to accommodate unexpected monetary policy shifts. Moreover, such a reaction is significant mainly when a restrictive monetary policy shock occurs and can last for six quarters. Further cross-sectional analyses confirm that the heterogeneous responses of investment depend on many firm-level characteristics, such as firm ownership, growth opportunities, local market development, and firm age.

Inflation and how to deal with it in France. A policy perspective from an empirical stock‐flow model

AbstractUsing an empirical stock‐flow consistent model, we simulate an imported inflationary shock to analyze the macroeconomic impacts on the French economy. Facing the risk of a profit‐price‐wage spiral; alternative economic policy responses are evaluated. Traditional restrictive monetary policy does not seem well‐suited to fight imported inflation as the cost is significant with limited and delayed results. Increased social transfers can help workers support their loss of purchasing power. Reduced Value Added Tax can directly limit the inflation drift, but its concrete implementation may raise difficulties. These measures have a cost for public finances but are affordable if the inflation shock is temporary.

Monetary Policy and Income Distribution in a Multisectoral AB-SFC Model

ABSTRACT Restrictive monetary policy can not only fail to achieve the conventional macroeconomic goal of controlling inflation but also be seen as responsible for the increasing income inequality that has occurred in recent decades. This result is not clear, however, if one remains bounded to the traditional monetary policy transmission mechanisms and conventional models. In this article, we create an agent-based, stock-flow consistent, heterodox disequilibrium model to analyse and evaluate the effects of different basic interest rate levels, especially its distributive effects. Using computer simulations, we show that the basic interest rate plays a key role when firms compete in oligopolistic markets and face financial constraints and costs. In such circumstances, increases in the interest rate can be responsible for price increases, creating the price puzzle problem. In addition, it forces redistribution of income in favour of the financial system and pressures the profit rate of industrial firms, which will raise prices and lower the wage share. The final distributive effect of an interest rate policy will ultimately depend on the power of these agents: the bargaining power of the workers to claim higher wages and the market power of the firms to raise prices.

AN EMPIRICAL ANALYSIS OF CAUSATIVE EFFECT OF LINGERING NAIRA DEVALUATION ON NIGERIAN ECONOMY

This study focused on the effect of the inflationary trend caused by persistent loss of value of Naira on the Economic growth and foreign exchange market in Nigeria. The study adopted quantitative research design. Data for this study were of secondary sources obtained from the Statistical Bulletin of Central Bank of Nigeria. Data collected were analysed using multiple regression. The result of the study revealed that inflation negatively affects the GDP. The loan cost on the other hand positively affects the GDP. Also, exchange receptiveness negatively affects the GDP. The study affirmed economic literature; highlighted the link between the exchange rate volatility and economic performance in Nigeria considering gross domestic product as an exponent of economic performance, thus the need to quantify the link between gross domestic product and exchange rate volatility emerges. The study suggests further diversification of the economy: an expansion in non-oil exports, adoption of measures to stimulate domestic production of essential household goods, and also encourage export of primary commodities in which the country has comparative advantage. A strong demand management of exchange rates through restrictive monetary and fiscal policies to ensure that growth of aggregate demand is compatible with a low and stable inflation is recommended. The study also recommended an adoption of a realistic exchange rate policy for naira best capable of restricting excessive demand for foreign exchange.

Inflation surprises in a New Keynesian economy with a “true” consumption function

AbstractThe resurgence of inflation has been accompanied by a reversal of prospects of growth, with a prominent role assigned to the fall of households' purchasing power. Yet this real income effect of inflation surprises, independent of restrictive monetary policy, is not present in the standard New Keynesian models for monetary policy. The reason lies in the formulation of the consumption‐based “IS equation”. The paper shows how the income effect can be introduced by reformulating the consumption function, with the consequence that it exerts an autonomus stabilization effect on inflation. The main monetary policy implications are examined by means of simulations.

Public investment as a growth driver for a commodity-exporting economy: Sizing up the fiscal-monetary involvement

<abstract> <p>The study presents a solution to maximize public investment as a growth driver for commodity-exporting economies. The solution is to compensate for the low efficiency of public investment by drawing on internal and external factors within an active fiscal and monetary policy framework. For this, the paper introduces a quantitative model that implements a golden rule of public finance in a resource boom backed by a sovereign wealth fund under an active monetary policy stance. The modeling results show that mobilizing windfall resource revenues to finance increased public investment can limit a crowding-out effect through proper resource allocation and change the sectoral structure in favor of the final goods sector. As confirmed by the sensitivity analysis, the low efficiency of public investment can be partially offset by a less restrictive monetary policy response to fiscal dominance, but this leads to excessive volatility in financial indicators. However, if the public debt burden is an issue due to a more robust fiscal dominance regime, a higher tax rate on exported raw materials can be used to maintain sustainability. By developing a policy goals domain, the paper initiates a discussion that can direct policy recommendations toward a promising growth path by maximizing the public investment driver in the complex policy environment of fiscal-monetary interaction.</p> </abstract>

Structural estimates of the South African sacrifice ratio

This paper estimates the output cost of fighting inflation—the sacrifice ratio—for the South African economy using quarterly data spanning the period 1998:1–2019:3. To compute the sacrifice ratio, the structural vector autoregressive (SVAR) model developed by Cecchetti and Rich (2001) based on Cecchetti (1994) is employed. Our findings show us a small sacrifice ratio, which lies within the range 0.00002–0.231 percent with an average of 0.031 percent, indicating a low level of output to be sacrificed while fighting inflation. Hence, the reserve bank is recommended to sustain an inflation rate within the target range and reap the benefits of a predictable and stable price path, as restrictive monetary policy has only a transitory effect on real variables like output.

Short and Long Run Effects of Monetary Policy on Food Inflation: A Study of Pakistan

Food plays a major role in the consumption basket of developing countries such as Pakistan, with a significant portion of the insufficient income of poor individuals spending on food. Therefore, higher food inflation severely affects the purchasing power of poor people. This study is designed to estimate the short and long-run impacts of monetary policy on food inflation in Pakistan. For this purpose, time series data from September 2005 to October 2020 was used through the Autoregressive Distributed Lag (ARDL) model. The findings indicate that food inflation can become stable by restrictive monetary policy in both the short and long run. The results show that the short-run shocks can be adjusted at the speed of 13.9% per month. To tackle food inflation, a balanced monetary policy is suggested. On the other hand, a fiscal policy providing subsidized food items to people can also be implemented to tackle food inflation in Pakistan.

BANKING SYSTEM OF UKRAINE: STATUS AND DEVELOPMENT TRENDS

s an important component of the financial market, the banking system of Ukraine provides conditions for the effective functioning of the entire economic system of the country. Traditionally, the task of the banking system is the concentration of monetary resources with their subsequent redistribution among business entities, households, and industries. By fulfilling this task, the banking system actually contributes to the economic development of the state.In 2022, with the beginning of the war, the national banking system was faced simultaneously with problems of a general economic internal nature caused by the war: a reduction in production and income from the export of industrial and agricultural products, devaluation of the national currency, an increase in security risks, mass migration of the population and problems of a global nature -this is a slowdown in the development of the world economy. In these conditions, the National Bank of Ukraine, as the regulator of the money market, was forced to switch to a strict model of monetary policy, the goal of which was, first of all, to maintain the rate of inflation and exchange rate stability, and the main "recipes" for improving the money market were to increase the discount rate and mandatory reserve norms for commercial banks. The transition to a restrictive monetary policy is always a test for banks, but. the timely application of restrictive measures made it possible to maintain control over the currency market, over price dynamics, and give a positive forecast for economic growth.Activity in the conditions of war and economic uncertainty became a reality for the banking system and a basis for the formation of further development trends.In the medium-term perspective, the main trends in the development of the banking sector include the NBU's continued strict monetary policy and the strengthening of market incentives for banks to attract long-term hryvnia deposits from individuals; dominance of credit risks in banking; significant investments by commercial banks in high-yield certificates of the NBU and Domestic state loan bonds with the aim of increasing interest income; gradual decrease in liquidity in the banking sector; slowing of inflation as a result of the reduction of security factors; the return of banks to their pre-war business models with the simultaneous search for new forms of lending and the formation of an effective anti-crisis model of bank regulation

MONETARY POLICY OF WORLD BANKS DURING THE PANDEMIC

MONETARY POLICY OF WORLD BANKS DURING THE PANDEMIC

Stability and performance of monetary and fiscal policies in the euro area

This research article examines the sustainability of fiscal policy and the impact of monetary policy on public debt management in the euro area from 1980 to 2014. This study applies the Augmented Dickey-Fuller (ADF) and Phillips Perron (PP) unit root tests to verify the existence of stationarity and indicates that the relevant variables are integrated. The analysis is based on error correction models and cointegrated VAR-models. The empirical findings indicate that there is no evidence to support the existence of strong political coordination in the euro area. Additionally, the study supports the idea that monetary policy has a more stabilizing influence on economic activity than budget policy. An important policy implication resulting from this study is that the fiscal rule generates a divergent dynamic of the public debt. The results suggest the Keynesian effects of macroeconomic policies in the eurozone and conclude that there is a sort of complementarity between monetary and fiscal policies in some euro area countries. This means that a restrictive monetary policy (higher interest rates, interest) is always accompanied by a restrictive fiscal policy (higher taxes or lower public spending) and vice versa. Concerning the Vector Error Correction Model (VECM) techniques, the findings demonstrate that the debt has a positive effect on the budget deficit, which ultimately results in behavior that affects the debt's stability.

More than Words: Twitter Chatter and Financial Market Sentiment

We build a new measure of credit and financial market sentiment using Natural Language Processing on Twitter data. We find that the Twitter Financial Sentiment Index (TFSI) correlates highly with corporate bond spreads and other price- and survey-based measures of financial conditions. We document that overnight Twitter financial sentiment helps predict next day stock market returns. Most notably, we show that the index contains information that helps forecast changes in the U.S. monetary policy stance: a deterioration in Twitter financial sentiment the day ahead of an FOMC statement release predicts the size of restrictive monetary policy shocks. Finally, we document that sentiment worsens in response to an unexpected tightening of monetary policy.

Capital Structure Theory in the Transport Sector: Evidence from Visegrad Group

Capital structure plays an important role in corporate finance, especially in the period of restrictive monetary policy in many developed countries. This paper aims to estimate the debt ratio based on five selected financial indicators: tangibility, return on assets, size of total assets, current ratio, and size of total sales using multiple linear regression for four countries, such as the Czech Republic, Hungary, Poland, and Slovakia, as well as the V4 region. The total sample consists of 3828 small- and medium-sized enterprises from the transport sector in the Central European area. These data are drawn from Amadeus by Bureau van Dijk from 2019. The results show that three of the five variables are statistically significant in all models. These findings indicate that transport companies prefer the pecking order theory. We find that the increase in tangibility, return on assets, as well as current ratio, reduce the debt ratio. The outputs provide new theoretical and empirical knowledge regarding transport companies in V4.

The Effects of Monetary Policy on Macroeconomic Variables through Credit and Balance Sheet Channels: A Dynamic Stochastic General Equilibrium Approach

Economic policies aimed at managing economic variables in the short and long term have always been of special importance. These policies seek to reduce economic fluctuations in the short term and increase sustainable economic growth in the long term. One of these policies is monetary policy, which is mainly carried out by central banks worldwide. This paper uses the Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to examine the effects of monetary policy on the real variables of the Iranian economy through the credit channel and the balance sheet channel. The presented model analyzed information about macroeconomic variables in Iran for the period from 1990 to 2020. The obtained results show that with the implementation of restrictive monetary policy in the economy, all productive activities of enterprises decreased, and this led to a decrease in household income, which in turn reduced household savings in the form of bank deposits. Because the most important sources of financing for banks are deposits, the ability of banks to offer loans was reduced. On the other hand, a restrictive monetary shock was associated with a decline in the value of corporate securities. As a result, the amount of received loans by firms was reduced by the value of the assets. This reduced the demand of banks for bank loans, which intensified the effects of the initial shock, along with a reduction in the banks’ ability to provide lending services. Further, the results indicate the relative success of the model in simulating Iran’s macro economy.

Threshold effect of financial stability on monetary policy in West Africa

This article aims to highlight the nonlinearity of the reaction function of the Central Bank of West African States (BCEAO) through financial stability. Using the smooth threshold autoregressive (STAR) model on aggregate data for the period 1970–2020, the study reveals that the dynamics of the BCEAO monetary policy are conditioned on financial stability, especially when using the money supply ratio as an indicator of financial stability. Thus, the BCEAO reacts to a financial instability risk when the volatility of the latter exceeds a threshold. In particular, the BCEAO adopts a restrictive monetary policy by raising its interest rate when the deviation of the financial stability index is greater than the estimated threshold. These results indicate that the BCEAO should take into account the cyclical component of the money supply ratio in conducting monetary policy. This strategy could prevent financial instability risks.

Can Food Inflation Be Stabilized By Monetary Policy? A Quantile Regression Approach

Theoretically, a consistent and well-defined monetary policy can stabilize food inflation. However, empirical findings have reported both positive and negative effects of monetary policy measures on food inflation. In the literature, several analytical techniques are used to grasp the impact of monetary policy tools on food inflation in developed and developing nations. Usually, VAR and ARDL approaches are employed to fulfill this task. However, these techniques do not capture the tail dynamics of food inflation. In countries like Pakistan, where food expenditures are a major chunk of the consumption basket and half of the population is either poor or on the verge of poverty, tackling food inflation has always been a major task for policymakers. To capture the effect of monetary policy on various quantiles of food inflation, we have employed the quantile regression approach in this study. We have used the time series data based on monthly observations from September 2005 to October 2020 of food inflation, monetary policy, and several other variables. We have found that monetary policy and transportation prices remain highly significant across all quantiles, exhibiting a positive impact on food inflation. Thus restrictive monetary policy leads to higher flood inflation in the country. In the case of Pakistan, governments usually provide subsidies to lower the impact of food inflation. It is suggested that a restrictive monetary policy is usually not required when a subsidies-focused fiscal policy is implemented.