Tight Monetary Policy Research Articles

The Bank of Russia Tightens Its Monetary Policy In Response to Accelerated Inflation

At its Board of Directors meeting in June, the Bank of Russia raised the key rate for the third time since the beginning of the year, by 0.5 p.p. to 5.5% per annum. This decision was caused by an accelerated inflation triggered by reviving demand as the containment measures were being lifted, alongside the ongoing super-loose fiscal and monetary policies in the majority of countries, rising prices in world commodity markets, and increasing inflationary expectations. As seen by the results of May 2021, inflation in annual terms reached 6% and, according to our estimates, its yearend index year will be at least 5.3%, which points to a high probability of continuing monetary policy tightening.

Nexus of Gold Price-Exchange rate-interest rate-Oil Price: Lessons for Monetary Policy in Pakistan

This study aims to evaluate the links among gold price, oil price, exchange rate and interest rate in Pakistan. All these channels are interconnected and have impact on monetary policy of the country. Monthly data ranging from 1995-01 to 2016-12 is used for the analysis based on VAR Model. Exchange rate depreciations are responded by tight monetary policy actions, which seem to have a significant effect on exchange rate stabilization process and raise gold price. Changes in oil prices at global level strongly affect the nexus in Pakistan. Monetary policy managers are suggested to take changes in gold prices as indicators of short-run fluctuations in Pakistan economy. The study contributes in two ways. Firstly, as a case study of Pakistan, it analyzes the role of gold market in response to changes in exchange rate and world oil prices. Secondly, the study links up monetary policy decisions to the nexus of gold price-oil price-exchange rate. Findings of the study may be useful for monetary policy makers, academia, and gold industry alike.

Does Guarantee Network Reduce Firms’ Earnings Management?

ABSTRACT Using data from China, this paper investigates the effect of a guarantee network on firms’ earnings management. The results suggest that guarantee networks significantly reduce earnings management and this effect is more pronounced under tight monetary policy. Further analyses suggest that guarantee networks reduce earnings management through supervision mechanism rather than financing mechanism and earnings management reduction effect depends on the property ownership and related-party guarantee of the network. Our study provides new insights on the positive effect of guarantee networks in China and contributes to the governance role of guarantee networks.

The effects of monetary policy in Russia: A factor-augmented VAR approach

Using factor-augmented vector autoregressive (FAVAR) models, this study examines the effects of the Central Bank of Russia’s (CBR) monetary policy on economic indicators. The sample includes 39 monthly macroeconomic series and covers the period 2004 through 2019. The analysis revealed counter-intuitive results, with consumer prices often responding positively to a contractionary monetary policy shock, and vice versa; this is related to the impossible trinity. The ruble exchange devaluation was accompanied by price increases through an import price pass-through, so the CBR chose exchange stability and free capital flows out of the impossible trinity, temporarily subordinating monetary policy independence. Such independence was limited, possibly due to Russia’s high dependence on energy exports and the link between energy prices and the exchange rate. The findings indicate no direct evidence of an effect of monetary policy tightening on the decrease in consumer prices; rather, the attenuation of ruble depreciation may have helped to stabilize prices, even after the CBR adopted inflation targeting.

An industrial‐organization approach to conventional and unconventional monetary policy

AbstractIn this study, we use an industrial‐organization model of the banking industry with money creation to examine the effect of conventional and unconventional monetary policy on the money stock. We consider quantitative monetary easing, qualitative monetary easing, and a negative interest rate on excess reserve balances as unconventional monetary policy. Our main findings are as follows. First, under a plausible setting of the parameters, the model with money creation supports the liquidity puzzle, in which tight monetary policy increases the money stock. The greater the number of banks, the stronger the effect. Second, quantitative monetary easing has no impact on money stocks, loans, deposits and bank holding assets other than government bonds. Third, the effect of qualitative monetary easing is ambiguous, but when the number of banks is sufficiently large, the effect is almost the same as the interest rate on reserves. Fourth, the effect of negative interest rate policy is quite complex.

The new Central bank three-year plan in the context of the main problems of the Russian economy (on the draft «Main directions of the unified state monetary policy for 2021 and the period 2022–2023» of the Bank of Russia)

The article presents an analysis of the draft «Main directions of the unified state monetary policy for 2021 and for the period 2022–2023» of the Bank of Russia, aimed at finding out whether the designed monetary policy will contribute to solving the main problems of the Russian economy. Leaning towards a generally negative answer to this question, the authors of the article, firstly, establish that some of these problems, including problems whose solution falls within the direct competence of the Bank of Russia, and which, accordingly, fall within the subject area of the regulatory instruments available to the Central Bank of the Russian Federation, are clearly insufficiently worked out in the document or, worse, only simply indicated. Unfortunately, this also applies to the key reproduction tasks associated with ensuring rapid, sustainable and high-quality economic growth. Secondly, they fix the year that began in March 2021 new round of increase in the key rate of the Bank of Russia. Third, they emphasize the fact of the negative synergy of the Bank of Russia’s tight monetary policy and the Russian Ministry of Finance’s tight budget policy, designed for the period up to 2023. The article substantiates the need for a coordinated approach of financial regulators and agencies to solve the problems of overcoming the crisis and stimulating economic growth.

Monetary policy transmission: Balance sheet channel and investment behavior of firms in Pakistan

Purpose - This study investigates the relevance of the balance sheet channel of monetary policy transmission concerning non-financial firms at the Pakistan Stock Exchange (PSX), a firm-level data.Methods - This paper estimates a family of panel data regression models and constructs a dummy variable for monetary policy tightness.Findings - The result indicates a positive relationship between cash flows and investment during periods of monetary tightness. The impact on cash flows is visibly more pronounced than that of the quantitative effect of an increase in capital cost, which gives rise to a balance sheet channel. Three financial constraints, namely size, leverage, and dividend policy, are used to segregate firms into financially constrained and unconstrained firms.Implication - The results highlight the balance sheet channel impact on smaller firms cash. The cash flows of highly leveraged firms were impacted more during the tight monetary policy periods and thereby were more prone to decline in investments. Results on constraints of dividend policy are, however, inconclusive.Originality - The paper contributes to the literature by investigating the relevance of the balance sheet channel of monetary policy transmission concerning non-financial firms using firm-level data. It also contributes to the literature by constructing a dummy variable to measure monetary policy tightness.

Monetary Policy, Inflation, and Distributional Impact: South Africa’s Case

The South African Reserve Bank has continued to fulfill its constitutional mandate to protect the value of the local currency by keeping inflation low and steady. This paper provides evidence that monetary policy tightening aimed at maintaining low and stable inflation could at the same time reduce consumption inequality over a 12–18 month horizon, commonly understood as the transmission lag of monetary policy action to the real economy, and similar to the distance between survey waves used in the analysis. In response to “exogenous” monetary policy tightening, the real consumption of individuals at lower ends of the consumption distribution declines relatively modestly, or even increases. With greater reliance on government transfers, thus smaller reliance on labor income, and relatively larger food consumption, these individuals appear to benefit mainly from lower inflation. By contrast, the real consumption of individuals at higher ends of the consumption distribution is more likely to decline due to lower labor income, weaker asset price performance, and higher debt service cost.

A critical analysis of the Brazilian ‘expansionary fiscal austerity’: why did it fail to ensure economic growth and structural development?

ABSTRACT This paper discusses the Brazilian economy since 2015. After an economic boom from 2005 to 2011, Brazil entered a downturn, which resulted in a strong recession in 2015 and 2016. The Economic Authorities understood that the cause of the crisis was due to an expansionary economic policy undertaken over the period 2009–2014; thereby the solution for the recession would be quite the opposite: fiscal austerity and tight monetary policy. However, the restrictive economic policies did not grant growth: Brazil grew a little bit more than 1.0% on average over 2017–2019. It was this stagnated Brazil that the Covid-19 pandemic met, turning it worse than what had already been bad. In view of that, we explain why the ‘expansionary fiscal austerity’ failed to furnish growth and debate what should be undertaken to ensure a sustainable economic activity and structural development.

Monetary Policy and the Corporate Bond Market: How Important is the Fed Information Effect?

Does expansionary monetary policy drive up prices of risky assets? Or, do investors interpret monetary policy easing as a signal that economic fundamentals are weaker than they previously believed, prompting riskier asset prices to fall? We test these competing hypotheses within the U.S. corporate bond market and find evidence strongly in favor of the second explanation—known as the "Fed information effect". Following an unanticipated monetary policy tightening (easing), returns on corporate bonds with higher credit risk outperform (underperform). We conclude that monetary policy surprises are predominantly interpreted by market participants as signaling information about the state of the economy.

Monetary policy tightening, accounting information comparability, and underinvestment: Evidence from China

Based on a macro and micro cross view, we empirically test the interactions among monetary policy, accounting information comparability, and investment efficiency with a sample of A-share listed firms in China from 2005 to 2019. We find that tightening monetary policy will aggravate underinvestment behavior, such as inefficient investment, while improvement in accounting information comparability can effectively mitigate the negative impact of tightening monetary policy on underinvestment, so as to improve firm investment efficiency. Further study shows that, in a period of monetary policy tightening, firms with high agency costs and high financing constraints can significantly reduce underinvestment by improving the comparability of accounting information, thus improving the investment efficiency of firms. After distinguishing the type of firm ownership (state-owned enterprises vs. private enterprises), we find that firms can reduce the effect of insufficient investment during a period of monetary tightening by improving the comparability of accounting information, which is more significant in the sample of private enterprises (PEs).

Cross-Border Bank Flows and Monetary Policy

Abstract We analyze the impact of monetary policy on cross-border bank flows for a large sample of countries over two decades. We find evidence in favor of a cross-border risk-taking channel, as the monetary policy stance of source countries is an important determinant of cross-border bank flows. A relatively tighter monetary policy in source countries prompts banks to reallocate their lending toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for source countries with lower-capitalized banks. Also, the reallocation is directed toward foreign borrowers in relatively safer destinations, such as advanced economies or economies with investment-grade sovereign ratings.

Wage Rigidity Impacts on Unemployment and Inflation Persistence in Tunisia: Evidence from an Estimated DSGE Model

This paper analyzes the effects of nominal wage rigidity on inflation persistence and unemployment using a dynamic stochastic general equilibrium model for the Tunisian economy. The model is estimated by using the Bayesian approach for a small open economy, allowing to simultaneously introduce nominal wage rigidity and unemployment in the labor market. Our main finding is that in the Tunisian context, the interest rate effects are mainly limited by the wage policy. The paper also provides estimates of the nominal wage rigidity implications on unemployment. Indeed, in a context of wage rigidity, a tightening monetary policy results in a slowdown in the activity level and an increase in the unemployment rate. A 1% increase in the interest rate causes prices to decrease by only 0.02%, while the unemployment rate rises by 0.2%. These results have important considerations for the monetary authorities in Tunisia. Dealing with nominal wage rigidities would be necessary in order to allow a better transmission of the monetary policy.

A SYSTEM DYNAMIC APPROACH FOR DETERMINATION OF OPTIMAL MONETARY POLICY DURING THE COVID-19 ECONOMIC CRISIS: A CASE OF TURKEY

Starting from mid-March 2020, Covid-19 outbreak spread across the world, the implementation of the social distance and closing the country borders led to the shutdown of economic activities and bring uncertainties for financial markets. Uncertainties have caused a decrease in global risk appetite and resulted to important portfolio outflows from emerging countries. In this process CBRT has started to adopt monetary expansion measures through rate cuts asset purchases to stimulate the financial markets. In this context, this article aims to explore the effects of expansionary monetary policies of CBRT on economic growth, inflation and financial stability in Turkey with a holistic approach. Using a dynamic model, two scenarios were developed covering the period from January 2010 to May 2020. In the first scenario, when monetary expansion policy is implemented, it is assumed that the policy rate and required reserves will not change, but a growth-oriented policy will continue. In the second model, a tight monetary policy, foreign capital inflow and, if necessary, a foreign currency intervention scenario was designed. It was observed that an expansionary monetary policy scenario that is not based on external resources did not fully realize the expected economic recovery. The findings obtained in the second scenario are more effective than the first scenario. Besides that, the second scenario is found more effective on growth, inflation and financial stability.

Liberia

Restoring macroeconomic stability, providing a foundation for sustainable inclusive growth, and addressing weaknesses in governance remain the main objectives of this program. While allowing for a slight fiscal loosening to meet humanitarian needs during the COVID-19 pandemic, tight monetary policy, much improved public financial management, domestic revenue mobilization, and zero central bank financing have supported the administration’s efforts to achieve price and exchange rate stability. This has helped to preserve the purchasing power of the poor who were the most affected by the high inflation environment at the program’s inception. The authorities consider bringing the ECF-supported program back on track of utmost importance and are committed to their development plan, the Pro-Poor Agenda for Prosperity and Development (PAPD).

Advanced International Business: A Review Article

The global economy's downturn was slower than previously regarding world economic growth, trade tensions, monetary policy tightening, and the crisis from the COVID-19 outbreak. Such negative factors affect the export, tourism industries, and all sectors lead to a fall in consumer trust. All businesses must control their business model and adapt to shifts in political, economic, management, cultural factors, evolving customer preferences, and technological innovation as its competitive advantage in local and global businesses. The political will impact both risks and opportunities to the global economy. A threat is such a tariff that blocks the purchase. The economic downturn harms corporate practices regarding diminished buying power and low wages and implications for a decision to grow a global business. Different cultures, languages, ethnicities, religions, national work systems, values, and standards affect global business expansion. Many companies require attention from all participants, not only for organizational culture-employee behaviors but also for customers and stakeholder satisfaction regarding its management. Therefore, the effect of all participants on its operation, both local and global businesses. This review article focuses on the worldwide economy, globalization, and the global market.

The impact of macroeconomic policies on Tunisian current account, an ARDL approach

During 1980-2010 Tunisian current account deficit was persistent and worsens between 2011-2018 following the Jasmine revolution of 2011 and contribute to slow down country growth and development. The objective of this study is: 1) to examine the linkage between persistent Tunisian current account deficit and a broad set of macroeconomic variables related to fiscal, monetary and trade policies between 1980-2018; 2) enlighten policy makers in their decision-making process related to the adjustment mechanisms. Based on ARDL approach, the key findings of this study show robust empirical evidence of short and long-run effects of fiscal and monetary policies, while the effect of trade policy is only apparent in the short-term. Therefore, we conclude that, in the short-term, both a tight monetary policy and a balanced fiscal budget are necessary to adjust the current account balance. However, these reforms are not sufficient; making the Tunisian current account deficit sustainable requires structural changes to the economy over the long-term.

Macroeconomic environment of India: An outlook

The stability of Macroeconomic environment is very much essential to sustain the overall competitiveness of a country. During the session of 2011-13 Indian economy was highly affected by uncertainty and volatility in currency exchange fluctuations. The world economy also remains challenged due to slowdown in advanced and emerging economies. Gross Domestic product of India increased by 5% in 2012-13 as against of 6.2% in 2011-12. Slacking external demand, weak business sentiment, tight monetary policy with inflation etc. are some point of reasons of slowdown in industrial and service sector. A high trade deficit was visible during the FY 201213. Merchandise exports have decreased and imports have increased during the FY 2012-13. But government of India has taken some unique steps by outlining a fiscal consolidation road map in order to reduce the fiscal deficit and a slow recovery in economic activity is expected in 201314.

Monetary Policy, Interbank Liquidity and Lending Behaviour of Banks in India

In this paper we investigate the role of interbank liquidity in monetary policy transmission in India. We employ standard and dynamic panel regression methods to analyze data for 40 commercial banks during the period 1999-2018. We find a significant role of interbank liquidity in easing the negative impact of monetary policy tightening on bank lending. We also find heterogenous role of interbank liquidity in monetary policy transmission across public sector and private sector banks. The policy implication for the monetary authority in India is that managing net liquidity positions of banks is necessary to realize the desired effects of monetary policy.

Money Matters: Global Banks, Safe Assets and Monetary Autonomy

This paper depicts an often neglected channel of transmission of monetary policy, namely international safety appetite, as an important source of production and risk-taking international monetary spillovers. The model features a local economy with exogenous financial frictions that lead firms to need both local and foreign financing to pay for their factors of production. Global and local risk-averse banks supply firms with risky loans while buying safe assets to governments to hedge themselves against equity shocks. Monetary policy shocks of a hegemon currency issuer affect returns obtained by banks for the risky loans they concede, altering these agents' risk pricing and balance sheet composition. Main results outline that global monetary policy tightening reduces the returns of risky global loans, inducing global banks to reduce risky loan creation, ultimately decreasing both production and consumption volatility internationally. Two more secondary results arise. First, local monetary authorities may counteract global monetary policy spillovers, but this will entail a trade-off between boosting production and reducing consumption volatility. Second, both global and local expansive monetary policy increase the demand for global safe assets, relaxing the budget constraint of monopolistic global safe asset issuers. Understanding the international safety appetite mechanism of transmission appears to be of critical importance as it may impact the effectiveness of monetary policy in open economies as well as its optimal design.