Tight Monetary Policy Research Articles

Effect of Exchange Rate on Domestic Price Level in Nigeria

Nigeria experienced significant depreciation of her currency during the specified period of this study, mainly due to factors such as falling oil prices, external economic conditions such as slowdown in global economic growth, trade tensions which led to capital outflows from emerging markets including markets in Nigeria, tightening of global monetary policy which affected capital flows to these emerging markets, coupled with domestic macroeconomic challenges like concerns over policy consistency, governance issues and security challenges, capital flight and weakened investors’’ confidence. These conditions collectively created an adverse environment for the Nigerian economy, leading to the depreciation of Naira. Consequently, this study set out to achieve the main objective of investigating on a more recent basis, effects of exchange rate on domestic price level in Nigeria. The period covered was from January 2015 through December 2022. The study adopted the Autoregressive Distributed Lag (ARDL) model and the variables included consumer price inflation, nominal exchange rate, import prices, international crude oil prices and real output growth. We found insignificant positive impact of the nominal exchange rate on consumer price inflation in Nigeria. The import prices also proved a significant effect on consumer price inflation in Nigeria. the study recommends that Governments at all levels in the country should encourage and support the innovative ideas of business firms and individuals. This will support local production, hence, there can be substitution of imported goods for domestically produced goods and the exchange rate will be stable.

A World on Fire: Observations and Speculations in a Crottyian Vein

I offer this article as a small way of honoring my friend, mentor, and role model Jim Crotty, whose intellectual legacy, commitment to engaged scholarship, lived experience, and warmth and generosity continue to influence me profoundly. Here, I offer several observations and speculations on the state of play in the global and US financial systems in a Crottyian vein. These include several 1980s throwbacks—bank failures in the United States; rentier-driven tight monetary policies across the world with attendant negative effects; and, debt distress and the likelihood of a (new) “lost decade” in the Global South. These familiar experiences are unfolding against the backdrop of an interregnum in which a “post-American global financial order” is emerging in an environment marked by “productive and destructive incoherence.” JEL Classification: F02, F33, O23, E44, E58

On the effectiveness of foreign exchange reserves during the 2021-22 U.S. monetary tightening cycle

This paper examines whether the size of foreign exchange (FX) reserves explains cross-country differences in foreign currency depreciation realized over the 2021-22 Federal Reserve monetary policy tightening that led to a sharp appreciation of the US dollar. Across a broad sample of countries, we document that an additional 10 percentage points of FX reserves/GDP held ex-ante were associated with 1.5 to 2 percent less exchange rate depreciation against the US dollar and this buffer effect was larger among less financially developed economies. Effects were more pronounced for large-reserve countries that sold reserves to intervene than for large-reserve countries that did not intervene, supporting the presence of both balance sheet and intervention channels. Higher ex-ante policy rates were also associated with less depreciation especially among financially open economies. An analysis of daily currency movements following the June 2021 FOMC meeting corroborates the main results. These findings suggest that FX reserves may promote monetary policy independence in the presence of global spillovers.

Bank homogeneity and risk-taking: Evidence from China

Homogeneity is a prominent problem facing China's banking industry, which is essentially a low-level competition lacking core competitiveness and brings challenges to the security and stability of the financial system. We find that homogeneity increases bank risk-taking, and this result is heterogeneous among different bank characteristics. It is further shown that reducing franchise value and increasing liquidity creation are two rational mechanisms through which bank homogeneity increases risk-taking. We also find that homogeneity increases common risk exposure and intensifies competition among banks, and economic policy uncertainty, tight monetary policy, and bank competition will prompt them to take more risks. Overall, our research suggests that in a banking system with restricted business models and strong regulatory constraints, homogeneity fails to achieve risk-sharing but increases individual risk-taking.

Small and Medium-sized Enterprises Private Equity Risk Management

Small and medium-sized enterprises are playing an important role in Chinese economic development. However, due to the lag in system construction, the scale of small and medium-sized enterprises is relatively small; many of these enterprises lack funds, and it is difficult to get loans. The financing difficulty of small and medium-sized enterprises always exists in China, which has become an important reason restricting their further development. In the past, smes used to borrow money from banks to finance their development. They have been borrowing from banks with their assets as collateral, but as the country has adopted a tight monetary policy, most of the loans applied for by smes have been rejected by banks. Private equity fund has the characteristics of low financing threshold and high added value of enterprises, helping many small and medium-sized enterprises to solve the capital problem, enabling them to develop and grow. In the process of private equity fund financing, the macro environment and micro factors bring huge risks to the whole financing process. Therefore, it is necessary to evaluate, analyze and control every risk that may cause financing failure in the financing process. This paper uses the method of literature review, qualitative and quantitative combination, through the construction of small and medium-sized enterprise private equity fund investment risk evaluation index system, from the micro and macro environment to evaluate and analyze the risk, for the analysis of small and medium-sized enterprises may face financing risk to provide effective avoidance measures.

Corporate market power and monetary policy transmission in Asia

This paper empirically examines the effect of corporate market power on monetary policy transmission in Asia. Using panel local projections based on a firm-level dataset for 11 advanced and emerging Asian economies, we find that after a monetary policy tightening, the real sales of firms with low market power significantly decline, while real sales of firms with high market power respond little. Moreover, we find that the average responses of firms’ real sales to monetary policy shocks are driven by firms with low markups. Our findings indicate that rising market power impairs the effective transmission of monetary policy. We discuss the implications in terms of balancing the need for industrial policies that promote innovation-led productivity against effective competition policy to compress heterogeneity in market power dynamics and enhance the monetary policy transmission mechanism.

Undesired monetary policy effects in a bubbly world

AbstractStock market bubbles arise as a joint monetary and financial phenomenon. We assess the potential of monetary policy in mitigating the onset of bubbles by means of a Markov-switching Bayesian Vector Autoregression model estimated on US 1960–2019 data. Bubbles are detected and dated from the regime-specific interplay among asset prices, fundamental values, and monetary policy shocks. We rationalize the empirical evidence with an Overlapping Generations model, able to generate a bubbly scenario with shifts in monetary policy, and where agents form beliefs over transition dynamics. By matching the VAR impulse responses, we find that procyclicality and financial instability align with high equity premia and the presence of asset price bubbles. Monetary policy tightening, by increasing real rates, is ineffective in deflating bubble episodes.

Are Cryptocurrencies Really a Threat to the Financial Stability and Economic Growth? Evidence From the Cointegration Approach

The main purpose of this paper is to investigate whether the cryptocurrency market affects financial stability and economic growth of India. The study used quarterly data on bitcoin, financial stability, inflation rate, real GDP, economic volatility uncertainty, exchange rate, and market volatility index for the period 2015Q1-2021Q4. The robustness of the findings was confirmed by the fully modified OLS (FMOLS) and canonical cointegration regression (CCR). The study results demonstrated that an increase in cryptocurrency investments will affect the financial stability of India significantly. Each 1% increase in the cryptocurrency would reduce the financial stability by 5% approximately. However, there was a marginal effect of cryptocurrency on economic growth. The results also found that exchange rate volatility and inflationary pressure would also deteriorate the financial stability of the country. Furthermore, the results also identified positive and significant cointegration between economic growth and financial stability. Due to most transactions in the economy being done through the financial system, it is paramount for economic growth. Going forward, aggressive monetary policy tightening, volatility in capital flows and exchange rates, deanchoring of inflation expectations, faltering in the economic recovery, disruptions due to global supply chains and climate change will be the major risks to the financial stability and economic growth of India.

The Nexus Between Monetary Policy, Innovation Efficiency, and Total Factor Productivity-Evidence from Global Panel Data

ABSTRACT This research explores the impact of monetary policy on the growth rate of total factor productivity (TFPG) and innovation efficiency (IE) through panel data of 30 countries from 1983 to 2018 by the bias-corrected fixed-effect dynamic (BCFE) model. We find that tight monetary policy negatively impacts the growth rate of total factor productivity (TFPG) and innovation efficiency (IE), which is still valid after a series of robustness tests. We then perform sub-sample regressions, and the results show that countries with higher government efficiency, higher financial development, and stricter environmental policy can reduce the negative impact of tightening monetary policy on total factor productivity and innovation efficiency. Our research illustrates that a tightening monetary policy not only adversely impacts total factor productivity but also influences the main driving force of its growth-innovation efficiency.

Bàn về một số phương pháp lượng hóa rủi ro tỷ giá

Exchange rate is the price of one currency expressed in terms of another currency. The fluctuation of the exchange rate depends on both domestic factors and foreign factors, in which changes in interest rate policies of central banks become a factor that causes exchange rates to fluctuate rapidly, significantly, and unpredictably. From the beginning of 2022 up to now, inflation has been exploded all over the world, including the US, EU and developed countries, forcing central banks to apply tight monetary policies by raising interest rates. During the period from the beginning of 2022 until now, the US Federal Reserve (Fed) has raised interest rates 8 times with a very high frequency and great intensity, causing the USD to be appreciated against most currencies, including VND. When the exchange rate fluctuates, it will affect almost all of economic activities such as import-export activities, foreign investment, international trade competitiveness, and even businesses and consumers that do not generate receipts or payments in foreign currency. Therefore, the study of measurement of exchange rate risks has become increasingly important from the perspectives of both theory and practice

Становлення мікро- та макроекономічного аналізу фінансового посередництва Стаття друга. Макроекономічний аналіз ролі фінансових посередників у роботах Б. Бернанке та застосування теорії фінансового посередництва у боротьбі з фінансовими кризами

The second of two articles which reveal the theoretical and practical significance of the researches awarded 2022 Sveriges Riksbank Prize in Economic Sciences. The author shows the theoretical and practical influence of B. Bernanke's research on the non-monetary effects of the banking crisis on the course of the Great Depression, which marked the beginning of recognition and measurement of the macroeconomic effects of financial intermediaries as institutions performing important functions under information asymmetry. The peculiarities of the global financial crisis and the latest crisis processes in the banking sector, which are taking place in the conditions of a change in the global monetary environment, are considered in light of the laureates' works. This change – a rapid tightening of monetary policy in developed economies was a reaction not only to global price shocks associated with the full-scale Russia's invasion of Ukraine, but also to the previous delay in anti-inflationary efforts in the conditions of a combination of supply shocks with monetary demand stimulation and monetary authorities' faith in well-anchored inflationary expectations. The article considers the extent to which the crisis processes at Silicon Valley Bank, Signature Bank, First Republic Bank and Credit Suisse are described by the models developed by the 2022 Nobel laureates. Based on that analysis, the author adjusts the answer to the question about the role of banking panics in the market economy. Probable directions for reforming banking regulation in the USA are characterized. It is substantiated that the government faces a complex set of tasks: to minimize social losses from banking panics; to prevent large business losses that would have broad macroeconomic consequences; and to prevent irrational contagion with panic moods and panic as a self-fulfilling prophecy, without eliminating the very possibility of depositors fleeing from a bank with poor management. It is shown that increasing and complicating the public presence in the financial sector has an extremely powerful and difficult to assess influence on the incentives of financial intermediaries, which embody the latter’s nature as special economic entities.

Are cryptocurrencies a threat to financial stability and economic growth of India? Evidence from the cointegration approach

The purpose of this paper is to investigate whether the cryptocurrency market affects the financial stability and economic growth of India. The study used time series quarterly data on bitcoin, financial stability, inflation rate, real GDP, economic volatility uncertainty, exchange rate, and market volatility index for the period 2015Q1–2022Q4. The robustness of the findings was confirmed by the fully modified OLS (FMOLS) and canonical cointegration regression (CCR). The study results demonstrated that an increase in cryptocurrency investments will affect the financial stability of India significantly. Each 1% increase in the cryptocurrency would reduce the financial stability by 5% approximately. However, there was a marginal effect of cryptocurrency on economic growth. The results also found that exchange rate volatility and inflationary pressure would also deteriorate the financial stability of the country. Furthermore, the results also identified positive and significant cointegration between economic growth and financial stability. Due to most transactions in the economy being done through the financial system, it is paramount for economic growth. Going forward, aggressive monetary policy tightening, volatility in capital flows and exchange rates, de-anchoring of inflation expectations, faltering in the economic recovery, disruptions due to global supply chains and climate change will be the major risks to the financial stability and economic growth of India.

The role of a discount rate in a transmission mechanism and its influence on the deposits market

The article focuses on the analysis of the dynamics of the discount rate as a key monetary policy tool. It examines how the discount rate, through the transmission mechanism, influences fluctuations in interbank interest rates and the bank deposit market. The study examines the indicators of Ukraine's banking sector over the past 5 years, considering the impact of external shocks such as the COVID-19 pandemic and large-scale armed aggression by Russia. These factors have resulted in inflation and interest rate growth in developed countries, a stronger US dollar, decreased business activity, and negative business expectations, all of which significantly impact Ukraine's small open economy. Consequently, the National Bank of Ukraine has implemented measures to stimulate creditworthiness, support entrepreneurship during lockdowns, and ensure access to profitable long-term financing, while also maintaining stability in the banking system during crises. The study analyzes the effects of the regulator's policy of increasing the discount rate and curtailing anti-crisis measures to curb inflation, which have had positive consequences during the most challenging crisis periods and the initial stages of economic recovery. It also highlights macroeconomic measures and restrictions imposed by the central bank to stabilize the economy in the face of a full-scale Russian military invasion, including state interventions to offset costs in priority areas of the economy. Despite the ongoing impact of tight monetary policy on the domestic market, a potential slowdown in inflation, stabilization of the exchange rate, and the funding market may contribute to the revival of the interbank market, bank lending, and potential revision of the discount rate and/or dollar exchange rate in the long term. The study further conducts a simulation of the balanced level of the discount rate using the classic Taylor equation, indicating the possibility of revising and gradually relaxing tight monetary conditions in 2023. However, it suggests that the rate reduction may be moderate, around 0.5-1.5 percentage points in the short term and 2 to 4 percentage points in the medium term. Overall, the study underscores the importance of the discount rate as a monetary policy tool and its implications for Ukraine's banking sector, given the external shocks and challenges faced by the country.

Research on the Two-way Influence of US Monetary Policy Since the COVID-19 Pandemic

Based on the novel coronavirus outbreak, the global economy has been strongly impacted, resulting in a worldwide economic recession. This paper mainly studies the orientation and target changes of the US monetary policy, adopts the method of dialectical analysis and data empirical analysis to study the two-way influence of the Fed monetary stance, and shows that implementation of monetary policy has an obvious two-way influence on the economy, that is, monetary policy will inevitably cause the imbalance between inflation and unemployment rate. Expansionary monetary policy can reduce unemployment and stimulate the economy meanwhile, it will lead to the accumulation of inflation. The tightening of monetary policy will lead to unemployment and economic recession while easing inflation. Excessive accumulation of negative consequences of monetary policy will result in a deeper economic crisis, which will become the main factor affecting the change of monetary policy direction. This shows that the monetary stance orientation of the Federal Reserve is based on the balance of advantages and disadvantages of its two-way effects, and the timely change of monetary policy orientation is the key to mitigating the negative effects caused by monetary policy.

Climate Finance: An Overview

Climate Finance: An Overview

Non-significant in life but significant in death: Spillover effects to euro area banks from the SVB fallout

Did Silicon Valley Bank (SVB) fallout spillover to the euro area banking sector? We find that euro area banks’ cumulative abnormal returns declined by about 10% on average after the collapse of SVB. Surprisingly, we also find that investors did not react to euro area banks sharing similar vulnerabilities as SVB, such as lower liquidity and less stable funding sources. Instead, they were more concerned about the possible negative repercussions on banks’ balance sheets coming from the pace of the current monetary policy tightening.

Factor-Augmented Vector Autoregression with narrative identification. An application to monetary policy in the US

We extend the Bayesian Factor-Augmented Vector Autoregressive model (FAVAR) to incorporate an identification scheme based on an external instrument approach. Using this novel modelling framework, we show that a monetary policy tightening in the United States has contractionary effects on the economy. Moreover, accounting for a large information set seems to help mitigate price and real economic puzzles in the estimated impulse responses.

The state of the global financial architecture: current trends and prospects for reform

Methods. The methodological basis of the research is a system of general scientific and specific methods, in particular, the method of logical analysis made it possible to build the logic of the research; the method of comparison – to assess the key parameters of the global financial architecture; analysis and synthesis – to generalize research results, the deduction method – to single out individual factors affecting the state of the modern world financial architecture. The graphic method made it possible to visualize the obtained research results. Results. The article is devoted to defining the trends of the world financial architecture. The structure of the modern world financial architecture, which includes global, regional and national levels, has been formed. The main problems of the global financial system have been identified, such as: the emergence of «bubbles» in some of its segments; increased volatility of international capital flows; volatility of exchange rates, etc. A list of global indicators influencing the global financial architecture has been determined. The need to reform the world financial architecture as a result of the global economic crisis of 2008–2009 is substantiated. The main directions of reforming the world financial architecture are identified: global financial management; banking sector; over-the-counter derivatives market and fight against offshore jurisdictions. New risks were identified, which caused the need to develop new mechanisms for reforming the global financial architecture at the end of 2018 – the beginning of 2020, the threat of new crises in countries with markets based on the principle of the «contagion effect». The impact of the pandemic on the world stock market was studied through the dynamics of the FTSE, Dow Jones Industrial Average and Nikkei indices. The article substantiates that an important aspect of the current state of the global financial architecture is the wide implementation of FinTech innovations. It has been proven that the war situation in Ukraine definitely affects the state of the financial architecture due to the strengthening of global inflation and the tightening of monetary policy by Ukraine's partner countries. Novelty. The originality and value of the research lies in the formation of a methodology for diagnosing the state of the world financial architecture. The main trends in the functioning of the world financial architecture have been determined. The importance of FinTech for achieving progressive changes in the global financial system and the development of the global financial architecture is determined. Practical value. There is substantiated the practical role of certain factors, which made it possible to determine the trends of the current state of the world financial architecture, which will become an analytical basis for assessing the degree of development of the financial architecture of the countries of the world.

Global Inflation and Global Monetary Policy Tightening: Implications for the Euro Area

Global Inflation and Global Monetary Policy Tightening: Implications for the Euro Area

Monetary policy uncertainty and corporate cash holdings: Evidence from China

This paper empirically explores the effect of monetary policy uncertainty on corporate cash holdings in China. We find robust evidence that monetary policy uncertainty is positively related to corporate cash holdings. The firms’ precautionary behavior in cash holdings is chiefly attributed to the increase in financial frictions rather than the reduction in corporate investments. The promoting effect of monetary policy uncertainty on cash holdings is more pronounced among firms with more severe financial constraints, firms with higher dependence on external finance, firms with worse access to bank financing, and non-SOEs, and during the period of monetary policy tightening. Our study suggests that firms hold more cash to cushion potential liquidity shortfalls induced by the increase in monetary policy uncertainty.