Tight Monetary Policy Research Articles

Impacts of Tightening Monetary Policy on the stock market in Korea

Impacts of Tightening Monetary Policy on the stock market in Korea

Assessment of the Financial and Economic Security Level of the EAEU Member States in the Context of Growing Macroeconomic Uncertainty

The main factors of macroeconomic uncertainty for the Eurasian Economic Union member states are the threat of a global financial crisis, long-term restrictive measures associated with the spread of the pandemic, trade wars between major states, new sanctions, volatility in commodity prices, growing inflationary pressures, internal risks of tightening monetary policy, volatility of national currencies, as well as an increase in the budget deficit and total debt. There is a need to protect against undesirable external influences and radical internal changes in the conditions of global instability, to assess the socio-economic potential of the Eurasian Economic Union member states on the way to a single integration space, in other words, the need for security is a basic, fundamental need, both for the life of an individual and including society and the state, which makes this study more relevant. The COVID-19 pandemic had a major impact on many economic and social processes. In these difficult conditions of external factors' influence, the system of ensuring financial and economic security acquires significance. The conducted research allows concluding that, firstly, the economic security of the countries of the Eurasian Economic Union is a complex concept that reflects the state of the financial system of countries, their ability to timely and reliably meet needs of the economy in the amounts necessary to provide growth of the economy in the conditions of integration. Moreover, the indicators of budget and stability of investments of each of the countries determine the level of the EAEU member financial security.

Прогноз валютной пары USD/RUB в краткосрочном периоде

The article provides a forecast of the USD/RUB currency pair based on the equation of a linear downward trend. The aim of the research is forecasting the USD/RUB currency pair to determine the effectiveness of Russia's foreign economic activity and the real incomes of the country's population in the future, which makes the research relevant. The research is carried out using the following scientific methods: analysis, synthesis, monographic (description of Russian macroeconomics), statistical (identification of trends, calculation of correlation coefficients, graphic). The research is based on statistical data on the economic indicators of the Russian Federation: the USD/RUB currency pair, exports, imports, trade balance, the consumer price index, the key rate of the Central Bank of the Russian Federation, the M2 monetary aggregate, the US dollar index, the Moscow Exchange Index (IMOEX). The USD/RUB currency pair is the main macroeconomic indicator influenced by Russian foreign economic factors: trade balance, inflation, key interest rate, money supply, US dollar index, Moscow Exchange Index (IMOEX). In the short term, the connection of the USD/RUB currency pair with the presented macroeconomic indicators has weakened. Therefore, the forecast of the exchange rate of the Russian ruble against the US dollar should be made on the basis of the trend equation. It has been established that, in the short term, the USD/RUB currency pair has the potential to decline, which is negative for exporters, but positive for the real incomes of the country's population. The sharp decline in the USD/RUB currency pair in recent months has been caused by the regulatory and legal currency regulation in the Russian Federation. It implies the following measures: restrictions on the issuance of US dollars from foreign currency deposits and accounts of citizens, on the sale of US dollars by banks to the public, on the transfer of US dollars abroad; high commissions for the purchase of US dollars on the stock exchange; restrictions on short sales of currencies on the stock exchange; mandatory sale of foreign exchange earnings by exporters; the use of Russian rubles in settlements for natural gas supplied to unfriendly countries; tight monetary policy of the Central Bank of the Russian Federation. The cancellation of these regulatory and legal measures of currency regulation will return the long-term trend of weakening of the Russian ruble against the US dollar.

ВПЛИВ МОНЕТАРНОЇ ПОЛІТИКИ НА ФОРМУВАННЯ МОНЕТАРНОЇ БЕЗПЕКИ ДЕРЖАВИ

Monetary policy is an important tool for ensuring economic and financial security of the state and has a strong influence on the national economic processes, which necessitates its study in the context of security. The development and implementation of effective monetary policy is an effective means of regulating the sphere of money circulation and credit relations, stabilization of the national currency to curb inflation, balancing the balance of payments and stabilization economic growth. Effective monetary policy minimizes and counteracts monetary threats, which allows to ensure a sufficient level of monetary security of Ukraine as a component of financial security. The aim of the article is to investigate the current impact of the NBU's monetary policy on the formation of monetary security of the state, given that the economic crises in Ukraine were of financial origin and monetary nature. The authors investigated that the achievement and provision of monetary security in the country depends on monetary policy. At the same time, the financial and monetary spheres are constantly generating challenges and threats that can turn into risks to the monetary security of the state. Therefore, it is important to study the sequence of measures to increase the effectiveness of the NBU's monetary policy and its impact on the monetary security of the state, in order to counter monetary risks and threats. In the article the authors presented the scheme of sequence of monetary policy formation in the context of monetary security, through a set of actions to identify monetary risks and threats, diagnose the level of monetary security and ensure the optimal level of monetary security. The main monetary measures to strengthen monetary security should be to strengthen coordination between fiscal and monetary policy; adherence to tight monetary policy in crisis conditions; increasing trust to the banking system. The authors concluded that there is a close relationship between the implementation of monetary policy and monetary security of the state. Only a clear, consistent and effective monetary policy can minimize monetary risks and threats, which in turn provides a sufficient level of monetary security

National industrial policy: issues of modern history, theoretical aspects of formation

In the recent history of the Russian economy of the 1990s, the relevance of the formation of a special state industrial policy was not recognized. The policy was aimed at liberalizing prices and foreign economic activity, mass formed privatization and tight monetary policy. There were no signs of industrial growth in general and progressive changes in the industrial structure of production. The attempts of the industrial department and leading associative organizations to formulate the conceptual foundations of the state industrial policy were considered. Adopted in 2014 the federal Law on industrial policy, despite its generally constructive role, did not ensure the proper effectiveness of production processes. The article provides recommendations for clarifying a number of terms in the field of industrial policy. A typology of its types is proposed. Its types are characterized as open and closed, active and passive, vertical and horizontal, soft and hard. Theoretical approaches to the modernization of the current state industrial policy are substantiated. The necessity of having the Concept of national industrial policy as part of the documents of strategic planning of the economy is substantiated.

The effect of monetary policy on China’s housing prices before and after 2017: A dynamic analysis in DSGE model

There is an anomaly of “the more regulation, the more rise” in China’s housing market before 2017. However, the anomaly seems to have reversed since 2017. To analyze the mechanism that leads to this transition, we construct a Dynamic Stochastic General Equilibrium (DSGE) model, including the public expectations about monetary policies. Before 2017, housing prices still rise due to the“tight-loose-tight…” regulatory policy, which leads the public to expect that tightening policies will not continue. However, since 2017, the government strengthens the consecutive tight policy, which leads to a continuous tight policy expectation like “tight-tight-tight…”. That’s the key to stabilizing China’s housing prices. The numerical analysis shows that the persistence of tight policies and the public’s expectations are the most important factors affecting China’s housing prices. As for China’s government, it is not only necessary to maintain the tightening policy but also to guide the public to form expectations of continuous tightening policy. As for the public, it is necessary to make investment decisions by judging the persistence of tight monetary policy.

In the face of spillovers: Prudential policies in emerging economies

We examine whether emerging market prudential policies help to reduce the macro-financial spillover effects of US monetary policy. We find that emerging markets with tighter prudential policies face significantly smaller, and less negative, spillovers to total credit from US monetary policy tightening shocks. Reserve requirements and, to a lesser extent, loan-to-value ratio limits appear to be particularly effective prudential measures at mitigating the spillover effects of US monetary policy. Consistent with the bank-lending channel, our findings indicate that domestic prudential policies can dampen emerging markets’ exposure to US monetary policy and the associated global financial cycle, even when accounting for capital controls. These findings suggest they may be a useful tool in the face of international macroeconomic policy trade-offs.

Monetary and macroprudential policies, output, prices, and financial stability

We examine the time-varying causal link between monetary policies and macroeconomy, macroprudential policies and financial stability in China. We find that expansionary monetary policy leads to output growth, tightening monetary policy leads to price stability, and tightening quantitative monetary policy or expanding price-based monetary policy is effective in maintaining financial stability. In response to stagnation or deflation, the central bank implements an expansionary monetary policy. To prevent financial turbulence, the central bank pursues an expansionary quantitative monetary policy or a tight price-based monetary policy. In addition, macroprudential policy should be used in conjunction with monetary policy to maintain financial stability.

Surname relationship and trade credit: Evidence from China

Surname relationship is a typical culture in China, which may cause impact on companies’ access to trade credit, an important alternative financing channel for bank loans. To empirically examine this effect, we select A-share listed companies in Shanghai and Shenzhen Stock Exchanges from 2007 to 2018. We first measure the surname relationship between companies’ senior executives and their suppliers’ CEOs using manually collected data. Then, we conduct panel data regression analysis to investigate how surname relationship affects trade credit. The empirical results show that the surname relationship is significant for companies to obtain more trade credit. We further explore the heterogeneous impact of surname relationship on trade credit by considering mainly four different situations, and find that the effectiveness of surname relationship is more obvious especially for state-owned enterprises, companies located in the region with strong clan strength, as well as under the tight monetary policy. These results supplement related literature on “culture and finance” and the relationship between surname culture and corporate behavior, and make companies aware of the importance of relationship culture when making decisions.

Bank solvency risk and funding cost interactions: Evidence from Korea

Using proprietary balance sheet data for Korean banks and a simultaneous equation model, we use a unique measure of the cost of new funding to document that increased funding costs lead to larger solvency risk (as measured by regulatory capital), which, in turn, leads to larger funding costs. When including the great financial crisis in the sample, our estimates imply that a 100 basis points (bp) increase in the cost of new funding (regulatory capital) is associated with a 265 (23) bp increase in regulatory capital (cost of new funding). We show these results are robust to alternative measures of solvency risk and that the traditionally used measure of average funding costs (interest expense over interest-bearing liabilities) does not properly capture this two-way negative feedback loop. The strength of this link is weaker during periods of monetary policy tightening, and is not affected by the specific funding business model chosen by banks. Our findings can inform macroprudential stress-tests calibration.

Structural Shifts in the Economy of the Russian Federation and Its Import Intensity in 2014–2019: Analysis of Macroeconomic Statistics.

The introductory part of the article formulates its objective – to characterize development conditions in Russia and main structural changes in the Russian economy (according to 2014–2019 data) from the standpoint of their compliance with the tasks of increasing the stability and quality of the country's economic growth during the transition of the world system to a new technological order. Аccording to the authors, this period is of particular interest in assessing and studying the experience associated with structural transformation in a highly unfavorable external condition amid tight monetary policy and restrictive income policy.The article sequentially addresses certain aspects of the structural transformation of the Russian economy. The authors, relying on macroeconomic statistics, assess shifts in production and use of products, investment, import intensity, the balance of payments, and international investment position, considering external and internal conditions.The paper focuses on analyzing the proportions of the economy according to the data of the Rosstat input-output tables (IOTs). The article provides estimates of structural changes in the dependence of the economy and its segments on types of imports, signifcant changes in the direction of the use of fnal products, including considering the dynamics of changes in the total input of intermediate imports. For the frst time, the characteristics of the concentration of gross value added (GVA) and gross domestic product (GDP) by areas of fnal demand are given. A methodological approach is proposed for monitoring shifts in import consumption by compiling annual summary tables with a minimum set of data obtained during the analytical processing of IOT information. Based on the results of testing this approach on data for 2016 and 2018, the authors rated cost product balances by the share of imports in the resources of products. Conclusions were drawn about the change in the import intensity of the economy for the selected types of products, the import intensity of Russian industries, and shifts in the distribution structure of types of imported products. The article formulates proposals for the development of measures necessary to consolidate and expand positive results of this stage in the development of the Russian economy and statistical support of macroeconomic analysis.

International monetary policy spillovers to emerging economies in Sub-Saharan Africa: A global VAR analysis

In this paper, we trace the transmission of monetary policy shocks from three prominent sources of global financial and trade shocks (US, Europe, and China) to the two largest emerging economies in Sub-Saharan Africa (SSA) (Nigeria and South Africa). To pursue this study's objective, we employ Global Vector Autoregression (GVAR) model and update the common GVAR database to accommodate selected SSA countries. We report impulse response functions obtained from the model to analyse the responses of inflation, exchange rate, interest rate, and output in the emerging SSA economies to monetary policy shocks emanating from the large open economies. We document some new findings on the relationship between international monetary policy and the behaviour of economic factors in the emerging SSA countries. First, we show that tight monetary policy in the US and EU moderates prices in Nigeria while it is inflationary in South Africa. Second, the impact of the same policy shock is positive and prolonged on the Nigerian Naira and South African Rand. Third, the monetary policy decisions in China and the US have greater influence on the monetary policy in Nigeria and South Africa compared to similar policy decisions in the EU.

World Economic Prospects Monthly

Overview: Higher inflation tempers the growth outlook ▀ A deterioration in the near‐term outlook for China and the squeeze on real incomes from higher CPI inflation, particularly in advanced economies, have triggered a further downgrade to our GDP forecast. We expect world GDP growth of 5.7% this year, down 0.1pp from a month ago, before a slowdown to 4.5% in 2022 from 4.7% seen last month. ▀ We do not consider the issues facing Evergrande likely to be a catalyst for a major financial crisis in China. But weakness in real estate construction looks set to undermine near‐term economic prospects while electricity shortages and production cuts are hampering manufacturing. In response, we have cut our China GDP growth forecasts for both 2021 and 2022 by 0.4pp to 8.0% and 5.4% respectively. ▀ Meanwhile, the economic impact of the recent surge in energy prices will vary across economies. In many EMs, government price controls will lessen the inflationary impact but at the same time will either place greater pressure on public finances or lead to energy shortages. ▀ Pass‐through to inflation in the advanced economies is expected to be greater. While we have nudged down the outlook for consumer spending, the hit is expected to be tempered by a faster return of household savings rates to more normal levels. ▀ Although we have raised our world inflation forecast again, to 3.6% in 2022 from 3.3% last month in response to recent events, we do not think this marks the start of a higher inflation regime. At the margin, we now see a slightly faster pace of monetary policy tightening in the US — where we have brought forward the first interest rate hike to end‐2022 — the UK, Canada and a few EMs. But in advanced economies we still see little evidence of significant second‐round inflation effects, suggesting that inflation should still drop back as supply chain issues are gradually resolved.

Determinants of German and Japanese Exports: A Comparative Study

This study investigates the determinants of German and Japanese exports in a comparative fashion. By estimating an autoregressive distributed lag model for each country, we find that the income elasticity of Japanese exports is three times as large as that of Germany’s exports. This relative insensitivity to external demand explains why Germany has maintained its export growth whereas Japanese exports started to stagnate after the global financial crisis. Because Germany adopted the euro in 1999, it was able to maintain large trade surpluses. If Germany had instead kept the Deutsche Mark (DM), the DM would have appreciated owing to the Central Bank of Germany’s consistent preference for a tight monetary policy, and Germany’s trade surpluses would have dissipated. A sharp increase in Japanese foreign direct investment after 2011 has also played a role in reducing Japanese exports after the global financial crisis.

An Interest Stabilisation Mechanism to Unburden the ECB

Following the twin crises of sovereign debt and COVID-19, the ECB risks being stuck in a situation of fiscal dominance, in which monetary policy is subordinated to the needs of finance ministers. A strong post-COVID-19 recovery may increase inflationary pressures, requiring a shift towards a less accommodative monetary policy stance. A tightening of monetary policy may, however, lead to a widening of interest rate spreads and new bond market tensions in the euro area. This article argues that the credibility of the ECB is undermined if it is perceived as aiming to close interest spreads. Interest spreads between euro countries arising from fiscal concerns should be a matter of fiscal policy, not monetary policy. The establishment of an interest stabilisation mechanism would allow the ECB to restore monetary dominance and to focus on maintaining price stability.

Is the Bank Lending Channel of Monetary Policy Evident in the Philippines? A Dynamic Panel Data Approach*

The paper examines the bank lending channel of the monetary transmission mechanism in the Philippines. Using the dynamic panel generalized method of moments (GMM) model on quarterly individual bank data from Q1:2006 to Q4:2017, the study finds that the bank lending channel of monetary policy in the Philippines is rather weak as highly liquid banks tend to react more to monetary tightening than less liquid banks. More liquid banks would rather hold their stock of liquid assets as buffers against crises than sustain or expand their lending activity amid monetary tightening. Banks are also risk‐sensitive in their lending behavior as the increase in the cost of borrowing following tighter monetary policy could increase the likelihood of loan default. The banks' cautious lending behavior supports the policy stance of the Bangko Sentral ng Pilipinas in terms of prudent regulatory standards to maintain the resilience of the Philippine financial system.

SHIBOR Fluctuations and Stock Market Liquidity: An MF-DCCA Approach

ABSTRACT This paper examines the nonlinear and dynamic cross-correlations between SHIBOR and Chinese stock market liquidity by employing MF-DCCA method. The cross-correlations display weak persistence and multifractal characteristics, explaining the variations in the relationship between them. The multifractality strength of the cross-correlations decreases after a recent liberalization reform. Moreover, interest rates have a significantly strong influence on stock market liquidity during tight monetary policy and emergencies, indicating the asymmetric and time-varying impact of interest rates on stock market liquidity. In addition, the effectiveness of interest rate transmission decreases in the period of the COVID-19 pandemic.

How does the interaction of macroprudential and monetary policies affect cross-border bank lending?

We combine a rarely accessed BIS database on cross-border lending flows with cross-country data on macroprudential regulations. We find significant interactions between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies in source (home) lending banking systems. Consistent with the bank lending channel, macroprudential easing in a home country amplifies the effect of currency issuers' monetary policy on lending. For instance, UK macroprudential easing amplifies the negative impact of US monetary policy tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice versa, tighter macroprudential policy mitigates these effects.

Monetary policy, hot money and housing price growth across Chinese cities

ABSTRACT We use a dynamic hierarchical factor model to identify the national, regional and local factors of the city-level housing price growth in China. During the zero-lower-bound (ZLB) episode in the U.S., local factors account for 78% of variations in the month-on-month city-level housing price growth. However, as the time horizon extends, the national factor gets a larger variance share, reaching 51% in a half-year horizon. This indicates that the city-level housing price growth in China is more of a national phenomenon in the long run. We then use a VAR model to investigate the driving forces of the national factor and find that monetary policy and hot money shocks affect the national housing price growth significantly. A tightening monetary policy shock has a significant negative impact on the national factor, which lasts for more than 2 years. An increase in hot money inflows causes a significant but transitory rise in the national factor. Moreover, we find that the quantitative easing measure adopted by the U.S. Fed is behind the surge of capital inflows into China.

Quantitative tightening: protecting monetary policy from fiscal encroachment

The paper advocates a reallocation of central bank assets towards easier-to-sell securities, so as to facilitate a tightening of monetary policy when needed, and descries how such a tightening might be carried out.