Policy Transmission Mechanism Research Articles

Role of Monetary Policy in Asset Price Inflation: A Comparative Study of Developed and Developing Economies

This study examined the relationship between monetary policy and asset price inflation in developed and developing economies, focusing on Pakistan. Using data from 2010-2024, the research employed multivariate GARCH and causality models to analyze the impact of various monetary policy tools on stock market indices and real estate prices. The findings revealed significant differences in economic policy's transmission mechanisms and effectiveness in influencing asset prices between developed and developing economies. In Pakistan, interest rate changes were found to have a more pronounced effect on stock market volatility than real estate prices. The study also highlighted the challenges developing economies face in implementing effective monetary policies to manage asset price inflation without compromising economic growth. This research is particularly important as it provides crucial insights for policymakers in developing economies like Pakistan, where the interplay between monetary policy and asset prices can have significant implications for financial stability and economic growth. By identifying the asymmetric effects of monetary policy and the role of policy uncertainty, this study contributes to developing more effective and targeted policy interventions in emerging markets.

HOUSING MARKET VOLATILITY, SHADOW BANKS AND MACROPRUDENTIAL REGULATION: A DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM MODEL ANALYSIS

Given the risks of shadow banks and their risk contagion with the housing market, this study investigates the necessity, policy transmission mechanism and impact of incorporating shadow banks into a macroprudential regulation framework. It constructs a dynamic stochastic general equilibrium (DSGE) model incorporating housing market volatility and heterogeneous financial intermediation, where housing market volatility transmits to the financial intermediation sector through the collateral channel. Meanwhile, regulatory asymmetry expands the shadow banking scale and leverage indicators driven by the housing market, increasing the shadow banking risk. Moreover, considering shadow banking credit size, the macroprudential regulation framework can mitigate the volatility of economic variables and maintain macro-financial and economic stability under the conditions of tightening monetary policy and strengthening regulation. However, policy effects are limited in curbing shadow banking risks from housing market fluctuations. Thus, it is necessary to crop the source of shadow banking risks from the transmission mechanism, formulate more targeted and specialized regulatory policies to complement housing market control measures, maximize cross-market effects among different policies, and incorporate shadow banking into the regulatory system.

Transmission mechanism of monetary policy and response to outside shocks in 2020 by National Bank of the Republic of Kazakhstan

The article examines the features and current state of monetary policy and transmission mechanism of the National Bank of Kazakhstan. The transmission mechanism is not a tool to achieve the goals set for the development of the modern economy. This mechanism is a set of interactions in economic processes through which the results of decisions or transactions in the framework of monetary policy affect the economy. In this regard, the article describes the level of inflation and its impact on the level of prices for goods and services. The situation with the use of the consumer price index to calculate inflation, calculated on the basis of the analysis of prices in the portfolio of consumer goods and services of the Ministry of National Economy of the Republic of Kazakhstan, is analyzed in detail. Macroeconomic and microeconomic factors, reflecting the viable direction of the monetary policy of the Republic of Kazakhstan, affect the level of the consumer price index. To make decisions, the NBRK conducts research to determine inflation forecasts. Inflationary expectations make it possible to assess the possible impact on the economy. In this context, the article states that the NBRK's inflation target will be achieved through the following channels (base rate, exchange rate and money supply). The conclusion is based on the fact that, given the global pandemic around the world, one can see the NBRK's expansionary monetary policy and decisions to lower the base rate, increase the money supply and stabilize the currency.

THE ANALYSIS OF THE TRANSMISSION MECHANISM OF MONETARY POLICY IN CONVENTIONAL AND SHARIA AGAINST INFLATION IN INDONESIA

This study aims to analyze the transmission mechanism of monetary policy in Indonesia in controlling inflation, both in terms of sharia and conventional terms. The data used in this empirical study is time series data during 2011:1-2017:4 originating from (Bank Indonesia), Financial Services Authority (FSA) and Ministry of Finance (Kemenkue). The analysis tool used is the Error Correction Model (ECM). This study analyzes the relationship between independent and dependent variables both in the short and long term. The results of this study throuht the asset prices indicate that from conventional monetary variable SBI (certifikat of bank indonesia) variables that have a positive and significant effect on inflation in the short-term. Where as in the long term the variable money supply has a positive effect and variable interest rates on Bank Indonesia, bonds have a positive and significant effect on inflation. In Islamic monetary variables, SBIS have a positive and significant effect on inflation in the short-term. Islamic bond variables (Sukuk) have a negative and significant effect on inflation in the short-term. While in the long-term the variable money supply, Islamic interest rates, and Islamic bonds have a positive and significant effect on inflation.

THE ANALYSIS OF THE TRANSMISSION MECHANISM OF MONETARY POLICY IN CONVENTIONAL AND SHARIA AGAINST INFLATION IN INDONESIA

This study aims to analyze the transmission mechanism of monetary policy in Indonesia in controlling inflation, both in terms of sharia and conventional terms. The data used in this empirical study is time series data during 2011:1-2017:4 originating from (Bank Indonesia), Financial Services Authority (FSA) and Ministry of Finance (Kemenkue). The analysis tool used is the Error Correction Model (ECM). This study analyzes the relationship between independent and dependent variables both in the short and long term. The results of this study throuht the asset prices indicate that from conventional monetary variable SBI (certifikat of bank indonesia) variables that have a positive and significant effect on inflation in the short-term. Where as in the long term the variable money supply has a positive effect and variable interest rates on Bank Indonesia, bonds have a positive and significant effect on inflation. In Islamic monetary variables, SBIS have a positive and significant effect on inflation in the short-term. Islamic bond variables (Sukuk) have a negative and significant effect on inflation in the short-term. While in the long-term the variable money supply, Islamic interest rates, and Islamic bonds have a positive and significant effect on inflation.

Institutionalism: on the rise or declining?

The article examines the state of the modern institutional direction of analysis in economic science. The aim is to identify the main methodological problems of this trend of thought from the point of view of the formation of such a scientific direction as "institutional macroeconomics". The method of comparative review analysis of the most advanced sources that laid the basis for the methodology and implements it in institutional research shows the fundamental reasons for the limited possibilities of institutionalism in the formation of the transmission mechanism of economic policy. In this regard, the large volume of scientific research of the institutional school, reflecting, among other things, the scientific fashion and the need to take into account institutions as factors of development, nevertheless, does not speak in favor of the flourishing and significant success of this line of analysis; at the very least, there are inherent difficulties in the development of this trend in economics. The main directions of research of the institutional school associated with overcoming methodological limitations, in particular, the expansion of ideas about institutional efficiency, which cannot be reduced solely to saving on transaction costs, have been identified. Methodological disputes, enthusiasm for holism and rhetoric in relation to the necessary consistency, on the contrary, lead institutionalism away from solving even those methodological problems that lend themselves to solution. The article shows the key positions on the development of institutional macroeconomics, including through the concept of institutional inflation, reduced to the contribution of institutions to price dynamics. The high level of institutional diversity and institutional complexity make it very difficult to truly assess this contribution. At the same time, denying the influence of institutions on prices, especially in connection with the inherent inaccuracies of the model approach, also becomes an unreasonable technique, as well as criticizing model options that demonstrate the directions of scientific research on this issue. A condition is obtained that connects the change in the costs of functioning of institutions with the function that determines the dynamics of prices for the greatest effect of the functioning of the institutional system, determined by the difference between the total benefits and costs.

Policy Maker’s Credibility with Predetermined Instruments for Forward-Looking Targets

Cette article propose des critères de choix par une banque centrale entre différentes règles de politique monétaire réagissant à l’inflation. Une attention particulière est portée sur la nature non-prédéterminée ou prédéterminée des instruments de politique monétaire. En prenant l’exemple d’une courbe de Phillips des nouveaux Keynésiens, un instrument non-prédéterminé lorsque l’inflation est aussi non-prédéterminée implique un manque extrême de crédibilité et de robustesse de l’ancrage et de la stabilisation des prix, dès lors que la banque centrale ne connaît pas exactement les paramètres de l’économie. En revanche, un instrument prédéterminé est tel qu’une régle proportionnelle ancre l’inflation non-prédéterminée de manière robuste et crédible. Cette règle peut alors être une forme réduite d’une politique optimale à la Ramsey avec un minimum de crédibilité et de robustesse. Nous recommandons de modéliser des politique optimales avec un minimum de crédibilité de la banque centrale plutôt qu’avec des règles proportionnelles en supposant non-prédéterminés à la fois les instruments et les cibles de la politique monétaire.

Monetary Policy and Inflation Compensation

We use two market-based measures of inflation compensation to explore the transmission mechanism of monetary policy to inflation markets. New information about the Fed's monetary policy stance becomes available on the days of meetings of the Federal Open Market Committee (FOMC) and is reflected in asset prices. We measure the sensitivity of inflation compensation measures to changes in monetary policy and compare its magnitudes across different maturity horizons, and across conventional and unconventional monetary policy regimes. Our analysis reveals that risk premia embedded in inflation compensation are horizon and monetary policy regime dependent.

Policy Maker's Credibility with Predetermined Instruments for Forward-Looking Targets

The aim of the present paper is to provide criteria for a central bank of how to choose among different monetary-policy rules when caring about a number of policy targets such as the output gap and expected inflation. Special attention is given to the question if policy instruments are predetermined or only forward looking. Using the new-Keynesian Phillips curve with a cost-push-shock policy-transmission mechanism, the forward-looking case implies an extreme lack of robustness and of credibility of stabilization policy. The backward-looking case is such that the simple-rule parameters can be the solution of Ramsey optimal policy under limited commitment. As a consequence, we suggest to model explicitly the rational behavior of the policy maker with Ramsey optimal policy, rather than to use simple rules with an ambiguous assumption leading to policy advice that is neither robust nor credible.

Nonparametric Time-Varying Vector Moving Average (infinity) Models

Multivariate dynamic time series models are widely encountered in practical studies, e.g., modelling policy transmission mechanism and measuring connectedness between economic agents. To better capture the dynamics, this paper proposes a wide class of multivariate dynamic models with time — varying coefficients, which have a general time — varying vector moving average (VMA) representation, and nest, for instance, time — varying vector autoregression (VAR), time — varying vector autoregression moving--average (VARMA), and so forth as special cases. The paper then develops a unified estimation method for the unknown quantities before an asymptotic theory for the proposed estimators is established. In the empirical study, we investigate the transmission mechanism of monetary policy using U.S. data, and uncover a fall in the volatilities of exogenous shocks. In addition, we find that (i) monetary policy shocks have less influence on inflation before and during the so — called Great Moderation, (ii) inflation is more anchored recently, and (iii) the long — run level of inflation is below, but quite close to the Federal Reserve's target of two percent after the beginning of the Great Moderation period.

Monetary Policy, Development of Financial Market and Banking Lending : An Analysis of the Bank-Lending Channel in Malaysia

Recent resurgence of interest in understanding the transmission mechanism of monetary policy focuses on two main channels of explanation, i.e. the money and credit channel. This paper investigates a version of the credit channel, i.e. the bank-lending channel for the Malaysian economy. The bank-lending channel assigns a critical role for the supply of bank loans in transmitting the effect of monetary policy on real economic activities. The study analyzes the effect of monetary policy on the ability and willingness of Malaysian banks to issue loans with respect to the development in the open financial market. Specifically it argues on the changes of the pattern of influence as progress in the open financial market takes place. A multivariate system analysis of vector auto regression (VAR) is used. The results show that prior to the progress in open financial market, the monetary authority has a direct influence on supply of loans of banks. However, this direct influence lessens as the open financial market develops. Loans are more affected by interest rates spread that dictates conditions in open financial markets. Thus, the ability of the monetary authority to steer real economic activities is subjected to development in the financial market.

USING ESCROW ACCOUNTS AND TARGET PROJECT EMISSIONS AS A NON-INFLATIONARY METHOD OF FINANCING INVESTMENT PROJECTS

The article is devoted to the development of mechanisms for monetary policy aimed at accelerated economic growth in Russia. It proves the need for a differentiated approach to determining the conditions of access to financial resources for different categories of participants in economic relations. To finance investment projects, it was proposed to use the target project emission mechanism using escrow accounts. Particular attention is paid to the exclusion of risks of inflation. Thus, the target project issue mechanism allows creating an additional non-inflationary project and investment money channel in the economy, developing an approach underlying the modern multi-channel transmission mechanism of the monetary policy of the Bank of Russia.

Negative interest rates in the eurozone

This paper reviews the eurozone's negative rate deposit facility and seeks to explain its rationale. The paper rejects the conventional explanation that the negative rate deposit facility improves the transmission mechanism of monetary policy and contributes to the economic recovery of the area. Instead, the paper argues that the rationale for the policy is to be found in the interbank market. The European unsecured interbank market has malfunctioned since the beginning of the global financial crisis in 2007. The negative policy rate is an extreme attempt to revive that market, but that attempt has failed. Rather than being a conventional policy, as some scholars have argued, the paper maintains that the policy is deeply unconventional because it does not target the overnight interest rate as the interbank market has effectively become irrelevant.

Анализ воздействия системы рефинансирования на кредитный и процентный каналы трансимиссионного механизма денежно-кредитной политики

Анализ воздействия системы рефинансирования на кредитный и процентный каналы трансимиссионного механизма денежно-кредитной политики

The Analysis of Monetary Transmission by Interest Rate Channel in Influencing the Inflation: VECM Approach

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A Forward Looking Small Semi-Structural Macroeconomic Model For Bangladesh

Small semi-structural models are suitable to explicate the monetary transmission mechanism by recognizing the interrelationships among major macroeconomic variables. This study presents a small semi-structural dynamic general equilibrium (DGE) New Keynesian model for Bangladesh to explore the dynamic interrelationships among major macroeconomic variables related to the transmission mechanism of monetary policy. Our DGE model comprises of four key behavioral equations – the aggregate demand (output), aggregate supply (inflation), interest rate and, the exchange rate. Using quarterly data over the sample period from 2006:Q3 to 2016:Q2, we have used Generalized Method of Moments estimation technique, which is useful for estimating forward-looking reaction functions on the basis of expected values for macroeconomic variables. The findings demonstrate that the model is inclusive enough to capture how the selected variables are interrelated. In most of the cases, the study finds significant and similar nature of interrelationships among the major macroeconomic variables as found by previous studies on Canada, Thailand, and South Africa. The model is also flexible enough in understanding shock propagation and conducting policy analyses. For Bangladesh, the policy transmission mechanism is found less efficient to control the monetary system (over 10 years to revert to steady state after the occurrence of shocks), while Canada, South Africa, and Thailand need 5 years, 10 years, and 10 years, respectively. This happens mainly due to the weak monetary policy which has two consequences. First, a small reaction parameter in the interest rate equation which means that the interest rate is only marginally adjusted to high inflation. Second, a small effect of monetary policy on the economy through the output and exchange rate equations. Most notably, in the exchange rate equation, the uncovered interest parity indicates a low coefficient. This might happen due to the absence of inflation targeting monetary policy in Bangladesh. A strong and quick policy response is required which could be achieved by implementing two major policy tasks: adoption of an inflation-targeting monetary policy, and full autonomy of Bangladesh Bank in both administrative and functional areas.

Fintech and Network Economics in Real Estate: REWs and MLS As Policy Transmission Mechanisms, ‘Portfolio Screens’ and ‘Portfolio Frames’

Multiple Listing Systems (MLS), Real Estate Website (REW) Laws, and Rent-Control and Rent-Stabilization statutes (RCRS) are un-constitutional and could have affected the transmission of monetary policy and fiscal policies, and the rapid changes in housing prices and housing demand which occurred in the US and other countries between 1995 and 2010. MLS and REWs are fintech systems that are used around the world. There is an increasing and symbiotic relationship between the un-constitutionality and anti-competition effects of MLS, Real Estate Websites (REWs) and RCRS on one hand, and systemic risk and financial stability. MLS, Real Estate Websites (REWs) and RCRS can have substantial effects on consumer behavior in credit and asset markets – and this can precipitate structural changes in the financial services, real estate and retailing industries. Hence, all existing housing-demand models and housing price forecast models are grossly mis-specified primarily because they don’t incorporate legal factors and associated economic effects.

Conceptual approaches to the formation and realization of Russian economic strategy: Current and long-term challenges

The development of Russia's economic strategy due to the balance of current and long-term challenges, when current ones must be subordinated to established long-term tasks is discussed in the study. The strategy content is often replaced solely by current tasks, the way the macroeconomic policy should be arranged, whether privatization should be carried out, monetization should be increased at the expense of target emissions, and to what extent inflation should be suppressed. These issues being significantly important in the current regime, nevertheless, do not give a strategic vision of what the economic system should become. The current policy instruments that are collectively referred to as strategic programs are broadly discussed. At the same time, the main reasons why the economy is in such a condition have not been analyzed yet. Another issue concerning the failure of the previous programs which have been earlier discussed has not been settled yet. The root of the problems is in the organization of the economy, its structural features and the already introduced new system of basic institutions, and the permanent correction of these institutions does not work for the benefit, even hinders economic development, as it forces agents to relentlessly modify adaptation models. The content of the development strategy must include the essence and ways of changing the economic structure so that this change reproduces new factors of its growth. Otherwise, economic growth will be based on the previous factor model, which the growth of 2017 demonstrates. The specifics of Russia's technological development have already been revealed under the new modernization priorities, the need for a radical change in the methods of the current macroeconomic policy for monetary and budgetary direction has been shown. A methodological framework for the formation of a strategic program that is useful for the work of the analytical services of the Russian government has been considered. The management of structural changes requires the organization of a model of intersectoral mobility of resources that takes into account the task of new markets formation and priority areas of technological development. The mobility will bring additional resources for industrial economic growth as excess resources (capital and labor) are concentrated in transactional and resource sectors. Thereby the strategy of Russia’s economy development requires measures that influence the proportion changes among sectors. This interaction is provided by changing of risks in economic activity in economic sectors and differentiations in monetary policy, in particular interest rates as a key tool of the policy. We suggest correcting a model of transmission mechanism of a macroeconomic policy that is considered to be a tactical method to solve strategic tasks of development. A systematic increase in the monetization of the economy and a differentiated percentage of investment projects by sectors are the main prerequisites for a new model of macroeconomic growth policy in Russia, where structural policy becomes the main element. Keywords economic strategy, macroeconomic policy, inflation, investments, technologies, economic growth. Acknowledgements The article was prepared in the framework and with the financial support of the grant (project) of the Russian Scientific Fond entitled “Investigation of opportunities of the long-term high-tech development of economy in terms of global technological shifts and crises” (the supervisor is academician of the RAS S.Yu. Glaz’ev).

Housing, consumption and monetary policy: how different are the first-, second- and third-tier cities in China?

ABSTRACTThis article presents an empirical analysis of the relationship between house prices and the real economy in China’s first-, second- and third-tier cities. A Structural Vector Autoregression model is applied to study the impacts of monetary policy shocks and housing demand shocks on various housing markets across China. We also investigate the role of house prices in the transmission mechanism of monetary policy. The results reveal that in first-tier cities, raising interest rates has a stronger negative effect on house prices. Also, as house prices decrease in first-tier cities, private consumption declines sharply. There is a stronger role of housing markets in the transmission of monetary policy shocks in these cities. Our findings indicate that interest rate adjustment could effectively curb spikes in housing prices in the first-tier cities, but the impact of such adjustments on household consumption must also be considered.

The effectiveness of exchange rate channel of monetary policy transmission mechanism in Sri Lanka

This study examines the effectiveness of the exchange rate channel in the transmission mechanism of monetary policy in Sri Lanka during the period from 1978 to 2015. A negative relationship between the two variables is accepted in theoretical insights on the topic. An increase in interest rate leads to appreciation of domestic currency against other foreign currencies. If the empirical situation is different to theoretical explanations, decision makers would not be able to make proper decisions to achieve macroeconomic targets in the economy. Monetary policy is conducted to achieve economic and price stability, and its policy shocks transforms to the economy through various transmission channels. A developing country like Sri Lanka usually prefers to depreciate local currency in order to increase export earnings and to reduce import expenditure to gain a balance of trade. Expansionary monetary policy tends to result in currency depreciation, thus increasing net exports. Higher economic growth can be achieved with domestic currency depreciation through increasing exports. In an inflationary situation, contractionary monetary policy can reduce aggregate demand with domestic currency appreciation. If there is no negative relationship between interest rate and exchange rate, the exchange rate transmission channel of monetary policy does not support the achievement of monetary policy co-objectives. The study uses the variables nominal exchange rate, Treasury bill rate, net exports and total external debt. Co-integration and Vector Error Correction tests are employed for the analysis due to the non-stationary of all the variables used in the study, and the results prove the negative relationship between exchange rate and interest rate as expected in the long run. Estimated value of the interest rate elasticity of exchange rate is -0.178, which proves that exchange rate channel is efficient in the Sri Lankan context. According to short run dynamics, 5% of the error in exchange rate is corrected annually.