Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

Monetary policy reactions and the exchange rate: a regime-switching structural VAR for Canada

The objective of this study is to identify monetary policy reactions in a nonlinear, structural vector autoregression (VAR) framework, with regime-switching contemporaneous policy responses in a small open economy. The key finding is that monetary policy in Canada responds contemporaneously to disturbances in the real exchange rate, as well as the output gap and inflation. The Bank of Canada is found to have much larger responses to exchange rate fluctuations during volatile periods than more stable periods. However, the Bank is found statistically to have a relatively linear reaction function with symmetric responses to output and inflation shocks across interest rate regimes. The estimates for the contemporaneous responses to the output gap in both regimes are found to be virtually identical to the 0.5 weights in the original Taylor rule for the United States, while the responses to inflation surprises are slightly smaller. Overall, the Bank of Canada is found to have operated within the range of optimal responses suggested by small-scale structural models in the normative literature on monetary policy rules.     

What drives the global official/policy interest rate?

We construct a GFAVAR model with newly released global data from the Federal Reserve Bank of Dallas to investigate the drivers of global official/policy interest rate. We find that 66% of movement in global official/policy interest rates is attributed to changes in global monetary aggregates (23%), oil prices (19%), global output (16%) and global prices (8%). Global official/policy interest rates respond significantly to increases in global output, inflation and oil prices. Increases in global policy interest rates are associated with reductions in global prices and global output. The response in official/policy interest rate for the emerging countries is more to global inflation, for the advanced countries (excluding the U.S.) is more to global output, and for the U.S. is to both global output and inflation.     

Optimal targeted reduction in reserve requirement ratio in China

This study determines the optimal targeted reduction in reserve requirement ratio in China. We find that a targeted reduction in reserve requirement ratio incentivizes commercial banks to reallocate more credit resources to micro and small enterprises, thus eliminating the negative output gap, slightly dampening the rise in unemployment, but also increasing financial instability. Although there is little direct effect on inflation, raising the targeted reduction in reserve requirement ratio can help mitigate the positive effect of output gap on inflation so that an output gap increase is accompanied by a smaller increase in inflation. Optimal rules for targeted reduction in reserve requirement ratio and interest rate policy are derived. Output gap, inflation, and financial instability are three main factors driving the policy dynamics. A targeted reduction in reserve requirement ratio is complementary to interest rate policy, which helps eliminate the negative output gap and allows the interest rate to be less responsive to inflation volatility.     

Searching for the natural rate of interest: a euro area perspective

A time-varying natural rate of interest is estimated for the euro area using a multivariate unobserved components model. The problem of aggregating interest rate data for the pre-EMU period is directly addressed, and a simple method is proposed in order to adjust the risk premia in the interest rate data prior to 1999. We show that, for the pre-EMU period, using risk-unadjusted policy rates leads to periods of high risk premia being erroneously taken as monetary policy replies to the output gap; in contrast, using risk-adjusted policy rates yields an estimate of the reaction of monetary policy to the output gap corresponding approximately to an increase of 40 basis points for a 1%positive deviation of output from potential output. A positive deviation of inflation from its trend of 1%is estimated to have triggered an approximately 1.2%increase in short-term interest rates.     

Monetary policy through the ‘credit-cost channel’: Italy and Germany pre- and post-EMU

We present an empirical analysis of the ‘Credit-Cost Channel’ (CCC) of monetary policy transmission. This channel combines bank credit supply and interest rates on loans as a cost to firms. The thrust of the CCC is that it makes both aggregate demand and aggregate supply dependent on monetary policy. As a consequence (1) credit market conditions (e.g. risk spreads) are important sources and indicators of macroeconomic shocks, (2) the real effects of monetary policy are larger and persistent. We have applied the Cointegrated Vector Autoregression (CVAR) econometric methodology to Italy and Germany in the ‘hard’ EMS period and in the European Monetary Union (EMU) period. The short-run and long-run effects of the CCC are detectable for both countries in both periods. Simulation of the estimated model also confirms that inflation-targeting by way of inter-bank rate control stabilizes inflation through structural shifts of the stochastic equilibrium paths of both inflation and the output.     

中国货币政策对资产价格波动反应的模拟分析

利用包含汇率波动和通胀预期的IS-Philips模型推导考虑资产价格的货币政策反应函数。在此基础上,分别以股价和房价作为资产价格的代理变量,模拟分析了资产价格波动对中国经济的影响。研究结果表明:考虑资产价格的货币政策在平抑产出和物价波动方面具有显著作用,但会增大利率波动幅度;考虑房价波动的货币政策比考虑股价波动的货币政策在平抑产出和物价波动方面具有更好的效果;与考虑股价波动的货币政策相比,考虑房价波动的货币政策对利率的冲击更小。     

An interest-rate-spread-based measure of Turkish monetary policy

A coherent method to measure the effectiveness of a monetary policy improves the monetary authority’s management capacity and renders the possibility of applying sound policies prior to and during a crisis. The trend in employing complicated and ambiguity-bearing unconventional monetary tools in the aftermath of the 2008 crisis has increased the value of such a method. The aim of this article is to introduce a coherent and consistent monetary policy evaluation method for Turkey. Accordingly, we suggest that innovations in the spread between overnight interest rates and Treasury auction interest rates are informative for exchange rate, output, and prices. Empirical evidence for this identification reveals that positive innovation in spread (implying a tight monetary policy measure) decreases output temporarily, permanently decreases prices, and appreciates local currency. This result is also robust to alternative specifications.     

Does the Reserve Bank of Australia follow a forward-looking nonlinear monetary policy rule?

ABSTRACT

The conventional monetary policy rule describes a simple linear relationship between the domestic interest rate, inflation rate and output gap. An important extension to this rule is to incorporate the forward-looking behaviour of central banks, where it is assumed that they target an expected level of inflation instead of its current realised value. Using quarterly observations for the period 1993:1-2018:2, this paper investigates whether the conduct of monetary policy in Australia can be described by a forward-looking linear monetary policy rule, or by a nonlinear forward-looking monetary policy rule. In particular, the nonlinear forward-looking monetary policy rule is analysed in a regime-switching framework using a smooth logistic transition regression model. While the results show that the conventional forward-looking linear monetary policy rule describes the application of monetary policy in Australia reasonably well, the interest rate setting behaviour of the RBA is best described by a nonlinear forward-looking monetary policy rule.     

我国积极财政政策"紧缩效应"的形成机制及其检验

积极财政政策的扩张性效果依赖经济周期的阶段性,积极财政政策也有可能通过货币需求的利率渠道和汇率渠道等,产生对于实际产出的紧缩影响.本文利用误差修正模型和时变参数模型,通过估计货币需求相对于实际产出的弹性系数,发现我国的财政政策仅在1996年前体现出显著的"紧缩效应",而在1996年后"紧缩效应"逐渐减弱和消失,这说明在我国宏观经济调控中,积极财政政策和稳健货币政策的组合方式和期限结构发挥了比较稳定的政策效果.     

通货膨胀、汇率波动与货币政策——基于符号约束的贝叶斯VAR模型实证研究

通过构建通货膨胀形成的理论模型,本文运用符号约束的贝叶斯VAR方法探讨通货膨胀和汇率波动对产出增长的影响。结果发现：实际利率对通货膨胀和人民币升值冲击均有较大的响应,且受通货膨胀的影响更大,即稳定价格的货币政策比稳定汇率的政策更加有效;通货膨胀冲击下,实际利率在长期有所上升,但并未达到控制通货膨胀的效果,实际利率偏低阻碍了货币政策效果的发挥;人民币升值对产出增长具有较大的负面影响,对通货膨胀具有负向）中击,但由于油价上涨的原因,人民币升值并没有降低通货膨胀水平。     

MODELLING DEMAND FOR BROAD MONEY IN AUSTRALIA*

The existence of a valid long‐run money demand function is still important for the conduct of monetary policy. It is argued that previous work on the demand for money in Australia has not been very satisfactory in a number of ways. This paper examines the long‐ and short‐run determinants of the demand for broad money employing the Johansen cointegration technique. Using quarterly data for the period 1976:3–2002:2, this paper finds, inter alia, that the demand for broad money is cointegrated with real income, the rate of return on 10‐year Treasury bonds, the cash rate and inflation. It appears that a disequilibrium in the demand for money can affect the efficacy of interest rate policy in the long run via its impact on future output growth and output gap.     

Changes in US Monetary Policy and Its Transmission over the Last Century

In this paper, we investigate US monetary policy and its time‐varying effects over more than 130 years. For that purpose, we use a Bayesian time‐varying parameter vector autoregression that features modern shrinkage priors and stochastic volatility. Our results can be summarized as follows: First, we find that monetary policy transmits jointly through the interest rate, credit/bank lending and wealth channels. Second, we find evidence for changes of both responses to a monetary policy shock and volatility characterizing the macroeconomic environment. Effects on the macroeconomy are significantly lower in the period from 1960 to 2013 than in the early part of our sample, whereas responses of short‐ and long‐term interest rates are nearly unaltered throughout the sample. Changes in the way the Fed conducts monetary policy and different economic environments may account for that.     

Unconventional monetary policy announcements and information shocks in the U.S.

We study unconventional policy shocks and information shocks associated with central bank announcements in the U.S. While unconventional policy shocks capture the direct influence of announced monetary policy actions, information shocks are associated with central bank information conveyed with the announcement. To disentangle these two types of shocks, we impose sign restrictions on high frequency changes in interest rates and stock prices around announcements. We find that information shocks lead to persistent declines in the 10-year government bond yield, whereas the actual unconventional policy shock induces only small interest rate responses. We also find that expansionary output effects of unconventional monetary policy are to some extent counteracted by the information shock.     

The transmission of euro area monetary policy to financially euroized countries

This paper provides a comprehensive analysis of the interest rate pass-through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroization and on the transmission channels of monetary policy spillovers. The results suggest that in the long run, more than the one-third of all euro retail rates in euroized countries of central, eastern, and south-eastern Europe is linked to the euro area shadow rate. Compared with euro area monetary policy, the share of cointegration of the domestic monetary policy rate is on average lower, suggesting that domestic central banks in euroized countries with independent monetary policy can only partially control the “euro part” of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission.     

前瞻性货币政策的微观传导机制有效吗*——来自中国上市企业资产负债表的证据

本文根据新古典资本需求理论和实际余额效应理论建立了一个包含投资需求和投资效率的前瞻性泰勒规则模型,并构造了一个反映企业投融资需求状况的企业综合状况指数,将其引入扩展的前瞻性泰勒规则模型,然后从宏观和行业两个层面对加入企业综合状况指数的前瞻性泰勒规则进行了检验和比较。研究发现：（1）前瞻性利率传导的企业资产负债表渠道基本有效,短期名义利率对于超过80%行业的企业综合状况指数缺口的反应系数显著,但对不同行业的反应差异较大;（2）短期利率对企业综合状况的反应系数较小,而对通胀缺口和产出缺口的反应系数相对较高,显示货币当局调整利率可能更多的是针对通胀缺口和产出缺口反应;（3）货币政策对资产价格“反应不足”,其对股价的反应系数非常小,对房价的反应系数不显著。     

The effectiveness of monetary policy and output fluctuations: An asymmetric analysis

Previous studies have investigated asymmetries in the effects of monetary policy on the real economic activity by using either vector autoregressive (VAR)-based regime-switching models with smooth transition technique or Gaussian functions to parameterise the dynamic effects of structural shocks on the economy. These kinds of VAR models assume asymmetry as a short-run relationship between the series since the long-run neutrality hypothesis of money states that monetary policy can only affect productive capacity of the economy in the short run, but not in the long run. The recent theoretical literature shows that this hypothesis is not quite right. Thus, this paper examines the extent to which monetary policy has a long-run asymmetric effect on output in a number of Organisation for Economic Co-operation and Development countries by using a nonlinear hidden cointegration analysis within a likelihood-based panel framework. The findings indicate that there is a long-run relationship between the real interest rate as an indicator of monetary policy and the growth rate of real output in five countries out of nine under review. This gives support for the view that output has responded asymmetrically to the real interest rate changes. The economic implication of our results is that monetary policy affects positive and negative output fluctuations differently.     

Does monetary policy affect the long-run expectations of non-stationary real interest rates?

In this article, we analyse whether the monetary policy affects the long-run expectation of the non-stationary real interest rate. The analysis is conducted through Beveridge–Nelson trend decomposition within a cointegrated vector autoregressive model based on the New Keynesian framework. We suggest an augmented test of the conventional co-integration test on the non-stationarity of the real interest rate, which checks whether the co-integration coefficient of inflation is one and the output gap affects the co-integration equilibrium of the nominal interest rate. We further suggest decomposing the long-run expectation of the non-stationary real interest rate into three trends: the interest rate shock (including the monetary shock), inflation shock and output gap shock. According to empirical analyses using monthly US data after the Korean War, the long-run expectation of the non-stationary real interest rate contains an interest rate shock trend and the impulse of the federal fund target rate induces a significant response of the interest rate shock trend. However, the interest rate shock trend has a very small portion of the long-run expectation of the non-stationary real interest rate, which may explain why the monetary policy was not particularly effective in the economic recovery after the global financial crisis.     

Fiscal and monetary effects on environmental quality,growth, and welfare

This paper examines the effect of fiscal and monetary policies on economic growth, inflation, environmental quality, and welfare. To this end, the horizontal-R&D growth model is extended to include pollution generated in the intermediate-goods production, and the demand for money through cash-in-advance (CIA) constraints on intermediate-goods production and R&D investment. Fiscal policy embodied in the taxation of pollution decreases output, profits, inflation, and wages in the intermediate-goods sector, reallocating labor to R&D that is the engine of economic growth. As it reduces pollution, it increases welfare if there are strong preferences for a clean environment. In turn, since the inflation rate is an increasing function of the nominal interest rate, the effects of changes in this monetary policy variable extend to the effects of changes in the inflation rate. An increase in the nominal interest rate penalizes employment, wages and output in the R&D sector relatively more if the respective CIA constraint is more demanding and thus economic growth decreases. As it also reduces pollution since decreases intermediate-goods production, it increases welfare if the preferences for a clean environment are strong enough.     

Examining asymmetries in the transmission of monetary policy in the euro area: Evidence from a mixed cross-section global VAR model

I estimate the transmission of a common euro area monetary policy shock across individual euro area economies. To do so, I develop a global VAR model in which all euro area economies are included individually while, at the same time, their common monetary policy is modelled as a function of euro area aggregate output growth and inflation. The results suggest that the transmission of monetary policy across euro area economies displays asymmetries, and that, in line with economic theory, these are driven by differences in economies׳ structural characteristics. In particular, euro area economies in which a higher share of aggregate output is accounted for by sectors servicing interest rate sensitive demand exhibit a stronger transmission of monetary policy to real activity. Similarly, even though the evidence is less conclusive, euro area economies which feature more real wage and/or fewer unemployment rigidities also appear to display a stronger transmission of monetary policy to real activity.