Macroeconomic transitions and the transmission mechanism: Evidence from Turkey

This paper investigates changes to the macroeconomic transmission mechanism in Turkey following a major reform of monetary policy in the early 2000s. We use a Threshold VAR (TVAR) framework to test for and then estimate a model with endogenous transitions between regimes. We detect two regimes, with a clear transition between them in 2003–4. The pre-reform regime is characterized by high inflation, passive monetary policy and persistent responses to shocks. The post-reform regime is characterized by low inflation, active and credible monetary policy and markedly less persistent responses to shocks. Using a model that contains sufficient variables to capture diverse transmission mechanisms, working through the real exchange rate, domestic credit and monetary policy, we find evidence of sharp changes in transmission mechanisms. Post-reform, the response of Turkey to macroeconomic shocks has changed to be similar to those in other modern, market-orientated economies.     

基于CC-LM模型的信贷渠道的实证分析

运用CC-LM模型,基于VAR的时间序列分析货币政策中信贷渠道的存在性及其贡献度,同时分析了货币渠道的存在性,两者综合说明信贷渠道的作用强于货币渠道,也就是说信贷渠道是主要的货币政策的传导渠道。为了增强货币政策的有效性,人民银行在监控货币指标的同时,应该更加着力监控信贷指标,特别是流向中小企业的信贷量。     

From Peg to Float: Exchange Market Pressure and Monetary Policy in the Czech Republic

Exchange market pressure (EMP) in the Czech Republic is calculated for 1995–2006, when the Czech National Bank transitioned to inflation targeting (IT). EMP is a useful indicator of incipient foreign exchange market pressures, a signal of the need for policy adjustments and a clear delineator of monetary policy regime change. VAR estimates clearly identify quite different policy responses during the two regimes. During 1995–98, interest rate and domestic credit responses to EMP were statistically significant and in accord with traditional theory, i.e. domestic credit creation and interest rates were managed to maintain the exchange rate target as if policymakers were explicitly responding to changes in EMP. During the 1998–2006 IT regime there is a link between domestic credit creation and EMP, with no interest rate effects. Exchange market interventions were incidental and supportive of IT goals. Impulse response functions mirror the VAR and Granger causality results.     

Constructing the Monetary Conditions Index for China

How can we fit different monetary transmission channels together to understand the effect of China’s monetary policy? This paper focuses on China’s monetary conditions and aggregate demand in terms of the monetary conditions index (MCI), which has been widely used as an important indicator for central banks, financial institutions, and scholars. To construct an MCI in the context of China over 1987Q1–2010Q2, we consider three channels through which monetary conditions might influence aggregate demand: the primary lending rate, the real effective exchange rate, and the bank credit. The weights of the component variables are obtained by estimating both the IS equation and the vector autoregressive model (VAR), which yield somewhat similar results. Further empirical tests show that the MCIs we derived contain useful information about future output growth and inflation in China over the short and medium term. From a historical perspective, the MCI we derived is more informative than individual monetary variables for the understanding of the development of China’s monetary conditions between 1987 and 2010.     

A small-scale DSGE-VAR model for the Romanian economy

This paper describes the theoretical structure and the estimation results for a DSGE-VAR model for the Romanian economy, an inflation targeting country since 2005. Having as benchmark the New-Keynesian model of Rabanal and Rubio-Ramirez (2005), the main additional feature introduced refers to the extension to a small open economy setting in order to account for this specific aspect of the Romanian economy.Within the inflation targeting monetary policy regime, forecasts of central macro variables, inflation in particular, play an important part. Because inflation reacts to monetary measures with a considerable lag, the central bank's policy has to be forward-looking. Based on univariate measures of forecast performance, it is shown that the VAR with DSGE model prior produces forecasts that improve on those obtained using an unrestricted VAR model and the popular Minnesota prior in case of inflation, real exchange rate and nominal interest rate. Moreover, the DSGE-VAR model is informative about the structure of the economy and can help the “story-telling” in the central banks.     

Monetary policy and credit cards: Evidence from a small open economy

This paper uses a unique monthly data set that covers the overall credit card usage in a small-open economy, Turkey, to investigate a possible credit channel of monetary policy transmission through credit cards. A reduced-form vector autoregression analysis is employed, where the forecast error variance decompositions are calculated for three-year windows over the period 2002–2009. It is shown that, during the recent financial crisis that has started in 2007, the monetary policy of Turkey has shifted toward focusing on output volatility and interest rate smoothing through setting short-term interest rates, while the inflation rate has been mostly affected by exchange rate movements and inflation inertia. Credit card usage has an increasing effect on inflation rates through time, requiring more policy emphasis on the credit channel through credit cards. When the effects of the credit view and the money view are compared, the former seems to be more effective on the real side of the economy, independent of the level of inflation.     

Monetary policy channels in Brazil through the lens of a semi-structural model

We develop and estimate a medium-sized, semi-structural model for the Brazilian economy during the inflation targeting period. The model describes fairly well key features of the economy and allows us to decompose the transmission mechanism of monetary policy. In the baseline decomposition, the transmission mechanism is broken down into household interest rate, firm interest rate, and exchange rate channels. In addition, we carry out an alternative decomposition that allows us to evaluate the expectations channel as well. In both procedures, the household interest rate channel is the most important for explaining the response of output to a monetary policy shock. In the baseline decomposition of inflation, both the household interest rate and the exchange rate channels are the main transmission channels. However, in the alternative decomposition, the expectations channel accounts for the bulk of the inflation response.     

The Bernanke and Blinder Model in an Open Economy: The Italian Case

Abstract. This paper analyzes the functioning of monetary policy transmission mechanisms in Italy from 1984 to 1998, highlighting the role performed by the credit system. We extend the Bernanke and Blinder model (1988) to the case of an open economy under a quasi‐fixed exchange rate regime, deriving analytically the conditions for the functioning of the three monetary policy channels generally identified in the literature (‘money’, ‘exchange rate’ and ‘credit’). These conditions explain the partial effectiveness of monetary policy in achieving price and income targets, while maintaining external equilibrium. By means of a structural VECM analysis, we evaluate the effectiveness of the transmission of monetary policy through the three channels.     

Exchange rate volatility and export performance: a cointegrated VAR approach

During the last decades Norwegian exporters have–despite various forms of exchange rate targeting–faced a rather volatile exchange rate which may have influenced their behaviour. Recently, the shift to inflation targeting and a freely floating exchange rate has brought about an even more volatile exchange rate. We examine the causal link between export performance and exchange rate volatility across different monetary policy regimes within the cointegrated Vector Autoregression (VAR) framework using the implied conditional variance from a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model as a measure of volatility. Although treating the volatility measure as either a stationary or a nonstationary variable in the VAR, we are not able to find any evidence suggesting that export performance has been significantly affected by exchange rate uncertainty. We find, however, that volatility changes proxied by blip dummies related to the monetary policy change from a fixed to a managed floating exchange rate and the Asian financial crises during the 1990s enter significantly in a dynamic model for export growth–in which the level of relative prices and world market demand together with the level of exports constitute a significant cointegration relationship. A forecasting exercise on the dynamic model rejects the hypothesis that increased exchange rate volatility in the wake of inflation targeting in the monetary policy has had a significant impact on export performance.     

Is inflation targeting or the fixed exchange rate more effective for attracting FDI into developing countries?

This article investigates which monetary policy regime – inflation targeting or the fixed exchange rate – is more effective for attracting FDI inflows into developing countries. Using propensity score matching and the difference-in-differences estimator, we find no evidence that adopting an inflation targeting regime would be more effective than adopting a fixed exchange rate, and vice versa, in encouraging FDI inflows.     

Monetary Policy in Russia: Identifying exchange rate shocks

Russian monetary policy has failed persistently to achieve sustained low inflation, both in absolute terms and relative to the peer group of countries similarly exiting from Soviet-style central planning. This paper explores the reasons for this state of affairs by analysing the kind of monetary policy that has been pursued by the central bank during the period 1995 to 2009. Our contribution is to search for a possible transmission channel between the real interest rate, inflation rate, exchange rate, output growth and foreign reserve growth, after having controlled for the effect of oil price inflation. Using a vector autoregressive model in error-correction form and using sign restrictions methodology, we show that the monetary authorities’ failure to abate double-digit inflation appears to be driven by the policy of exchange rate targeting, as reflected in our identified exchange rate shocks.     

美元贬值对中国通货膨胀的影响:传导途径及其效应

本文结合有向无环图方法(DAG)及结构向量自回归模型(SVAR),分别从成本推动渠道、资金输入渠道和货币扩张渠道就美元贬值对我国通货膨胀影响的传导途径及其效应进行了实证研究。分析表明,由成本推动渠道,美元贬值会迅速带动我国工业品出厂价格上涨,能源价格、食品价格和金属价格的传导效应都很显著,而推动我国居民消费价格走高则存在一定时滞,主要依赖食品价格传导。此外,国际大宗商品价格上涨对我国通货膨胀的影响更侧重于生产领域。由资金输入渠道,美国联邦基金利率走低和美元指数下滑会带动国内商品房销售价格和资本市场价格的结构性上升,进而拉动我国通货膨胀,其中以市场利率和短期资本流动传导尤为显著。由货币扩张渠道,美元贬值对我国工业品出厂价格的影响更为显著,货币扩张主要通过外汇占款和人民币升值预期对我国通货膨胀产生影响,且以对消费领域的影响较为明显。本文的研究显示,我国当前承受着较大的输入型通货膨胀压力。     

Exchange Rate Asymmetry and Flexible Exchange Rates under Inflation Targeting Regimes: Evidence from Four East and Southeast Asian Countries

While many have underscored the role of a flexible exchange rate policy under an inflation targeting (IT) regime, very few studies have examined what actually happens to exchange rate policy once the emerging market announces that it will adopt inflation targeting. The central contention of this paper is that while the adoption of an inflation targeting (IT) policy may lead to more flexible exchange rate movements, for various reasons it is possible that the degree of flexibility will be significantly higher on one side of the market. In this study, we demonstrate that four Asian economies—namely, Indonesia, Korea, the Philippines and Thailand—whom were among the first group of emerging markets to embrace the inflation targeting framework of monetary policy, tend to adopt a form of asymmetrical exchange rate behavior, wherein appreciation pressures are restrained more substantially than depreciation pressures.     

Impact of foreign prices and interest rates on canadian economy under alternative monetary and exchange rate regimes

The main objective of this paper is to analyze the impact of U.S. short- and long-term monetary policy under both flexible and managed floating systems, using the new CANDIDE Model 2.0. We have also examined the role of domestic monetary policy in the Canadian economy under both fixed and flexible exchange rate systems. The following are some of the important findings of our study:

1. Our results support the traditional view that under the fixed exchange rate regime, monetary authorities cannot successfully pursue an independent monetary policy from its trading partners — an effort to increase money supply will be almost offset by increases in the balance of payments deficit. In contrast, in the flexible exchange rate regime, monetary policy is more effective in producing an increased growth in output and employment. However the increased output growth comes at the cost of higher prices induced by increased wages and a depreciation of the Canadian dollar.
2. Our results suggest that the impact of U.S. interest rates on investment, GNE, employment, productivity, and government debt is less severe in a pure floating exchange rate regime, compared to the managed floating system. However, the impact of U.S. interest rate policy on the Canadian inflation rate is worse in the case of flexible exchange rate regime. Even though real income and inflation are less favourable in both cases, our results indicate a trade-off between output growth and inflation.
3. Our results imply that under a pure floating monetary authorities can determine the long-run rate of inflation in Canada independent of others. However, the United States and Canadian economies are interrelated during the adjustment process, even under the flexible exchange rates, through the terms of trade and the wage-price spiral channels.

     

The effects of the monetary policy regime shift to inflation targeting on the real interest rate in the United Kingdom

This paper studies the effects of the monetary policy regime shift to inflation targeting on the stochastic properties of the real interest rate in the U.K. The empirical analysis suggests a constant mean of the real interest rate that shifts with the monetary policy regime change to inflation targeting in October 1992. The mean-reverting level of the real interest rate has decreased from 5.1% to 2.3% per annum with the change in monetary policy to inflation targeting. In addition, the shift in monetary policy regime to inflation targeting has reduced the volatility of the real interest rate and increased the persistence of real interest rate deviations from the mean. The results suggest that the central bank can affect the stochastic properties of the real interest rate through the choice of monetary policy regime over a long period of time.     

The changing transmission mechanism of US monetary policy

We examine the relative importance of the interest rate, exchange rate, and bank-lending channels for the transmission mechanism of monetary policy in the United States over the past fifty years. Our analysis is based on a structural vector autoregressive model that includes bank loans and uses sign restrictions to identify monetary policy shocks. Given these identified policy shocks, we quantify the relative importance of different transmission channels via counterfactual analysis. Our results suggest a nontrivial role for the bank-lending channel at the aggregate level, but its importance has been greatly diminished since the early 1980s. Despite the timing, we find no support for a link between this change in the transmission mechanism and the concurrent reduction in output volatility associated with the Great Moderation. There is, however, some evidence of a link to the reduction in inflation volatility occurring at the same time.     

中国货币政策的二元传导机制——"两中介目标、两调控对象"模式研究

The research, using VAR model and economic and financial data starting from January 1998 and expiring by June 2006, by econometric methods and theoretical analysis, examines the intermediate target and transmission channel of China’s monetary policy. The results are as followings: (1) Monetary supply M2 is a good indicator for China’s monetary policy, its prediction ability to economic variables is far above other monetary variables; (2) M2 is China’s monetary intermediate target because M2 reacts systematically to the industrial added value and CPI, and M2 innovation is made by the People’s Bank of China (PBC); (3) Monetary transmission channel does not exist in China basically, the main transmission channel is bank loans, credit quota is a de facto intermediate target, which regulates macroeconomy directly and induces the changes in M2, so there are two intermediate targets—credit quota and M2, which is fundamentally the same as the situation before 1998; (4) The two intermediate targets function in different fields—credit quota for real economy and M2 for the financial market, which is a realistic choice and PBC has successfully coordinated them. These conclusions are meaningful for the practices of China’s monetary policy, which indicates that we should pay more attention to the credit quota and take it as the core variable to regulate macroeconomy. Of course, this monetary transmission mode is only effective temporarily because there are many limitations in it. In the future, it is necessary to adopt the interest rate, which is more informative, as the intermediate target, which takes the marketization of the interest rate and exchange rate as the preconditions. __________ Translated from Jingji Yanjiu 经济研究 (Economic Research Journal), 2008, (10): 37–51     

Evaluating inflation targeting as a monetary policy objective for India

This study formulates a small open economy model for India with exchange rate as a prominent channel of monetary policy. The model is estimated using the Instrumental Variable-Generalized Methods of Moments (IV-GMM) estimator and evaluated through simulations. This study compares different cases of domestic and CPI inflation targeting, strict and flexible inflation targeting, and simple Taylor type rules. The analysis highlights the unsuitability of simple Taylor-type monetary rules in stabilizing the Indian economy and suggests that discretionary optimization works better in stabilizing this economy. There seems to be a trade-off between output gap stabilization and exchange rate stabilization in flexible domestic inflation targeting and CPI inflation targeting respectively. However, flexible domestic inflation targeting seems a better alternative from an overall macro stabilization perspective in India where financial markets are still not sufficiently integrated to ensure quick transmission of interest rate impulses and existence of rigidities in the economy.     

通货膨胀目标制度在我国实施的可行性分析

20世纪90年代以来,由于通货膨胀目标制(Inflation Targeting,以下又简称通胀目标制)被越来越多的国家采用,使得通胀目标制成为近年西方货币经济学领域最热门的研究课题之一。从传统的以控制货币供应量为主的货币目标法(Monetary'Targeting)和以稳定汇率为主的汇率目标法(Exchange rate Targeting)到明确公布通货膨胀目标的通胀目标制是一个货币政策方面的重大转变。本文主要分析了我国实施通胀目标制的可行性,并提供相关的政策建议。     

Monetary transmission mechanism in Turkey under free float using a small-scale macroeconomic model

This study analyzes the monetary transmission mechanism in the Turkish economy following the switch to free float under informal inflation targeting scheme in the aftermath of the February 2001 crisis. A small-scale macroeconomic model is simulated using equations for output gap, exchange rate, sub-items of inflation, short-term policy rate, government borrowing rate, “Embi+ Turkey” and inflation expectations. The preliminary results indicate that, despite some slight departures, both static and dynamic simulations capture the dynamics of the fundamental economic variables. The results also show that at a time of weak domestic demand, output gap has been seemingly less significant in determining inflation. Furthermore, risk premium as measured by “Embi+ Turkey” has a high explanatory power in shaping government borrowing rate and exchange rate. Finally, forward-looking component of inflation has been effective in determining non-administered prices.