Transmission of central bank communication to emerging economies: Evidence from the Korean stock market

This study analyzes the impact of US central bank communication on financial markets in emerging economies. We find that informal communication from the Fed positively influences the Korean stock market at a greater magnitude than the US stock market. The results show that the Korean stock market experienced higher excess return when Korea's monetary policy decisions are uncertain, suggesting that central bank communication in central countries could transmit to emerging economics through their monetary policy decisions and uncertainty. In addition, various portfolios and individual equities have a positive market risk-return tradeoff in the presence of Fed communication only.     

Dove or Hawk? Characterizing monetary policy regime switches in India

The past two decades have witnessed a worldwide move by emerging markets to adopt explicit or implicit inflation targeting regimes. A notable and often discussed exception to this trend, of course, is China which follows a pegged exchange rate regime supported by capital controls. Another major exception is India. It is not clear how to characterize the monetary regime or identify the nominal monetary anchor in India. Is central bank policy in India following a predictable rule that is heavily influenced by a quasi inflation target? And how has the monetary regime been affected by the gradual process of financial liberalization in India? To address these points, we investigate monetary policy regime change in India using a Markov switching model to estimate a time-varying Taylor-type rule for the Reserve Bank of India. We find that the conduct of monetary policy over the last two decades can be characterized by two regimes, which we term ‘Hawk’ and ‘Dove.’ In the first of these two regimes, the central bank reveals a greater relative (though not absolute) weight on controlling inflation vis-à-vis narrowing the output gap. The central bank however was found to be in the “Dove” regime about half of our sample period, focusing more on the output gap and exchange rate targets to stimulate exports, rather than moderating inflation. India thus seems to be following its own direction in the conduct of monetary policy, seemingly not overly influenced by the emphasis on quasi-inflation targeting seen in many emerging markets.     

Bond markets co-movement dynamics and macroeconomic factors: Evidence from emerging and frontier markets

This paper examines the co-movement dynamics of ten emerging and four frontier government bond markets with the US market and the impact of macroeconomic factors and global bond market uncertainty on the time-varying co-movement. We find that macroeconomic factors play important role in explaining time variations in the bond return co-movement. Specifically, domestic macroeconomic factors have higher relative importance than global factors, with domestic monetary policy and domestic inflationary environment identified as the most influential factors. The global bond market uncertainty, based on an implied volatility measure, has explanatory power in driving co-movement dynamics in emerging and frontier bond markets.     

中国货币需求差异变动研究综述

货币需求是否稳定是宏观经济理论和政策实践中经常关注的重要问题,稳定的货币需求函数是中央银行制定宏观经济政策的重要参考依据.通过系统介绍1994年以来学者有关分析目前中国货币需求差异变动的测度方法、产生差异原因,以及制定中国宏观货币政策的思路等研究成果,以期为中国货币政策的实施提供理论依据.     

A POST‐KEYNESIAN STOCK‐FLOW CONSISTENT MODEL FOR DYNAMIC ANALYSIS OF MONETARY POLICY SHOCK ON BANKING BEHAVIOUR

We try to make Keynes' approach compatible with an endogenous theory of the money supply. For that purpose, the principle of liquidity preference is generalized within a competitive banking framework. Private banks can impose a monetary rationing independently of the central bank. Then, we analyse the consequences of a monetary policy shock on the financial behaviour of banks. We clarify the dynamic process between the monetary policy and net investment within a Minskyan approach. First, we build a Post‐Keynesian stock‐flow consistent model with a private‐bank sector introducing more realistic features. Second, we perform some simulations.     

Monetary Policy,Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View

‘Capitalism without failure is like religion without sin’. Charles Kindleberger's book Manias, Panics and Crashes points out that speculation and crises have always been present: the world economic crisis of the 20th century, the South Sea bubble in the 18th century, and the tulip mania in the first part of the 17th century. Starting with the Japanese bubble in the 1980s we take the reader on a tour through 20 years of bubbles in emerging markets and industrial countries which have recently culminated in the 2007/08 US subprime market crisis. We explain the global stock market and real estate booms based on the real and monetary overinvestment theories of Hayek, Wicksell and Schumpeter, arguing that ample liquidity supply originating in the large industrialised countries has contributed – independent from the exchange rate regime – to overinvestment cycles in new and emerging markets around the globe. The policy implication is to keep interest rates not too low for too long in response to bursting bubbles.     

The Effectiveness of Central Bank Independence vs. Policy Rules

This paper assesses the relative effectiveness of central bank independence vs. policy rules for the policy instruments in bringing about good economic performance. It examines historical changes in (1) macroeconomic performance, (2) the adherence to rules-based monetary policy, and (3) the degree of central bank independence. Macroeconomic performance is defined in terms of both price stability and output stability. Both de jure and de facto central bank independence at the Federal Reserve are considered. The main finding is that changes in macroeconomic performance during the past half century were closely associated with changes in the adherence to rules-based monetary policy and in the degree of de facto monetary independence at the Federal Reserve. But changes in economic performance were not associated with changes in de jure central bank independence. Formal central bank independence alone has not generated good monetary policy outcomes. A rules-based framework is essential.     

Does People's Bank of China communication matter? Evidence from stock market reaction

This paper tests whether the communication of the People's Bank of China affects market expectations and matters as a monetary policy tool. For that purpose, we first rely on a computational linguistic tool to measure the tone of PBC speeches and second, we use a high frequency methodology to estimate the effect of tone on stock price. Our results show that positive changes of the tone affect positively stock price in the Shanghai and the Shenzhen stocks markets. Additional extensions show that PBC communication still has a positive and significant impact on stock price even when controlling for all the monetary policy instruments implemented by the central bank, but that this impact is not persistent over time. One potential channel through which PBC tone affects stock prices is the risk-based channel of monetary policy.     

INTEREST AS AN ARTEFACT OF SELF‐VALIDATING CENTRAL BANK BELIEFS

The classical/Sraffian approach to distribution is proposed as a more congenial framework for Keynes's concept of interest as a conventional variable—resulting from the interplay between central bank behaviour and financial market sentiment—because it provides a sounder basis for multiple interest rate equilibria. While either monetary policy or market expectations can be decisive, the capacity of policy to ensure markets acquiesce in the authorities' view remains at least as plausible as Keynes supposed. Interest is a result of ‘history’ plus the beliefs of the monetary authorities, where those beliefs may be illusory but nevertheless validated by actual outcomes.     

The COVID-19 pandemic and financial markets in Central Europe: Macroeconomic measures and international policy spillovers

This paper investigates the effects of macroeconomic policy announcements on financial markets in three Central European economies: Czechia, Hungary, and Poland (CE–3). We focus on the unprecedented stabilisation policies implemented from March to December 2020 during the COVID-19 pandemic, including unconventional monetary measures and large stimulus programs. Detailed categories of monetary and fiscal measures are introduced into vector autoregressions with exogenous regressors and dynamic conditional correlations, which we estimate using daily data. This allows us to control for policy spillovers from abroad, as well as global risk factors and pandemic-related variables. We find that, in general, macroeconomic policy measures implemented in the CE–3 countries played an important role in stabilising financial markets during the pandemic. We uncover several notable patterns in the reaction of markets to anti-crisis measures across the region. The impact of the monetary policy announcements on 10-year sovereign bond yields was more substantial than on stock market returns and exchange rate returns. The communication of the unconventional tools proved effective in lowering the bond yields. Interestingly, we document that the effects of non-standard measures for some variables, such as the exchange rate, can be qualitatively different from those resulting from a conventional monetary expansion. Even though the domestic monetary events became more important than the fiscal ones, the latter proved relevant for financial market returns, especially when large-scale immediate fiscal measures and tax deferrals were introduced. We also show that the CE–3 economies were subject to the cross-border transmission of policy announcement effects from the Euro Area and the US, although the magnitude of these effects was smaller than expected and varied across the CE–3 countries.     

Liquidity and stock returns in emerging equity markets

Using data for 27 emerging equity markets for the period January 1992 through December 1999, we document the behavior of liquidity in emerging markets. We find that stock returns in emerging countries are positively correlated with aggregate market liquidity as measured by turnover ratio, trading value and the turnover–volatility multiple. The results hold in both cross-sectional and time-series analyses, and are quite robust even after we control for world market beta, market capitalization and price-to-book ratio. The positive correlation between stock returns and market liquidity in a time-series analysis is consistent with the findings in developed markets. However, the positive correlation in a cross-sectional analysis appears to be at odds with market microstructure theory that has been empirically supported by studies on developed markets. Our findings regarding the cross-sectional relation between stock returns and liquidity is consistent with the view that emerging equity markets have a lower degree of integration with the global economy.     

Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies

Nowadays foreign exchange interventions occur in emerging market economies, whereas empirical studies on interventions mainly refer to advanced economies. However, interventions in emerging markets are different from those in advanced economies: they occur ‘regularly’ and central banks have considerable leverage, derived from relatively high reserves, some non‐sterilisation, the central bank’s information advantage and capital controls. Consequently, these interventions often successfully impact the level and volatility of exchange rates. Nevertheless, more research on interventions in emerging markets is needed analysing the influence of heterogeneous institutional circumstances, examining the role of central bank communication and using high‐frequency data.     

Avoiding toxic assets and ensuring bank stability: English commercial bank investments, 1880–1910

New estimates are made of the relative importance of investments within the banks' assets structure, of the significance of bank investments in the market as a whole, of the composition of those investments, and of how those changed in a period that experienced a significant increase in the scale, liquidity and diversity in Britain's organised secondary capital markets. Investment holdings in the total market and amongst insurance companies are used as benchmarks. One main finding is that there was a great deal of variation in the size of bank investments relative to total assets, with no evidence of a ‘norm’ investments ratio. Another finding is that although there is some evidence of greater diversity over time, conservatism – and especially the continued heavy reliance on public sector securities – is more evident. Overall, there was a commitment to a high liquidity, risk-averse approach to portfolio management which contributed to bank stability and limited the financing of the private sector.     

What explains default risk premium during the financial crisis? Evidence from Japan

As is well documented, subprime mortgage markets carried significant default risk. This paper investigates the relationship between default risk premium, stock market conditions and macroeconomic variables during the financial crisis. Using iTraxx Japan Credit Default Swap (CDS) index spreads covering the period from March 2006 to November 2009, we employ a time-varying dynamic factor model with Markov regime switching to generate regime probabilities for default risk. We analyze the sensitivity of default risk premium changes to stock market conditions and macroeconomic variables by using two-state Markov switching models: a crisis regime sparked by rising loan defaults in the sub-prime mortgage market, and a non-crisis regime. We found strong evidence that the relationship between default risk premium changes, stock market and macroeconomic variables is regime-dependent. Our results suggest that during periods of crisis, CDS indices behave as a higher-risk indicator and become more sensitive to stock market conditions and macroeconomic variables. This paper examines the effects of the financial crisis in explaining the default risk premium. Understanding the determinants of default risk premium is important for financial analysts, economic policy makers and credit risk management.     

我国货币政策工具有效性分析

货币政策工具的有效性决定了货币政策的最终效果,我国运用的货币政策工具主要有公开市场操作、准备金率、中央银行基准利率、信贷政策、再贷款、再贴现以及外汇市场的调控等。具体分析发现,我国近十年主要使用的货币政策工具,总体上可以对基础货币产生影响,但对其他因素（如流动性、外汇占款过大等）来说,货币政策工具的操作效果减弱。另外,货币政策内部传导机制中的时滞效应也使货币政策工具难以及时发挥作用。     

中国货币政策不确定性和宏观经济新闻的人民币汇率效应

基于2012年4月30日至2018年12月17日的银行间7天逆回购操作利率,本文首次使用波动率回归拟合的方法,从政策利率的角度改进中国货币政策不确定性指数,并进一步研究了在不同程度货币政策不确定性的情况下,人民币兑美元汇率对宏观经济新闻的反应。收集和构建10项宏观经济新闻后,本文发现当市场参与者普遍不能较为准确地预测未来政策变化的情形时,货币政策不确定性上升,在岸、离岸人民币兑美元汇率对宏观经济新闻的反应显著减弱。当货币政策存在较高不确定性时,市场对未来政策判断的分歧加剧,进而人民币汇率对宏观经济新闻的反应不足。在货币政策不确定性较高时,增加央行的汇率沟通,可以发挥其对宏观经济新闻的补充作用,同时增强市场对宏观经济基本面信息的反应。本文不仅丰富了货币政策不确定性的负面影响、经济后果以及宏观经济新闻的人民币汇率效应相关理论研究,而且为未来货币政策制定、调整和实施提供了有价值的依据,为货币当局进行有效外汇市场干预提供了经验参考。     

Size, value and liquidity. Do They Really Matter on an Emerging Stock Market?

The paper extends the evidence on factors determining stock prices on emerging markets by focusing on the most advanced stock market in Central and Eastern Europe, the Polish market. Besides market, size and value factors, we investigate whether liquidity is a priced risk factor, addressing the hypothesis of its particular relevance in emerging markets. Our results support existing evidence for developed markets regarding market, size, and value factors. Contrary to the expectation that liquidity is a priced factor on emerging markets, we do not find evidence supporting this hypothesis. Analyzing specific market characteristics, we consider possible explanations behind these findings.     

Sovereign ratings,macroeconomic dynamics,and fiscal policy. Interactions within a stock flow consistent framework

Operating in the context of deregulated financial markets, credit rating agencies do not only ‘provide an opinion’, but also affect macroeconomic dynamics. By utilizing a two‐country stock flow consistent model that provides a representation of the Eurozone, the paper connects the movements of sovereign ratings with the dynamics of the financial market and the constraints on fiscal policy. With endogenous fiscal expenditure and an endogenous credit rating mechanism the model shows how following a recessionary shock, a rating downgrade can influence the financial constraints that surround a government, pushing it toward fiscal austerity and thereby deepening the already ongoing recession.     

China’s Growing Influence in Southeast Asia – Monetary Policy and Equity Markets

This study analyses the potential transmission of China’s monetary policy shocks to equity markets in Southeast Asia. Impulse response functions indicate that the impact of a monetary expansion in China is significant and positive for four of the five Southeast Asian equity markets. One explanation for this result is that monetary policy shocks in China lead to an increase in demand for goods and services in both China and abroad, which then shows up in the foreign equity market. The results in this paper provide evidence of China’s influence in Southeast Asia and its financial markets. The transmission effect is small and very short lived, but can be expected to increase if the current trends of a deepening economic integration between China and Southeast Asia and a maturing Chinese central bank continue.     

Separating the wheat from the chaff: Understanding portfolio returns in an emerging market

In this paper we apply Random Matrix Theory (RMT) to study daily return correlations of 83 companies that are part of the Chilean stock market during the period 2000 to 2011. We find that using RMT to identify statistically significant correlations within our sample of stocks significantly improves the efficiency of a family of Markowitz Portfolios. Moreover, by using Vector Autoregressive analysis we identify global risk aversion as the main driver of the Chilean equity market returns followed in importance by shocks to the monthly rate of inflation and the country's monetary policy rate. By studying the effects of macroeconomic variables on the constructed portfolio returns we reach a better understanding of the true risks involved in an emerging market portfolio.