Optimal Monetary Policy in China

Using the structural vector autoregression model, we estimate the current responses of monetary policy to contemporaneous shocks from macroeconomic variables. Our findings indicate that the People's Bank of China responded to inflation and output changes, but did not react to asset price fluctuations during the period from January 1997 to March 2010. The optimal monetary responses to exogenous shocks are also examined. It is revealed that using asset prices to formulate monetary policy would not help to improve monetary authorities' performance in lowering the volatilities of output growth and inflation while keeping output growth and inflation in their safety zones. The effectiveness of monetary policy and fiscal policy in reacting to external shocks is also discussed.     

Commodity prices and the macroeconomy: An extended dependent economy approach

This paper proposes a straightforward model for analysing the impact of export commodity price fluctuations on open macroeconomies with particular reference to Australia and New Zealand, major commodity exporters in the Asian region. It extends the dependent economy approach, first by re-specifying goods and services production as either exportable, importable or non-tradable, and second by adding a monetary sector to highlight key linkages between commodity prices, the exchange rate, price level, national output and trade account. The framework sheds new light on the phenomenon of ‘commodity currencies’, how exchange rate movements shield national output from terms of trade shocks, the importance of economic openness in this process, and the significance for monetary and exchange rate policy of short term, versus sustained, commodity price movements.     

Commodity Prices, Inflationary Pressures, and Monetary Policy: Evidence from BRICS Economies

We assess the transmission of monetary policy and the impact of fluctuations in commodity prices on the real economy for the five biggest and fastest growing emerging market economies: Brazil, Russia, India, China and South Africa (BRICS). Using modern econometric techniques, we show that a monetary policy contraction has a negative effect on output, suggesting that it can lean against unexpected macroeconomic shocks even when the financial markets are not well-developed in this group of countries. We also uncover the importance of commodity price shocks, which lead to a rise in inflation and demand an aggressive behaviour from central banks towards inflation stabilisation.     

The Effects of Fiscal Policy in a Small Open Economy with a Fixed Exchange Rate

We study the empirical effects of fiscal policy in Denmark since the adoption of a fixed exchange rate policy in 1982. Denmark’s fixed exchange rate implies that the nominal interest rate remains fixed after a fiscal expansion, facilitating a substantial impact of the fiscal stimulus on the real economy. On the other hand, the large degree of openness of the Danish economy means that a sizeable share of the fiscal stimulus will be directed towards imported goods. Our results suggest that the ‘monetary accomodation channel’ dominates the ‘leakage effect’ in the short run. We demonstrate that fiscal stimulus has a rather large impact on economic activity in the very short run, with a government spending multiplier of 1.1 on impact in our preferred specification. We also find that the effects of fiscal stimulus are rather short-lived in Denmark, with the effect on output becoming insignificant after around two years. The fiscal multiplier is above 1 only in the first quarter, and drops to 0.6 one year after the shock. We also find that in the short run, the government spending multiplier is larger than the tax multiplier. Finally, we demonstrate that exogenous shocks to government spending account for less than 10 % of the movements in output over the business cycle in Denmark.     

The Term Structure of Interest Rates in a Small Open Economy: A Stochastic Analysis

This article employs a rational expectations IS-LM model with price adjustment to study the effect of domestic monetary and fiscal policy and world interest rate disturbances on the real and nominal small open economy term structure of interest rates. The impact of both temporary and permanent shocks are investigated. Notable results include the fact that monetary expansions lead to positive yield curves, while the implications of fiscal expansions and increases in the world interest rate depend crucially on the duration of the shock.     

Oil shocks and endogenous markups: results from an estimated euro area DSGE model

This paper estimates a linearised DSGE model for the euro area. The model is New Keynesian and allows for a role for oil usage and endogenous price markups. The importance of shocks to monetary policy and oil prices is estimated to have declined in the post-1990 period, in line with the higher predictability of policy and the fall in the persistence and—to a lesser extent—variability of oil disturbances. Counterfactual exercises show that oil efficiency gains would alleviate the inflationary and contractionary consequences of oil shocks, while higher wage flexibility would help ease the impact on real output at the expense of larger inflationary pressures. While we report evidence of “countercyclical” price markups, the rise in markups induced by an oil disturbance is not found to considerably amplify the inflationary and contractionary effects of the shock. The paper discusses the policy implications of our empirical results for the euro area economy.     

Measuring Monetary Policy in a Small Open Economy with Managed Exchange Rates: The Case of Taiwan

We use sign restrictions to identify monetary policy for a small open economy with heavily managed exchange rates. We apply the proposed sign restrictions to the Taiwanese case, where existing studies tend to find no clear effect of monetary policy shocks on the output and price level. Our principal findings are that a contractionary monetary policy shock causes a permanent and significant decline in real gross domestic product, broad money, and price level. Our identification scheme is able to avoid the puzzling impulse responses from which other identification schemes more or less suffer. The fact that monetary policy has not been correctly identified may have led existing studies to conclude that monetary policy is ineffective.     

The impact of world oil price shocks on macroeconomic variables in Vietnam: the transmission through domestic oil price

This study examines the impact of world oil price shocks on macroeconomic variables in Vietnam with a focus on the transmission channel of domestic oil prices. The Structural Vector Autoregression model with two blocks of real economy variables and monetary variables is employed. The world oil price follows an autoregressive process to reflect the exogenous nature of world oil price shocks to the domestic economy. The retail domestic oil price is determined simultaneously by only the world oil price due to the government's control of the domestic oil market. Using monthly data in the period between 2009 and 2021, the study indicates that a positive shock to world oil prices will increase the domestic oil prices significantly, industrial production (slightly and only statistically significant in the third month after), and inflation (significantly in 8 months). Besides, the domestic oil price is not the only transmission channel of world oil price shocks to the economy. This result implies forecasting, assessing, and controlling the impact of the world oil price shock on the economy should focus on both domestic oil prices and other indirect channels.     

The Optimal Monetary and Macroprudential Policies for the South African Economy

We investigate the optimal design and effectiveness of monetary and macroprudential policies in promoting macroeconomic (price) and financial stability for the South African economy. We develop a New Keynesian dynamic stochastic general equilibrium model featuring a housing market, a banking sector and the role of macroprudential and monetary policies. Based on the parameter estimates from the estimation, we conduct an optimal rule analysis and an efficient policy frontier analysis, and compare the dynamics of the model under different policy regimes. We find that a policy regime that combines a standard monetary policy rule and a macroprudential policy rule delivers a more stable economic system with price and financial stability. A policy regime that combines an augmented monetary policy (policy rate reacts to financial conditions) with macroprudential policy is better at attenuating the effects of financial shocks, but at a much higher cost of price instability. Our findings suggest that monetary policy should focus solely on its primary objective of price stability and let macroprudential policy facilitate financial stability on its own.     

Monetary Policy in Estimated Models of Small Open and Closed Economies

This paper compares monetary policy effects in New-Keynesian models of small open and closed economies fit to Canada. A monetary policy rule allows the central bank to systematically manage the nominal interest rate in response to inflation, output, and money growth variations. The structural parameters of a small open-economy (SOE) and a closed-economy (CE) models are estimated using a maximum-likelihood procedure with a Kalman filter. Estimation results show that the SOE and CE models lead to qualitatively similar estimates for the Canadian economy. Also, the effects of monetary policy shocks, and of other domestic shocks, generated in the SOE model resemble to those generated in the CE model. In addition, the forecast-error decomposition shows that foreign shocks account for small fractions of the variability observed in Canadian macroeconomic variables.     

Historical Decomposition of Aggregate Demand and Supply Shocks in a Small Macro Model

We estimate and analyze the impact of multiple aggregate demand and aggregate supply shocks in a small macroeconomic model of the economy. The analysis serves two purposes. First, we assess the relative importance of the various shocks in explaining the path of output over the past three decades. Second, we conduct counterfactual policy experiments which show the effects of alternative policies on key macro variables. We find that using the monetary policy tool (reserves or the base) such that constant money growth occurs would have produced superior economic results.     

Macroeconomics of Agricultural Trade Liberalization

Abstract

In this article a macroeconomic model is built to examine interactions between the agricultural sector and the industrial sector in an emerging market economy. This article examines how monetary shock and real shocks produce agricultural price fluctuations and change in employment through multiple cross effects. Monetary shocks result in overshooting of primary commodity price while real shock in terms of rise in the production of primary commodity mitigates the volatility of primary price.     

Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma

Using the “trilemma indexes” developed by Aizenman et al. (2010) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—we examine how policy configurations affect macroeconomic performances, with focus on the Asian economies. We find that the three policy choices matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation rate. We find that trilemma policy configurations affect output volatility through the investment or trade channel depending on the openness of the economies. Our results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears to enhance the stabilizing effect of the trilemma policy choices, and this may help explain the recent phenomenal buildup of IR in the region.     

What to Aim for? The Choice of an Inflation Objective when Openness Matters

Inflation targeting countries generally define the inflation objective in terms of the consumer price index. Studies in the academic literature, however, reach conflicting conclusions concerning which measure of inflation a central bank should target in a small open economy. This paper examines the properties of domestic, CPI, and real-exchange-rate-adjusted (REX) inflation targeting. In one class of open economy New Keynesian models there is an isomorphism between optimal policy in an open versus closed economy. In the type of model we consider, where the real exchange rate appears in the Phillips curve, this isomorphism breaks down; openness matters. REX inflation targeting restores the isomorphism but this may not be desirable. Instead, under domestic and CPI inflation targeting the exchange rate channel can be exploited to enhance the effects of monetary policy. Our results indicate that CPI inflation targeting delivers price stability across the three inflation objectives and will be desirable to a central bank with a high aversion to inflation instability. CPI inflation targeting also does a better job of stabilizing the real exchange rate and interest rate which is an advantage from the standpoint of financial stability. REX inflation targeting does well in achieving output stability and has an advantage if demand shocks are predominant. In general, the choice of the inflation objective affects the trade-offs between policy goals and thus policy choices and outcomes.     

Home-product bias, capital mobility, and macroeconomic volatility

This paper uses a dynamic general equilibrium two-country optimizingmodel to analyse the consequences of international capital mobilityfor macroeconomic volatility. To this end, the dynamic macroeconomiceffects of a monetary policy, a fiscal policy, and a labor supplyshock are analysed. Simulations are used to analyse the implicationsof changes in the degree of capital mobility for the propagationof shocks. The simulation results obtained for a bond economyare compared with the simulation results obtained for a complete-marketeconomy. It is shown that allowing for a home-product bias inpreferences has a number of interesting implications for theway changes in international capital mobility and in the structureof international financial markets affect how shocks propagatethrough an open economy.     

The macroeconomic effects of monetary policy: Evidence from Japan

This study examines the macroeconomic effects of monetary policy in Japan. We apply the new identification strategy proposed by Bu et al. (2021) to the Japanese case and estimate monetary policy shocks that bridge periods of conventional and unconventional monetary policymaking. We show the macroeconomic effects of monetary policy; a contractionary monetary policy shock significantly decreases output and inflation rates even under the effective lower bound. However, because the shorter-term and longer-term nominal interest rates are already close to zero, the magnitude of monetary policy shocks on the macroeconomic variables is modest.     

THE CYCLICALITY OF MONETARY AND FISCAL POLICY IN SOUTH AFRICA SINCE 1994

This paper uses a structural vector‐autoregression approach to discuss the cyclicality of fiscal and monetary policy in South Africa since 1994. There is substantial South African literature on this topic, but much disagreement remains. Though not undisputed, there is growing consensus that monetary policy has contributed to the remarkable stabilisation of the South African economy over this period. The evaluation of the role of fiscal policy in stabilisation has been less favourable and there is little evidence that a countercyclical fiscal stance was a priority over this period. This paper considers these issues in an empirical framework that addresses some of the shortcomings in the literature. Specifically, it constructs a structural model in contrast with the reduced form models typically used in the South African literature, incorporates the dynamic interaction between monetary and fiscal shocks on the demand side and supply shocks on the other, and avoids controversy over “neutral” base years and the size of fiscal elasticities. The model confirms the consensus on monetary policy, finding it to have been largely countercyclical since 1994. On fiscal policy, this paper finds evidence of pro‐cyclicality, especially in the more recent period, though the policy simulations suggest that the pro‐cyclicality of fiscal policy has had little destabilising impact on real output.     

人民币国际化对货币政策有效性的影响

人民币国际化是否影响货币政策有效性?是人民币国际化程度提高之后货币大规模跨境流动而引起的担忧。文章研究发现,在给定其他因素不变的情况下,人民币国际化程度的提高放大了境外汇率变动对国内经济产出和价格的影响。因此,人民币国际化背景下,中央银行应将境外汇率失衡纳入货币政策的反应函数,反应系数取决于境外利率、产出和价格对境外货币需求的决定系数。理论分析还表明,人民币国际化程度不影响货币政策对国内价格的有效性,而是否影响货币政策对国内经济产出的有效性,则取决于经济结构特征。实证结果表明,目前人民币国际化未对国内利率、产出和价格带来明显冲击,且无论是在M0层次,还是在M2层次,人民币国际化均未明显影响国内货币政策有效性。     

On the Sources of Inflation in Kenya: A Model‐Based Approach

We develop a semi‐structural new‐Keynesian open‐economy model – with separate food and non‐food inflation dynamics to study the sources of inflation in Kenya in recent years. To do so, we filter international and Kenyan data (on output, inflation and its components, exchange rates and interest rates) through the model to recover a model‐based decomposition of most variables into trends (or potential values) and temporary movements (or gaps) – including for the international and domestic relative price of food. We use the filtration exercise to recover the sequence of domestic and foreign macroeconomic shocks that account for business cycle dynamics in Kenya over the last few years, with a special emphasis on the various factors (international food prices, monetary policy) driving inflation. We find that while imported food price shocks have been an important source of inflation, both in 2008 and more recently, accommodating monetary policy has also played a role, most notably through its effect on the nominal exchange rate. We also discuss the implications of this exercise for the use of model‐based monetary policy analysis in sub‐Saharan African countries.     

On the choice of an anchor for the GCC currency: does the symmetry of shocks extend to both the oil and the non-oil sectors?

This paper assesses the costs of forming a monetary union among the Gulf Cooperation Council (GCC) countries by looking at economic linkages within the GCC, and between the GCC and the potential anchors (the US, and major European countries such as France, Germany and Italy) for their proposed new currency. We investigate the importance of the US dollar compared to the Euro by focusing on aggregate demand (AD) and aggregate supply (AS) shock symmetry across these countries. We differentiated between oil and non-oil sector by estimating structural vector autoregression (SVAR) models with a combination of variables: oil output, non-oil output, total output, nominal/real price of oil and overall price level. One set of models was identified with the long-run restrictions of Blanchard and Quah (Am Econ Rev 79(4):655–673, 1989), whereas the set that assesses the robustness of the findings was estimated with the short-run restrictions of Sims (Eur Econ Rev 36(5):975–1000, 1992). We find overwhelming support for AD shock symmetry across the GCC countries and between the GCC and the US, but none for the major European countries with the GCC. Non-oil AS shocks are mostly asymmetric, but oil AS shocks are mostly symmetric when the real price of oil is included. This agrees with the view that GCC countries are subjected to common oil shocks. It also suggests that previous VAR models estimated to pass judgment on the feasibility of monetary union across GCC countries may have suffered from problems of mis-specification if the real price of oil was not considered. We surmise that the US dollar is a better anchor candidate for anchoring the new GCC currency than the Euro, since US monetary policy can at least help smooth demand shocks in these countries.