Does monetary policy influence banks’ risk weights under the internal ratings-based approach?

This paper studies the extent to which monetary policy may affect banks’ perception of credit risk and the way banks measure risk under the internal ratings-based approach. Specifically, we empirically analyze the effect of different monetary policy variables on banks’ risk weights for credit risk. We present robust evidence of a strong, statistically significant relationship between monetary policy easing and lower implicit risk weights of banks using the internal ratings-based approach. Further, we show that the recent prolonged period of accommodative monetary policy has been instrumental in establishing this relationship. The presented findings have important implications for the prudential authority, which should be aware of the possible side effects of monetary policy on how banks measure risk.     

Coordination and non-coordination risks of monetary and macroprudential authorities: A robust welfare analysis

This study compares a central bank’s leaning against the wind approach with a mix of monetary and macroprudential policies under parameter uncertainty in an estimated DSGE model with two financial frictions. We show that uncertainty of the economic environment is an essential constituent in properly designing macroprudential policy. Although coordination between monetary and macroprudential policies minimizes the policymakers’ Bayesian risk, coordination and non-coordination risks threaten the goals of both authorities. The former describes the situation where the authorities partly resign from implementing the monetary policy objectives to stabilize macroprudential risk. The latter is when conducting a non-coordinated macroprudential policy induces higher total Bayesian risk than when only the central bank minimizes the expected total welfare loss. The robust Bayesian macroeconomic rules show that when financial shocks shrink the banks’ or entrepreneurial net worth, a contractionary macroprudential policy should be combined with an expansionary monetary policy. However, if capital adequacy ratio or risk shocks strike the economy, such a conflict in macroeconomics policy instruments disappears, thus synchronizing both policies.     

Risk pricing of wholesale funds and the behavior of retail deposit rates

We explore the relationship between bank risk and retail deposits. Predicted risk premiums on wholesale funds explain retail rate heterogeneity through two channels. First, increased bank risk premiums encourage the bank to substitute from wholesale funds to small certificates of deposits (CD) by increasing small CD rates. Second, increased rival risk premiums in a local market require the bank to increase small CD rates even more. Our results are consistent with risk encouraging the use of small CDs as a marginal source of funds and promoting local market competition for small CDs. As risk premiums rise, banks also reduce rates on other retail deposits. Our approach has implications for regulatory and monetary policies and financial stability.     

A survey on time-varying parameter Taylor rule: A model modified with interest rate pass-through

Today, the prime aim of central banking is to achieve price stability and, to a lesser extent, output stability. To this end, central banks use various monetary policy rules. This paper intends to provide a broad survey of the literature on Taylor-type monetary policy rules with a time-varying parameter (TVP) specification. To include the TVP feature, some modification is made in the monetary transmission mechanism of Taylor-type monetary policy models to account for the changing risk preference of individuals. In line with this approach, we introduce an interest rate pass-through specification of the monetary transmission process in a general equilibrium model to account for the varying perceptions of risk by individuals. We include an application for Turkey and estimate the time-variable parameters of the model by employing a structural extended Kalman filter (EKF). The results indicate that the EKF performs better than the standard Kalman filter in estimating the reaction function of the central bank.     

Testing for optimal monetary policy via moment inequalities

The specification of an optimizing model of the monetary transmission mechanism requires selecting a policy regime: commonly, commitment or discretion. In this paper we propose a new procedure for testing optimal monetary policy, relying on moment inequalities that nest commitment and discretion as two special cases. The approach is based on the derivation of bounds for inflation that are consistent with optimal policy under either policy regime. We derive testable implications that allow for specification tests and discrimination between the two alternative regimes. The proposed procedure is implemented to examine the conduct of monetary policy in the US economy.     

Divisia monetary aggregates for Russia: Money demand,GDP nowcasting and the price puzzle

The lack of developed financial markets and well-functioning transmission channels assigns monetary aggregates in emerging economies the potential role of nominal anchor, intermediate target, or informational variable for monetary policy. The effectiveness of this approach relies crucially on the correct measurement of money, which is not fulfilled by the conventional index based on the simple sum of financial assets. This paper calculates alternative Divisia monetary aggregates for Russia over the period 1998–2019, which account for the level of liquidity of a given monetary asset by assigning weights according to the usefulness of that asset for transaction services. Divisia is found to follow a markedly different growth pattern from the simple sum, whereby deviations between the two series are even more pronounced when foreign currency accounts are included. We conduct three empirical exercises to demonstrate the advantages of Divisia over the simple sum. Divisia confirms the stability of the money demand function and reflects portfolio shifts in response to changes in the opportunity cost of money. Divisia-based GDP nowcasting performs better in times of financial turmoil than the simple sum. Lastly, Divisia mitigates the price puzzle phenomenon relative to the conventional measure. We conclude that Divisia monetary aggregates would improve the effectiveness of monetary policy in Russia.     

How oil price and exchange rate affect stock price in China using Bayesian Quantile_on_Quantile with GARCH approach

We revisit the links of real exchange rate, oil price and stock market price for China using Bayesian Multivariate Quantile_on_Quantile with GARCH approach over the period of September 14, 2001 to June 17, 2022 (a total of 4051 days). Results indicate both the links between stock price and oil price and between stock price and exchange rate varying under different combinations of quantiles. GARCH model also indicate that yesterday news and persistence measures varying with current conditional variance under different quantiles. We further estimate half-life of a shock to our whole markets and find out the half-life of a shock range from 0.415 to 4.015 days. Result not found in previous study. Our study has important policy implications for the investors, practitioners, and the government.     

Solving endogenous regime switching models

This paper solves rational expectations models in which structural parameters switch across multiple regimes according to state-dependent (endogenous) transition probabilities. Assuming small shocks and smooth transition probabilities, we apply a perturbation approach. We first provide for conditions under which a unique bounded equilibrium exists. We then compute first- and second-order approximations. In a new-Keynesian model with monetary policy switching, we document new effects of monetary policy switching when transition probabilities depend on inflation.     

Optimally derived fixed rules and indicators

Monetary targets have come to be regarded as inadequate for the conduct of short-term monetary policy, both among theoreticians and practitioners of policy. In this paper two approaches are put forward, analysed and evaluated for improving the performance of monetary targets. According to the first approach, simple rules for monetary targets are derived within an optimisation framework. These rules, related to ultimate targets, are simple so that they can be announced and are flexible so that they are subject to revision when the economy drifts away from its course due to unexpected shocks.The second approach is based on indicators and complements monetary targets with exchange rate targets through a simple feedback law for determining interest rate policy. The advantage of this feedback law is that it provides the mechanism through which policy is to be revised in response to shocks. If such a feedback law is announced, private economic agents have the means of distinguishing discretionary and arbitrary changes of policy from those which are needed to bring the economy back to the announced and committed course. This approach is used to analyse and extend the suggestions in the House of Commons Report on International Monetary Arrangements.The common ground between the two approaches is an optimisation framework with respect to the parameters of either the fixed simple rules or the simple feedback laws. This is discussed in section 1. The approach of deriving simple fixed rules is illustrated in a monetarist model in which there is a link between private sector expectations and the credible announcement of monetary targets. The model is explained in section 2 and simple fixed rules are discussed in section 3. The performance of simple rules for monetary targets is evaluated in terms of a minimax strategy with model uncertainty between the monetarist model and a Keynesian model without the assumption of announcement effects. This is discussed in section 4. Optimal feedback laws are derived and analysed in section 5. The parameter sensitivity of these feedback laws with respect to the model and the objective function, as well as their behaviour under shocks, is also examined.     

Financial Depth and the Asymmetric Impact of Monetary Policy

This paper investigates the importance of financial depth in evaluating the asymmetric impact of monetary policy on real output over the course of the US business cycle. We show that monetary policy has a significant impact on output growth during recessions. We also show that financial deepening plays an important role by dampening the effects of monetary policy shocks in recessions. The results are robust to the use of alternative financial depth and monetary policy shock measures as well as to two different sample periods.     

What does a Monetary Policy Shock Do? An International Analysis with Multiple Filters*

What does a monetary policy shock do? We answer this question by estimating a new‐Keynesian monetary policy dynamic stochastic general equilibrium model for a number of economies with a variety of empirical proxies of the business cycle. The effects of two different policy shocks, an unexpected interest rate hike conditional on a constant inflation target and an unpredicted drift in the inflation target, are scrutinized. Filter‐specific Bayesian impulse responses are contrasted with those obtained by combining multiple business cycle indicators. Our results document the substantial uncertainty surrounding the estimated effects of these two policy shocks across a number of countries.     

Political Macroeconomics: A Survey of Recent Developments

The paper surveys political macroeconomics, covering its development from Rogoff's conservative central banker to the most recent discussions of monetary policy and institutional design. Topics include the inflation-stabilization trade-off, central bank independence with escape clauses and overruling with costs, inflation targets, performance contracts for monetary authorities, and the consequences of output persistence for these issues. Further topics are the political business cycle when output is persistent, the political macroeconomics of fiscal policy, the government spending bias, and the game-theoretic interaction between fiscal and monetary policy. All work is discussed within a coherent analytical framework.     

Oil price shocks,geopolitical risks,and green bond market dynamics

This research explores the causal relation among oil price, geopolitical risks, and green bond index in the United States from December 2013 to January 2019. Unlike the conventional linear model specification used in earlier works, we evaluate causal relations based on Granger-causality in quantile analysis. Our empirical results reveal unidirectional Granger-causality from geopolitical risk to oil price at the extreme quantiles. We also observe a significant bi-directional causality from oil price to green bond index for the lower quantiles. Findings also reveal causality from geopolitical risk to green bond index in the lower quantiles of the distribution. Therefore, knowledge of these causal relationships can help policy makers to evaluate and implement effective policies to prevent sudden and substantial oil price shocks and geopolitical risk.     

In search for yield? Survey-based evidence on bank risk taking

Monetary policy can have an impact on economic and financial stability through the risk taking of banks. Falling interest rates might induce investment into risky activities. This paper provides evidence on the link between monetary policy and bank risk taking. We use a factor-augmented vector autoregressive model (FAVAR) for the US for the period 1997–2008. Besides standard macroeconomic indicators, we include factors summarizing information provided in the Federal Reserve’s Survey of Terms of Business Lending (STBL). These data provide information on banks׳ new loans as well as interest rates for different loan risk categories and different banking groups. We identify a risk-taking channel of monetary policy by distinguishing responses to monetary policy shocks across different types of banks and different loan risk categories. Following an expansionary monetary policy shock, small domestic banks increase their exposure to risk. Large domestic banks do not change their risk exposure. Foreign banks take on more risk only in the mid-2000s, when interest rates were ‘too low for too long’.     

Managed Floating as a Monetary Policy Strategy

Although there seems to be a broad consensus among economists that purely floating or completely fixed exchange rates (the so-called corner solutions) are the only viable alternatives of exchange rate management, many countries do not behave according to this paradigm and adopt a strategy within the broad spectrum of exchange rate regimes that is limited by the two corner solutions. Many of these intermediate regimes are characterized by significant foreign exchange market interventions and a certain degree of exchange rate flexibility with non-preannounced exchange rate targets. While academic research in this area usually concentrates on some specific aspects of intermediate regimes (such as the effectiveness of interventions or institutional aspects), managed floating has rarely been analyzed as a comprehensive monetary policy strategy. In this paper, we present a monetary policy framework in which central banks simultaneously use the exchange rate and the interest rate as operating targets of monetary policy. We explain the mechanics of foreign exchange market interventions and sterilization and we explain why a central bank has an interest of controlling simultaneously the two operating targets. We derive the monetary policy rules for the two operating targets from a simple open economy macro model in which the uncovered interest parity condition and the monetary conditions index play a central role.     

A monetary business cycle model with unemployment

To reproduce key features of the post-war U.S. data, most monetary business cycle models must assume there are high price markups and that agents have high labour supply elasticities despite the existence of contradictory microeconomic evidence. This paper eliminates the need for these assumptions by introducing imperfectly observed effort into a limited participation model. The estimated model is better able to capture the sluggish price response to a monetary policy shock than the standard model, and is consistent with evidence regarding the qualitative responses of the U.S. economy to technology shocks, fiscal policy shocks and monetary policy shocks.     

财政政策与货币政策相对有效性研究

本文从实证的角度 ,对我国财政政策和货币政策的相对有效性进行了研究。运用协整分析方法并通过邹氏检验 ,对整个数据期间进行了制度检验。结果显示1980年以前平均来说 ,财政政策比货币政策有效 ,而其后平均来说货币政策比财政政策有效。这一结论与我国建国以来宏观经济调控政策选择的基本情况相吻合 ,为对宏观调控的政策选择提供了有力的支持。     

Effect of monetary policy shocks on the racial unemployment rates in the US

This study analyzes the effect of monetary policy shocks on the unemployment rate of different racial groups in the US, using data from 1969Q2 to 2015Q4. Employing a narrative approach to identify monetary policy shocks and local projections, we find that although an expansionary monetary shock affects White workers positively and significantly, the effect on Black workers is larger, and for Hispanic workers it is not statistically different from zero. These results are robust when considering unconventional monetary policy measures in the specification, and when exploring the impact of monetary policy on different genders and age groups. We also highlight how recession affects the transmission channel of monetary policy to the labor market for White and Hispanic workers. Finally, further extensions suggest that the Fed’s monetary policy is effective in reducing the racial unemployment gap, particularly between Whites and Blacks, and during economic booms.     

Security markets and the information content of monetary policy turning points

Substantial evidence shows that a significant relationship exists between Federal Reserve monetary policy signals and subsequent security returns. Recent evidence, however, suggests that Fed rate changes do not signal shifts in monetary policy and therefore have no real policy significance. In this study, we investigate whether certain Fed signals, characterized as turning points in the monetary cycle, have real policy significance. Our evidence suggests that the Fed's signal that a turning point is occurring is unambiguous, predicts a substantial shift in Fed monetary policy, and provides costless and meaningful information about future security market returns.     

Monetary policy,financial uncertainty,and secular stagnation

A monetary policy framework describing how to cope with a financial crisis might alleviate a recession; however, it might also result in subsequent secular stagnation. Based on an empirical New Keynesian model with financial uncertainty, this study investigates how monetary policy can avoid sluggish economic recovery in response to financial shocks. The results show that a protracted sluggish response of an output gap to a financial shock is triggered by inflation targeting, without considering interest rate variations. In such a policy, the uncertainty causes additional sluggish behavior after a sharp reduction in the output gap. In contrast, in a speed limit policy, the output gap recovers rapidly, regardless of the central bank’s approach to interest rate variations, and the uncertainty mitigates reductions in the output gap. Finally, the results are robust under several alternative settings.