Is U.S. money causing China's output?

This paper tries to answer the long-standing question of whether money causes output. Instead of focusing on domestic monetary policy and output, we analyze U.S. monetary policy and its possible effects on real output in China. Our results indicate that the main monetary instrument in the U.S., the Federal Fund Rate, Granger causes China's output. A second monetary variable, U.S. money supply, does not seem to have a significant effect on China's output. The results are supported by variance decompositions, which indicate that Federal Fund Rate shocks have an effect on China's real output. The findings have important implications for policy makers in China that focus on maintaining a high and stable economic growth.     

Inflation in South Africa: An Assessment of Alternative Inflation Models

We consider the relative empirical performance of a range of inflation models for South Africa. Model coverage is of Phillips curve, New Keynesian Phillips curve, monetarist and structural models of inflation. Our core findings are that the single most robust covariate of inflation is unit labour cost. We further decompose unit labour cost into changes in the nominal wage and real labour productivity. The principal association is a strong positive relationship between inflation and nominal wages, while improvements in real labour productivity report only a relatively weak negative association with inflation. Supply‐side shocks also consistently report an association with inflation. As to demand‐side shocks, the output gap does not return a robust statistical association with inflation. Instead, it is growth in the money supply and government expenditure which return robust and theoretically consistent associations with inflationary pressure.     

Money,inflation, and output growth: Does the aggregate demand-aggregate supply model explain the international evidence?

Money, Inflation, and Output Growth: Does the Aggregate Demand-Aggregate Supply Model Explain the International Evidence? - Using annual post-war data for 32 countries, it is shown that output and the price level are positively related along the aggregate supply and negatively related along the aggregate demand curve. This implies that the negative correlation between inflation and growth simply means that the price level has been countercyclical as aggregate supply shocks domi-nated aggregate demand shocks. It is also shown that money growth has positive and permanent effects on inflation, but may affect output only in the short run: in the long run, money is probably neutral.     

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.     

Evidence on the Effects of Money Growth on Inflation with Regime Switching

Since the latter half of 2010, a new round of inflation has gradually been manifesting in China. The debate regarding whether excess money supply is responsible for this inflation has attracted scholars to investigate the effects of money growth on inflation. In this paper, we use correlation analysis to confirm the comovement between growth of monetary aggregates and inflation. We explore the asymmetric effects of monetary policy on inflation using the Markov regime‐switching model. The empirical results show that monetary policy can be more effective in curbing inflation in a high inflation state than in boosting the price level in a low inflation state. However, simply tightening the money supply might not be sufficient to suppress the price level. To this end, the Chinese Government should adopt other policies, such as supply stabilization policies, to help suppress the price level. Our study can help policy‐makers to determine the actual economic state and provides some policy implications for the current inflation.     

中国货币政策的福利损失与政策规则选择——基于新凯恩斯DSGE模型的分析

本文在新凯恩斯主义DSGE模型框架下,运用福利损失函数和脉冲响应方法研究我国最优货币政策规则选择的问题。研究结果表明,货币供应量规则相对于利率规则,使外生冲击对产出和通货膨胀的影响更持久,造成更大的福利损失,因此中央银行的货币政策规则应该逐步从货币供应量规则转向利率规则;在一定条件下,前瞻型利率规则、后顾型利率规则和泰勒规则所造成的福利损失相差不大,从便利的角度出发,中央银行应该选择后顾型利率规则。     

Separating shocks from cyclicality in Indian aggregate supply

Simultaneity issues as well as incorrect measurement of shocks and of the cyclical variable bias estimated slopes of the Indian aggregate supply curve (AS). Our initial Generalised Method of Moments estimation, based on a filtered output gap variable and including supply shocks, also gives an unrealistic downward sloping AS. But we find measures of asymmetries in price changes outperform traditional measures of supply shocks. Estimation using marginal costs as a proxy for the output gap gives a positive coefficient that reduces in size on including our comprehensive supply shock variable, implying the correct AS has a small positive slope, but is subject to multiple shifts. The semi-structural specification, closer to firms’ actual decisions, gives estimates of structural parameters such as degree of price stickiness and extent of forward-looking price adjustment. The results more correctly separate shocks from cyclicality, help to interpret India's growth and inflation experience, and have implications for policy.     

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.     

Does Money Have a Role in Monetary Policy for Price Stability under Inflation Targeting in Thailand?

This paper deploys Thai quarterly data for the study period 1999q1–2014q4 to econometrically investigate the proposition that money growth is an important, if not the sole, determinant of inflation under inflation targeting and that the money growth-inflation relation is not conditional on the stability of the money-demand function. The autoregressive distributed-lag (ARDL) bounds-testing results suggest that, across the study period, the Thai money stock (narrow or broad), real output, prices, interest rates and exchange rates maintained a long-run equilibrium relationship. The associated error-correction model of inflation confirms the cointegral relationship among money (narrow or broad), real output, prices, interest rates and exchange rates. It also suggests that money growth has a significant distributed-lag impact on inflation. The presence of this money growth-inflation relationship was associated with a stable narrow money-demand function, whereas the broad money-demand function remained unstable. These results for the study period are consistent with the view that the causal relationship between money growth and inflation holds in Thailand under inflation targeting when the Bank of Thailand deploys a short-term policy interest rate, rather than a monetary aggregate, as the instrument of monetary policy and that this relationship is not conditional on the stability of the money-demand function.     

DSGE模型框架下我国货币政策规则的比较分析

货币政策规则是中央银行为了保持通货膨胀和产出稳定并使经济更快发展所使用的货币政策的指导原则。目前,通行于各个国家的货币政策规则主要有利率规则和货币供应量规则。过去一段时间以来,西方发达国家都已逐渐从货币供应量规则过渡到利率规则,而在我国不管是应用方面还是理论研究方面,对于哪一个货币政策规则更适合我国始终都还没有定论。因此,本文试图在DSGE模型的框架下,对我国的货币政策规则进行比较分析。结果得出,相比于货币供应量规则,利率规则下:(1)货币政策更有效;(2)技术冲击所引起的通货膨胀和产出波动更小;(3)技术冲击对通货膨胀和产出的影响更短暂。因此,研究得出,我国更适合使用利率的货币政策规则。     

The external and domestic side of macroeconomic adjustment in China

This paper sheds new light on the external and domestic dimension of China’s exchange rate policy. It presents an open-economy model to analyse the macroeconomic adjustment process in China under both flexible and fixed exchange rate regimes. The model-based results indicate that persistent current account surpluses in China cannot be rationalized, under general circumstances, by the occurrence of permanent technology or labour supply shocks. As a result, to understand the macroeconomic adjustment process in China it is necessary to mimic the effects of potential inefficiencies, which induce the subdued response of domestic absorption to permanent income shocks, thereby causing the observed positive unconditional correlation of the trade balance and output. The paper argues that these inefficiencies can be potentially seen as a by-product of the fixed exchange rate regime, and can be approximated by a stochastic tax on domestic consumption or a time-varying transaction cost technology related to money holdings. Our results indicate that a fixed exchange rate regime with financial market distortions, as defined above, might induce negative effects on GDP growth in the medium term compared with a more flexible exchange rate regime.     

Macroeconomic Effects of Inflationary Shocks with Durable and Non-Durable Consumption

In this paper we show that inflation, both in the short and long run, negatively affects durable and non-durable consumption and output, and positively influences the current account balance. In particular, the impact of inflation is more pronounced on durable relative to non-durable goods. Using quarterly data from Canada, the UK and the USA, we demonstrate that these findings are consistent and robust across different econometric specifications. An open economy model with durable and non-durable consumption, households with labor/leisure choice and money introduced through cash-in-advance (CIA) constraint on consumption expenditure alone could meaningfully explain these empirical observations. Our empirical findings of non-neutral and negative effects of inflation on real growth are significant for many economic models in the asset pricing literature that support a negative co-movement of stock prices and expected inflation. Moreover, such positive inflation premium in our model could provide economic explanation for a positive slope of the nominal term structure in the data.     

Deflation,Productivity Shocks and Gold: Evidence from the 1880–1914 Period

In this paper we examine the sources and impact of deflation on the growth experiences of the four dominant countries on the gold standard in the period 1880–1913: the United States, The United Kingdom, France and Germany. We distinguish between good deflation, (driven by positive aggregate supply shocks) and bad deflation (driven by aggregate demand shocks). We use an empirical Blanchard/Quah model which decomposes the behaviour of prices, output and the money stock into the impact of shocks such as a world price level shock, a domestic supply shock, and domestic demand shocks including a shock to the domestic gold stock. Our key finding is that the European economies were essentially classic in the sense that output was mainly supply driven and that money was neutral even when country specific gold stocks are included. In the United States, however, we observe both good and bad deflation.     

Changes in world real interest rates and inflationary expectations

Changes in World Real Interest Rates and Inflationary Expectations. —One of the major macroeconomic puzzles has been that the real interest rates were persistently low in the seventies and persistently high in the eighties. The authors use a news framework to investigate the extent to which shocks in real output, money supply, world trade, oil prices, stock prices and expected inflation affect the world and national real interest rates. They find dominant effects on real interest rates from movements in expected inflation rates. This suggests the presence of persistent misperceptions about future inflation and the need of further research into the formation of inflationary expectations.     

Effectiveness of history-dependent monetary policy

In this paper, we evaluate the effectiveness of history-dependent monetary policy, focusing on the design of targeting regimes and simple policy rules. Our quantitative analysis is based on a small estimated forward-looking model of the Japanese economy with a hybrid Phillips curve. Our main findings are: (1) History-dependent targeting regimes, such as price level targeting and income growth targeting, outperform inflation targeting; (2) Committing to a simple history-dependent policy rule results in nearly the same social welfare as the optimal delegation of price level targeting and income growth targeting; (3) The central bank can achieve almost the same performance as the optimal commitment policy by adopting the first difference hybrid policy rule in which the change in interest rate responds to inflation, output gap, and real income growth rate. J. Japanese Int. Economies 18 (3) (2004) 330–361.     

Openness and the Effects of Fiscal and Monetary Policy Shocks on Real Output in Nigeria (1960–2003)*

Abstract: This study investigates the effects of monetary and fiscal policies on the real output growth in a small open economy. It is a country‐specific, time series study that verifies the implication of increasing economic openness on the efficacy of monetary and fiscal policy. A modified GARCH model was used to estimate the anticipated and unanticipated shocks. Two measures of fiscal and monetary shocks were combined with openness and real oil price shocks in a VECM model to assess the effects of anticipated and unanticipated policy shocks on the output equations. The empirical results showed that anticipated and unanticipated fiscal and monetary shocks had no significant positive effects on real output. This suggests that the open macroeconomic version of the policy ineffectiveness proposition was valid for both monetary and fiscal policy shocks in Nigeria. This is in consonance with earlier works in this area. Furthermore, the degree of openness and oil price shocks had a negative implication on the efficacy of macroeconomic policy in Nigeria; also in agreement with the Dutch Disease Syndrome. Finally, the policy implication of this study therefore is that trade liberalization policy should be implemented cautiously. The Nigerian economy is weak to withstand the unwholesome consequences of full economic integration.     

Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting Versus Flexible Currency Board in Sub‐Saharan Africa

The paper examines the monetary policy actions through which central banks in sub‐Saharan Africa have tried to eliminate the negative impacts of the shocks facing their economies. We compare two different monetary policy regimes: a currency board regime (in the CFA zone) and an inflation targeting policy regime (Ghana and South Africa) when central banks respond to demand, supply, and fiscal shocks. We extend the usual forecasting and policy analysis system models to replicate the economic features of these economies during the period 2002–12 and to evaluate the impact of several policies in response to these shocks. We find that both policies are inappropriate in helping the economies escape from the effects of negative demand shocks, both are essential when negative shocks to primary balance occur, while inflation targeting dominates the currency board regime as a strategy to cope with positive shocks to inflation.     

Money and price relationship in China

This paper investigates the effectiveness monetary policy by Granger causality tests in the two regimes of inflation and deflation, respectively. The surplus lag rolling estimation is applied to deal with the problem of the frequent structural changes in the Chinese monetary system. We found that the monetary policies have become less effective in stabilizing the price level in the deflation era that started from 1998. There is also empirical evidence to suggest that money was endogenous in China during the inflation period. This implies that the People's Bank of China had difficulty exercising the power of money supply to reduce inflation if the endogeneity was the result of the market behaviour. However, if the endogeneity was due to the government inflation-targeting rule, then there is no evidence to suggest that this rule has been effective for M0, M1 and M2 instruments, except for the M0 instrument during the inflation period of April 1990 to March 1995. Although it was found that money ceased to be endogenous in the deflation periods, it does not support the proposal of utilizing the money supply as a policy instrument, as we found that money is impotent in influencing price in the deflation regime. Our findings provide some empirical evidence to support the Chinese government adopting alternative policy instruments such as an active fiscal policy in the era of deflation.     

Global food prices and monetary policy in an emerging market economy: The case of India

This paper investigates a perception in the political debates as to what extent poor countries are affected by price movements in the global commodity markets. To test this perception, we use the case of India to establish in a standard SVAR model that global food prices influence aggregate prices and food prices in India. To further analyze these empirical results, we specify a small open economy New-Keynesian model including oil and food prices and estimate it using observed data over the period 1996Q2 to 2013Q2 by applying Bayesian estimation techniques. The results suggest that a big part of the variation in inflation in India is due to cost-push shocks and, mainly during the years 2008 and 2010, also to global food price shocks, after having controlled for exogenous rainfall shocks. We conclude that the inflationary supply shocks (cost-push, oil price, domestic food price and global food price shocks) are important contributors to inflation in India. Since the monetary authority responds to these supply shocks with a higher interest rate which tends to slow growth, this raises concerns about how such output losses can be prevented by reducing exposure to commodity price shocks.     

Asymmetric effects of inflation shocks on inflation uncertainty

The empirically documented regularity that dis-inflationary shocks are associated with larger output changes than are positive shocks presents an interesting puzzle to macroeconomists. This paper presents, and empirically supports, a new explanation for this asymmetry. The authors show, using a TARCH model, that negative inflationary shocks result in greater inflation uncertainty than positive shocks. As Friedman [1977] argues, and a body of empirical evidence demonstrates, inflation uncertainty leads to lower output growth. Drawing on this explanation, this essay points to an avenue by which the output asymmetry of inflationary shocks can be explained.