Transmission mechanisms of conventional and unconventional monetary policies in open economies

This paper provides an empirical examination on the transmission mechanisms of conventional and unconventional monetary policies for two non-EMU countries, Switzerland and the United Kingdom, over the period 1990–2017. We investigate the role of stock prices and consumer expectations in the transmission of monetary policy. We propose two distinct structural VAR models. The model for the case of conventional monetary policy covers the pre-2009 period, while the model for the case of unconventional monetary policy covers the post-2009 period. The official bank policy rate and central bank’s reserve assets are used as instruments for conventional and unconventional monetary policy. The analysis reveals that the inclusion of a forward-looking informational variable of near-term development in economic activity and a financial variable such as the stock prices is of key importance for the monetary policy assessment. We provide evidence for the existence of a consumer confidence channel in the transmission of conventional monetary policy. Moreover, the long-term government bond yields, the exchange rate and stock prices have an important role in the transmission of unconventional monetary policy. Our findings indicate that conventional and unconventional monetary policies have short-run expansionary effects in both countries by increasing output, consumption, investment, stock prices and wages, while reducing unemployment.

     

What has foreign exchange market intervention since the Plaza Agreement accomplished?

We review the conduct and scale of official intervention by monetary authorities in the U.S.A., Japan, and West Germany since the Plaza Agreement. Relative to trading volume and the stock of internatonally traded assets denominated in foreign currencies, intervention is small-scale and sporadic, hence at best limited to transitory effects. It does not appear to reduce volatility of daily exchange rates. Monetary authorities gamble that they will not suffer losses on their foreign currency holdings. Evidence in favor of sterilized foreign exchange market intervention as a way of conveying information to the private sector is far from convincing. Since changes in relative monetary growth rates are sufficient to alter bilateral exchange rates, monetary authorities can achieve their exchange rate preferences with domestic monetary policy, but at the cost of possible distortionary effects on monetary growth rates, domestic interest rates, and international capital flows.     

Bank dependency on foreign funding and global liquidity shocks: The importance of US monetary policy for a developing country

We examine international spillover effects of US monetary policy on bank lending in Cambodia, using unique data about loan disbursements and the funding structures of Cambodian banks from 2013Q1 to 2019Q2. The banking sector in a developing country is likely dependent on foreign funding, while the dependency could be the source of vulnerability to international monetary and economic conditions. We empirically document that US monetary policy is likely to be transmitted to Cambodian bank lending through foreign funding. We also document that Cambodian banks change their risk-taking behavior in response to the spillover effects of US monetary policy. Furthermore, these results are robust for US monetary policy, but weak and not robust for the monetary policies of the Cambodian bank’s major shareholders’ home countries, suggesting that US monetary policy should be primarily taken into account in supervising banks that are reliant on foreign funding, in addition to domestic economic conditions.     

Currency intervention and the global portfolio balance effect: Japanese lessons

This paper extends the analysis of Bernanke et al. (2004) to show that the official Japanese purchases of foreign exchange in 2003–04 seem to have lowered long-term interest rates not only in the United States, but in a wide range of countries, including Japan. It seems that this decline was triggered by the investment of the intervention proceeds in US bonds and that global portfolio rebalancing spread the resulting decline in US dollar yields to bond markets in other currencies, thus easing global monetary conditions. We also show that the global portfolio balance effect is detectable in the response of yields to large Japanese intervention in data before and after 2003/04, though the effect is weaker. While our findings contribute to a growing body of work that points to common responses across bond markets to official portfolio shifts in the form of large-scale bond purchases (“quantitative easing”), our analysis has the advantage of focusing on a pure portfolio shock.     

Pollution in a globalized world: Are debt transfers among countries a solution?

We analyze the effects of a debt relief, that is, a decrease in public debt of a low-income country financed by a high-income country, on environmental quality. Under perfect mobility of assets, the debt relief increases the overall capital stock, and environmental quality when public abatements are sufficiently efficient. Welfare in both countries can also improve. Under a weak mobility of assets, capital does no more increase in the richest country, but environmental quality can improve. This comes from a crowding-out effect of debt in the high-income country, which does no more take place when the mobility of assets is significant.     

International monetary transmission in East Asia: Floaters,non-floaters,and capital controls

This paper analyzes the impacts of the United States (US) monetary shocks on East Asian countries using structural vector-autoregression (VAR) model. We find that the impacts of the US monetary shocks on East Asian domestic interest rates and exchange rates contradict conventional wisdom. The conventional exchange rate channel is unlikely to play much role in the transmission of the US monetary policy shocks to floaters in East Asian countries, excluding Japan. In these countries, the domestic interest rates respond strongly to the US interest rate changes, by giving up monetary autonomy, probably because of fear of floating. However, the domestic interest rate does not respond much in countries with fixed exchange rate regimes and capital account restrictions, such as China and Malaysia. This may suggest that the countries with fixed exchange rate regimes enjoy a higher degree of monetary autonomy, most likely with the help of capital account restrictions.     

Monetary Policy and Risk-Based Asset Allocation

This paper focuses on the effects of the Fed’s monetary policy on stock and bond returns co-movement and their implications to risk-based asset allocation. Using a regime-switching model that controls for the economic effects of monetary policy we identify three co-movement regimes. We document that risk-based portfolio strategies poorly perform in the low correlation regime which features inflation shocks. We find outperformance evidence under the negative correlation regime with a high stock market risk and a very accommodating Fed policy. Less effectiveness is demonstrated under the positive correlation regime where bonds are regarded as risky assets and interest rate volatility is fueled by monetary policy.     

中国持有美国资产的风险

中国持有约1.4万亿美元美国金融资产,近90%为政府担保债券。如果美国继续巨额财政赤字和宽松货币政策,汇率政策调整及储备货币地位丧失引发美元贬值的风险将上升。未来几年美元对外实际价值下降的可能性较低,利率风险与以往美国经济衰退期接近,股市波动影响较大。中国所持美元资产的风险短期内来自市场波动,长期依赖于美国财政及货币纪律。     

The Feldstein-Horioka puzzle: The IS-LM model with optimal policy

The high correlations between saving and investment, which suggest a small variability of the current account, is explored within an IS-LM framework. While Feldstein and Horioka interpret this evidence to imply a low degree of capital mobility, the pattern of shocks to the model is also important. If the monetary authorities are pegging domestic rates to foreign returns, then we would expect the Feldstein-Horioka evidence even under high mobility. We explore whether such a rule is optimal when policymakers wish to avoid income variability where fiscal and monetary policy are coordinated and where monetary policy must act alone. We suggest that the Voicker Federal Reserve switched to the latter stance and created a dramatic exception to the Feldstein-Horioka paradox.     

固定汇率下资本账户开放对经济的影响——基于修正的Mundell模型的动态分析

本文拓展了蒙代尔(1960)的模型,并用该模型分析了固定汇率体系下资本账户开放对实际汇率和利率的影响,以及资本完全流动时经济的动态稳定性。本文的主要发现是,随着资本账户的开放,资本流动性的加强将会引起实际汇率和利率相对于初始状态的调整。而且,随着资本账户的放开,国内货币政策越来越受制于外部因素。模型的另一个发现是,当资本完全流动时,固定汇率体系呈现一种稳定的稳态。     

Saving,investment, and capital mobility among OECD countries

Historically investigations of the international mobility of capital have studied rates of return on similar assets denominated in different currencies. Recently, however, efforts directed at ascertaining the degree of international capital mobility have examined the relationship between domestic saving and investment rates. The first approach assesses the mobility of groups of financial assets which represent the existing capital stock while the latter actually scrutinizes the mobility of new physical capital.This paper employs the second approach in a times series study of capital mobility among OECD countries. Implementation of four different tests of the saving-investment relationship suggest that physical capital is more mobile than previous studies have indicated.     

Net foreign asset positions and appreciation expectations on the Swiss franc and the Japanese Yen

The paper shows that currencies of countries with persistent current account surpluses and high foreign-currency denominated assets, such as the Swiss franc and the Japanese yen, are under persistent appreciation pressure, particularly when the centres of the world monetary system follow expansionary monetary policies. This limits the choice of exchange rate regime. Given flexible exchange rates, a negative risk premium on the domestic interest rate can emerge. Empirical estimations provide mixed evidence for a negative impact of net foreign asset positions and exchange rate uncertainty on interest rates of international creditor countries at the periphery of the world monetary system.     

Real financial market exchange rate volatility and portfolio flows

This paper studies the relationship between real financial market exchange rate volatility and US cross-border equity flows. We found strong evidence that causality goes from real financial market exchange rate volatility to equity flows. According to our results, real financial market exchange rate volatility negatively influences purchases of foreign equity. This finding is in line with the portfolio optimization theory. The impact of real financial market exchange rate volatility on sales of foreign equity is also negative. This result can be explained by the theory of behavioral finance which states that investors are reluctant to realize losses of their portfolios. This is why investors decrease sales of assets when riskiness of the assets increases. The impact of real financial market exchange rate on net purchases of foreign equity is positive. It follows from these results that sales of foreign equity decrease more strongly than purchases of foreign equity when riskiness of foreign assets increases.     

国际资本流动与房地产、上证市场联动性研究

去年底以来,我国出现了国外短期资本出逃的现象,这直接导致了人民币兑美元汇率的连续"跌停"。一方面,作为国外资本的主要投资场所,房地产市场和上证市场的发展状况直接影响了国外短期资本的投资热情;另一方面,国外短期资本的流动也影响着房地产市场和上证市场的发展。鉴于此,本文从外汇储备、房地产市场以及上证市场三个角度,结合相关的实证分析方法,来深刻揭示这三者之间的相互影响关系。分析过程用到的方法包括ADF检验、协整检验、格兰杰因果检验、脉冲响应函数分析、方差分析等。最后得出三者间存在较为明显的联动效应的结论。     

Policy Choices and Resilience to International Monetary Shocks

Abstract

The well-known trilemma theory states that the nominal exchange rate regime plays a crucial role in a country's ability to pursue monetary policy that is for its domestic objectives independent from other countries' influences. In particular, a flexible exchange rate is required for an independent monetary policy. Capital controls may help a country with a fixed exchange rate to gain some policy space but the effect of capital controls is leaky and often short-lived. We revisit these conventional wisdoms and find no strong evidence supporting them in practice. In particular, a flexible exchange rate does not reliably deliver monetary policy independence, but capital controls do. This is consistent with the view that most (developing) countries dislike either depreciation or appreciation of their currencies, and therefore would choose to follow US monetary policy moves even if they are on a flexible exchange rate regime. In other words, to build resilience to international monetary policy shocks, capital controls are a necessarily component.     

On budgetary policies, growth, and external deficits in an interdependent world

We investigate the effects of budgetary policies in a two-country model of overlapping generations and endogenous growth. In the presence of capital mobility, endogenous growth rates are equalized, but output levels do not converge. A worldwide rise in the public debt to GDP ratio or the share of government consumption reduces savings and growth. A relative rise in one country's debt to GDP ratio or its GDP share of government consumption results in a fall in external assets and its relative savings rate. In the short run, the fall in the savings rate is higher, and the country experiences higher current account deficits as a percentage of GDP.     

Spillovers of the Conventional and Unconventional Monetary Policy from the US to South Africa

This paper assesses the effect of US monetary policy on South Africa during the period 1990–2018. We separately analyse and compare the effect of conventional monetary policy, before the Global Financial Crisis, and unconventional monetary policy, after the US monetary policy reached the zero-lower bound. Our impulse response function results indicate that monetary policy in South Africa responds mainly to local inflation, economic activity and financial conditions. While there is strong correlation between the global and South African financial cycle, the financial cycle is not transmitted to the real economy because of the sluggish response of industrial production and domestic credit, especially after the global financial crisis. We see this as an indication of the effects of structural issues to the real economy and constrained households’ balance sheet which has prevented the local economy to take advantage of low local interest rates and the global economic recovery after the crisis.     

Some Evidence on the Relevance of Bank Behaviour for the Lending Channel in The Netherlands

This paper studies the behaviour of Dutch banks. We test the adjustment of banks' balance sheets in times of monetary policy changes during the period 1957–1991. As a reaction to a policy change, banks basically have two alternatives to adjust their net money creation: (1) sell securities in public capital markets, and/or issue long-term liabilities, and (2) change domestic loan supply. If banks opt for the latter a lending channel may be relevant, even in a small open economy with a fixed exchange rate and a high degree of international capital mobility. We test for the effectiveness of both indirect and direct instruments of monetary policy. It turns out that in case of changes in the official interest rate, the volume of bank loans is not affected and that banks display a kind of buffer-stock behaviour by diminishing their publicly traded assets. In situations with quantity restrictions on the growth of net money creation, however, the volume of loans is affected significantly when the quantity restriction is withdrawn thereby fulfilling a necessary condition for the bank lending channel to be effective.     

Effectiveness of Capital Controls and Sterilizations in China

Since 2003, China has been facing a trilemma of determining how to maintain independent monetary policy and limit exchange rate flexibility simultaneously, while facing persistent and substantial international capital flows. The present paper is an empirical evaluation of the effectiveness of China＇s sterilizations and capital mobility regulations, measured by sterilization and offset coefficients, respectively, using monthly data between mid-1999 and March 2009. We find that the effectiveness of China＇s sterilizations is almost perfect in terms of the monetary base, but not in terms of M2, and that China＇s capital controls still work but are not quite effective. Recursive estimation reveals that increasing mobility of capital flows and decreasing effectiveness of sterilizations might undercut China＇s ability to maintain monetary autonomy and domestic currency stability simultaneously. To solve the trilemma smoothly, China＇s monetary authority should continue to relax the management of the exchange rate, and take further steps towards deregulation of capital outflows.     

Direct Inflation Targeting and Nominal Convergence: The Czech Case

This study analyses the impact of direct inflation targeting (DIT) on monetary policy credibility in the Czech Republic, as evidenced by asset prices. It examines the effect of changes in the two-week repo rate (the official interest rate) on short and long–term market interest rates. It assumes the asymmetry of information and the existence of a stationary stochastic equilibrium with full knowledge of authorities reaction function. We find that at short maturities, the coefficients for changes in the official repo rate are lower in the DIT period than in the pre-crisis period. This implies that the hypothesis of no increase in the transparency of monetary policy with the introduction of DIT can be rejected. We find that bond yields and interest rate swap rates with maturities of 5 years and longer did not react significantly to official interest rate decisions in the DIT period. This is consistent with the hypothesis that monetary policy was credible both before and after introduction of DIT.