WHAT CAN WE LEARN FROM THE IMPLEMENTATION OF MONETARY AND MACROPRUDENTIAL POLICIES: A SYSTEMATIC LITERATURE REVIEW

The emergence of macroprudential policies, implemented by central banks as a means of promoting financial stability, has raised many questions regarding the interaction between monetary and macroprudential policies. Given the limited number of studies available, this paper sheds light on this issue by providing a critical and systematic review of the literature. To this end, we divide the theoretical and empirical studies into two broad channels of borrowers – consisting of the cost of funds and the collateral constraint – and financial intermediaries – consisting of risk‐taking and payment systems. In spite of the existing ambiguity surrounding coordination issues between monetary and macroprudential policies, it is argued that monetary policy alone is not sufficient to maintain macroeconomic and financial stability. Hence, macroprudential policies are needed to supplement monetary. In addition, we find that the role of the exchange rate is critical in the implementation of monetary and macroprudential policies in emerging markets, while volatile capital flows pose another challenge. In so far as how the arrangement of monetary and macroprudential policies varies across countries, key theoretical and policy implications have been identified.     

THE BENEFITS AND COSTS OF MONETARY UNION IN SOUTHERN AFRICA: A CRITICAL SURVEY OF THE LITERATURE

Abstract.  With the 14 members of the Southern African Development Community (SADC) having set the objective of adopting a common currency for the year 2018, an expanding empirical literature has emerged evaluating the benefits and costs of a common-currency area in Southern Africa. This paper reviews that literature, focusing on two categories of studies: (1) those that assume that a country's characteristics are invariant to the adoption of a common currency and (2) those that assume that a monetary union alters an economy's structure, resulting in trade creation and credibility gains. The literature reviewed suggests that a relatively small group of countries, typically including South Africa, satisfies the criteria necessary for monetary unification. The literature also suggests that, in a monetary union comprising all SADC countries and a regional central bank that sets monetary policy to reflect the average economic conditions (e.g. fiscal balances) in the region, the potential losses (i.e. higher inflation) from giving up an existing credible national central bank, a relevant consideration for South Africa, could outweigh any potential benefits of trade creation resulting from a common currency.     

Monetary Policy Rules, Policy Preferences, and Uncertainty: Recent Empirical Evidence

We survey recent empirical evidence on monetary policy rules, and find that the emphasis in the political economy literature on institutional design (e.g. central bank independence and inflation targeting) is exaggerated. Formal institutional reform seems neither a necessary nor a sufficient condition for the observation of shifts in monetary policy rules. However, there is no doubt that in some cases (e.g. the UK following the start of inflation targeting in 1992, and Bank of England Independence in 1997), a major shift in monetary policy conduct is detectable. We also highlight the problems in explicitly testing the predictions of the political economy literature. Semi-structural modelling approaches, such as time-varying VAR models may be more useful in understanding policy rules, and the interaction between policy shifts and changes in the transmission mechanism.     

CENTRAL BANK POLICIES AND INCOME AND WEALTH INEQUALITY: A SURVEY

This paper reviews recent research on the relationship between central bank policies and inequality. A new paradigm which integrates sticky‐prices, incomplete markets, and heterogeneity among households is emerging, which allows for the joint study of how inequality shapes macroeconomic aggregates and how macroeconomic shocks and policies affect inequality. The new paradigm features multiple distributional channels of monetary policy. Most empirical studies, however, analyze each potential channel of redistribution in isolation. Our review suggests that empirical research on the effects of conventional monetary policy on income and wealth inequality yields mixed findings, although there seems to be a consensus that higher inflation, at least above some threshold, increases inequality. In contrast to common wisdom, conclusions concerning the impact of unconventional monetary policies on inequality are also not clear cut. To better understand policy effects on inequality, future research should focus on the estimation of General Equilibrium models with heterogeneous agents.     

MACRO‐FINANCE LINKAGES

In this survey, I review the academic and policy‐oriented literature on the linkages between financial markets and the rest of the economy. First, I summarize the leading economic theories for why the financial sector can influence the macroeconomy. Second, I consider empirical research on spillovers from the financial sector to the rest of the economy, as well as across financial markets in different countries. Third, I discuss key monetary policy debates regarding the appropriate response of central banks to financial conditions. Finally, I conclude with an overview of the major gaps in the existing literature.     

The puzzling effects of monetary policy in VARs: Invalid identification or missing information?

Standard vector autoregressions (VARs) often find puzzling effects of monetary policy shocks. Is this due to an invalid (recursive) identification scheme, or because the underlying small‐scale VAR neglects important information? I employ factor methods and external instruments to answer this question and provide evidence that the root cause is missing information. In particular, while a recursively identified dynamic factor model yields conventional monetary policy effects across the board, a small‐scale VAR identified via external instruments does not. Importantly, the discrepancy between both models largely disappears once the information set of the VAR is augmented via factors. This finding is comforting news for the recent monetary literature. Two leading empirical advances with different underlying assumptions—namely external instruments (applied to a factor‐augmented VAR) and dynamic factor models (identified recursively)—find very similar effects of monetary policy shocks, cross‐verifying each other.     

MONETARY POLICY IN A NON‐REPRESENTATIVE AGENT ECONOMY: A SURVEY

It is well known that central bank policies affect not only macroeconomic aggregates, but also their distribution across economic agents. Similarly, a number of papers demonstrated that heterogeneity of agents may matter for the transmission of monetary policy to macro variables. Despite this, the mainstream monetary economics literature has so far been dominated by dynamic stochastic general equilibrium models with representative agents. This paper aims to tilt this imbalance towards heterogeneous agents setups by surveying the main positive and normative findings of this line of the literature, and suggesting areas in which these models could be implemented. In particular, we review studies that analyse the heterogeneity of (i) households’ income, (ii) households’ preferences, (iii) consumers’ age, (iv) expectations and (v) firms’ productivity and financial position. We highlight the results on issues that, by construction, cannot be investigated in a representative agent framework and discuss important papers modifying the findings from the representative agent literature.     

我国货币财政政策存在区域效应的实证分析

货币财政政策是现代国家干预经济的两个最重要的宏观调控政策，关于它们的研究文献数不胜数，但是长期以来一直没有对两政策实施后的区域效应给予足够的重视。本文结合目前我国东中西三大经济地带的经济发展已经存在明显差距的现实，通过两地区的简约化模型对1978-2004年间我国货币政策与财政政策在东部和中西部两个样本地区的作用进行了实证分析，结果表明，我国货币财政政策确实存在区域不对称效应，特别是货币政策，具有明显的区域影响差异。     

ASSESSING THE EFFECT OF PUBLIC SUBSIDIES ON FIRM R&D INVESTMENT: A SURVEY

This survey examines the empirical literature on the relationship between public R&D subsidies and private R&D investment over the past five decades. The survey reveals a considerable heterogeneity of empirical results that cannot be explained fully by methodological issues. We aim to provide further explanations of the possible causes of that heterogeneity. In particular, we emphasise a set of issues that, in our view, are critical to understanding the potential effect of public R&D subsidies on private R&D spending. Special attention is paid to the dynamic aspects and composition of firm R&D, the constraints faced by the firm (such as financial constraints), and the amount and source of public subsidies. None of these issues have been investigated in depth. We formulate a set of research assumptions to guide future empirical research in this field.     

SOCIO‐ECONOMIC STUDIES ON SUICIDE: A SURVEY

Abstract In this paper, we review economic theories and empirical studies on the socio‐economic aspects of suicide. Through our survey, we would like to emphasize the importance of studying suicide by employing a ‘rational’ approach that complements the medical perspective on suicide. We first introduce major economic theories of suicide and then present a summary of a variety of empirical studies from the socio‐economic perspective. To shed light on the mixed empirical evidence, we employ a meta‐regression method to investigate how the existing empirical results vary. We have identified a publication bias, not highlighted previously, in the existing literature with respect to several commonly employed socio‐economic factors. Several characteristics of existing studies have been identified as influencing the qualitative outcome. We then discuss the recent developments in economic studies on suicide, on the basis of the authors’ ongoing project on suicide. In the concluding section, we point out some issues for further studies.     

Trade Credit and Monetary Policy Transmission

Abstract.  Recently, an increasing number of papers have investigated the role of trade credit as an external source of finance when analyzing the monetary transmission mechanism. These works support the balance sheet-channel view and at the same time explain the difficulties encountered when looking for evidence in favor of the bank-lending channel. This paper presents a survey of the emerging literature on the role of trade credit in the transmission of monetary policy, trying to link it with the well-established credit-channel literature.     

A SURVEY OF RECENT DEVELOPMENTS IN THE LITERATURE OF FINANCE AND GROWTH

Abstract.  This paper provides a survey of the recent progress in the literature of financial development and economic growth. The survey highlights that most empirical studies focus on either testing the role of financial development in stimulating economic growth or examining the direction of causality between these two variables. Although the positive role of finance on growth has become a stylized fact, there are some methodological reservations about the results from these empirical studies. Several key issues unresolved in the literature are highlighted. The paper also points to several directions for future research.     

Monetary policy transparency in a forward-looking market: Evidence from the United States

Because unsatisfactory measures of the monetary policy transparency were used, the existing literature found mixed empirical results for the relationship between the monetary policy transparency and risk/volatility. This paper extends the literature by using a recently developed monetary transparency index [Kia’s (2011) index] which is dynamic and continuous. Furthermore, the existing literature ignores the fact that market participants can be forward looking and, therefore, not policy invariant. This study also finds that the agents in the market are not policy invariant and the more transparent the monetary policy is the less risky and volatile the money market will be.     

INTEREST RATE PASS‐THROUGH: A META‐ANALYSIS OF THE LITERATURE

The interest rate pass‐through describes how changes in a reference rate (the monetary policy, money market or T‐bill rate) transmit to bank lending rates. We review the empirical literature on the interest rate pass‐through and systematize it by means of meta‐analysis and meta‐regressions. Using the pass‐through to corporate lending rates as the baseline, we find systematically lower estimated pass‐through coefficients in studies that focus on the pass‐through to consumer lending rates and rates on long‐term loans. Also studies estimating the pass‐through by averaging all lending rates into one category report a lower pass‐through. Importantly, the interest rate pass‐through is significantly influenced by the country's macro‐financial environment. In economies with deepening stock markets, the estimated pass‐through strengthens significantly. Interestingly, after the global financial crisis, the pass‐through weakened across the board, including because of growing trade openness and supply chain financing, rising volatility and stock market turnovers, as well as declining central bank independence. Inflation targeting frameworks, if in place, helped diminish this pass‐through weakening.     

SUCCESSFUL IN THE LONG RUN: A META‐REGRESSION ANALYSIS OF PERSISTENT FIRM PROFITS

We study the profit persistence literature by applying meta‐regression analysis (MRA) to a set of 36 empirical papers, which analyze the persistence of abnormal firm profits over time. The analyzed literature provides evidence for a mediocre degree of persistence in abnormal profits. An initial analysis of the distribution of reported profit persistence estimates reveals some degree of excess variation. This points toward publication bias that favors significant results independent of their algebraic sign. The MRA, however, reveals that publication bias is particularly favoring results that indicate profit persistence and thus contradict the neoclassical model of perfect competition. Moreover, the MRA enables to control for heterogeneity driven by the study design. We find that the analyzed country (developing vs. developed), the applied econometric approach, as well as the analyzed period of time are significant drivers of heterogeneity in reported persistence estimates.     

THEORETICAL APPROACHES TO MONETARY DISINFLATION

Abstract. During the 1980s many countries adopted tight monetary policies to reduce high inflation rates which were the legacy of the 1970s. As inflation threatens to rise at the beginning of this decade, this paper provides a survey of the 1980s literature which sought to provide theoretical understandings of how monetary disinflation is achieved. Four models are presented—monetarist, neo-Keynesian, new classical and post-Keynesian. Each model's explanation of the recession which accompanies the monetary disinflation is outlined, as well as possible policy measures to reduce the extent of the recession and to hasten the return to full employment.     

How effective is monetary transmission in low-income countries? A survey of the empirical evidence

This paper surveys the evidence on the effectiveness of monetary transmission in low-income countries. It is hard to come away from this review with much confidence in the strength of monetary transmission in such countries. We distinguish between the “facts on the ground” and “methodological deficiencies” interpretations of the absence of evidence for strong monetary transmission. We suspect that “facts on the ground” are an important part of the story. If this conjecture is correct, the stabilization challenge in developing countries is acute indeed, and identifying the means of enhancing the effectiveness of monetary policy in such countries is an important challenge.     

DIVORCE LAW REFORMS AND DIVORCE RATES IN THE USA: AN INTERACTIVE FIXED‐EFFECTS APPROACH

This paper estimates the effects of unilateral divorce laws on divorce rates in the USA from a panel of state‐level divorce rates. We use the interactive fixed‐effects model to address the issue of endogeneity due to the association between cross‐state unobserved heterogeneity and divorce law reforms. We document that earlier studies in the literature do not fully control for unobserved heterogeneity and result in mixed empirical evidence on the effects of divorce law reforms. While reconciling these conflicting results, our results suggest that divorce law reforms have temporal positive effects on divorce rates, thus confirming the 2006 findings of Wolfers. Via simulation experiments, we assess the degree to which faulty inclusion or faulty exclusion of interactive fixed effects affects the policy effect estimators. Our results suggest that faulty inclusion only results in efficiency loss whereas faulty exclusion causes bias. Copyright © 2013 John Wiley & Sons, Ltd.     

Equilibria under monetary and fiscal policy interactions in a portfolio choice model

This paper studies how the presence of income-taxes changes the properties of general equilibrium models with monetary and fiscal policy interactions. It is found that from a global perspective, the only policy regime that leads to a unique equilibrium is one where fiscal policy is active, i.e. the fiscal theory of the price level regime in Sims (1994). From a local perspective, there are three regimes. In particular, and relative to the previous literature following Leeper (1991), a new third regime exists where a passive fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. To obtain the size of the new regime, the paper characterizes analytically the extent to which tax cuts are self-financing and how the distortionary tax Laffer curve looks near the steady state. In the new regime, monetary and fiscal backstops are brought into play so as to rule out off equilibrium dynamics, and inflation can temporarily increase in order to increase seigniorage revenues. With this flexibility, the monetary policy is consistent with the real debt remaining bounded, and the arithmetic that follows is monetarist and unpleasant in the sense of Sargent and Wallace (1981).     

MONETARY AND FISCAL POLICIES INTERACTION IN MONETARY UNIONS

In this paper, the literature on the interaction between monetary and fiscal policies in a monetary union is surveyed. By adopting the concept of symbiosis as a starting point, the paper highlights the importance of uncertainty, policy makers' preferences and targets. Then, the role of commitment to policy rules and coordination is addressed. The analysis also focuses on the importance of the data considered for the generation of the policy mix. As a final step, the paper discusses the main results in the literature on public debt management in a monetary union. All the reported theoretical results are then adopted to retrieve policy and institutional implications for the European Monetary Union.