The Relationship Between Price Stability and Financial Stability: Evidence From Major Emerging Economies

We examine the relationship between price stability and financial stability for major emerging economies using a Markov regime-switching model. Empirical results suggest that monetary policy is consistent with the Taylor rule in all countries except for India and all countries followed both low and high inflation targeting monetary policy regimes. Low inflation targeting regime seems to be more persistent and has higher duration than high inflation targeting regimes except for Indonesia and South Africa. All countries seem to have had financial stability concerns when they formulated their monetary policy as the coefficient of the financial stress index is statistically significant at least in one regime. Overall the results suggest that Taylor rule-based monetary policies have been implemented to various degrees in major emerging economies to achieve economic stability, price stability, and financial stability.     

Assessing Nonlinear Dynamics of Central Bank Reaction Function: The Case of Mozambique

This paper sheds some light on the elements governing monetary policy‐making during the period 2000Q1–2015Q1 in Mozambique. We estimate a time‐varying Taylor‐type rule for the BM, using a Markov‐switching (MS) model and a Threshold model. The general finding is that the behaviour of the BM can be characterised by two regimes. In regime 1, only changes in inflation trigger a reaction by the monetary authority. This behaviour is prominent after the establishment of the monetary policy committee in 2007 (CPMO). In regime 2, the BM reacts aggressively both to cool off the economic activity and to curb inflationary pressures. Regime 2 occurred most frequently during 2000–2006, when the fiscal policy might have played an important role in output stabilization. After the establishment of the CPMO, regime 2 occurred in the context of a steep rise in fuel and food prices in 2007–2008 and in 2010. Both the MS model and the Threshold model show similar asymmetric effects. We find evidence that inflation is viewed more seriously by the monetary authorities when it is accompanied by a high output‐gap in the previous period, which triggers a more aggressive response from the monetary authorities.     

Measuring the monetary policy stance of the People's bank of china: An ordered probit analysis

The People's Bank of China (PBC) has employed a range of different instruments in the implementation of its monetary policy over the past decades, so perhaps no single instrument would constitute an adequate representation of the monetary policy stance. We thus develop a new policy stance index, and examine it in an ordered probit model, which follows the studies by Gerlach (2004) and He and Pauwels (2008). The empirical results show that in a backward-looking model, monetary policy reacts to actual output growth; one the other hand, when deviations from trend levels are considered, the PBC concerns inflation most seriously. In a forward-looking model, when we examine the PBC's statements in its quarterly Monetary Policy Executive Report from 2001Q1 to 2010Q3, it seems that the PBC's assessment of the prospects for inflation plays a key role determining the PBC's monetary policy stance. Our conclusions suggest that the PBC is informally targeting inflation, although no explicit target has ever been announced to the public by the PBC.     

Do conservative governments make a difference in monetary policy? A study of the U.S. and the U.K.

This paper offers an empirical test of the Simon's proposition: Do conservative governments make a difference in monetary policy? Using quarterly data on the inflation rate and the GDP gap, the authors test the hypothesis during the tenure of two regimes: conservatives and non-conservatives, and for two countries, the U.S. and the U.K. Under the assumption that the monetary authority followed a Taylor rule, they evaluate monetary policies pursued by alternative regimes in the two countries. Alternatively, they assume that the monetary authority adjusts money growth in response to deviations of inflation and GDP from their target levels. The estimation results were mixed. The Simon's hypothesis was supported in the U.K. during the Thatcher regime, but not in the U.S. during the Reagan's tenure. The findings for the U.S. in contrast to those obtained for the U.K. indirectly validate the Simon's contention that monetary policy in the U.S. is subject to manipulation by interest groups“Perhaps the ultimate test of the conservative status of government is its willingness to pursue stable monetary policy.”William E. Simon, 1980, p. 8     

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。     

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.     

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。     

Monetary policy rules for a developing country: Evidence from Pakistan

This paper estimates forward-looking monetary policy rules to examine the interest rate setting behavior of the State Bank of Pakistan. Considering the external constraints on monetary policy, core inflation and a country-specific measure of the output gap, we demonstrate that the State Bank of Pakistan reacts to changes in inflation, the output gap and the federal funds rate.     

基于金融稳定目标的规则型货币政策研究

随着货币政策与金融稳定之间联系的不断深化，中央银行理应在防范金融市场系统性风险中发挥重要的作用。文章首先构建我国金融稳定指数，并将其加入线性货币政策规则，研究结果表明，中央银行在调整名义利率时的确对金融稳定状况有所关注，相比于传统泰勒规则，纳入金融稳定指数的泰勒规则中通胀系数与产出缺口系数均有显著改善，其能够更好地拟合中央银行的实际政策操作。随后，为了进一步考察货币当局对名义利率调整的动态变化特征，文章通过TVP-SV-VAR模型对拓展的时变参数泰勒规则进行了再估计。研究发现，随着经济周期和金融形势的更迭，中央银行也会不断动态调整其政策目标。其中，货币政策对通货膨胀的调控不存在明显的惰性区域，控制通胀始终是中央银行工作的重心。其次，中央银行存在规避经济收缩的偏好，在经济下行时期其对货币政策的调整会向产出缺口倾斜。最后，为了抑制金融机构的过度风险承担，货币当局在本次金融危机之后显著增强了对于金融稳定的关注。     

Inflation-targeting under a Managed Exchange Rate: the Case of the Chinese Central Bank

In 2004, the People's Bank of China (PBC) is reported to have abandoned the quantity of money as its intermediate goal and to adopt some elements of the apparatus of inflation targeting, without giving up the managed exchange rate regime for the renminbi (RMB), the Chinese currency. We show in this paper, using a dynamic setting, that partially implementing the apparatus of inflation targeting by the PBC to improve the performance of monetary policy encounters various difficulties from out-of-equilibrium dynamics to macro-economic and financial instability. In this context, some macro-economic measures can be helpful for reducing disequilibrium. Further development of internal monetary and financial markets and assigning balanced weights by the PBC to inflation and output targets are necessary conditions for the regime to be stable.     

我国开放条件下的货币政策操作规则

本文利用我国1994～2006年季度数据,分别对开放经济条件下的Taylor规则和McCal-lum规则进行了实证检验。结果表明,我国货币政策操作一直遵从McCallum规则,Tay-lor规则不适合我国国情。这意味着,如果经济结构不发生大的变化,就可以根据历史数据回归得到的McCallum规则的各种参数和通胀缺口、实际汇率、货币乘数、货币流通速度等变量的预期变化,测算出合理的基础货币增长率,这将为调控基础货币供给提供重要参照。     

On the choice of monetary policy rules for China: A Bayesian DSGE approach

Motivated by the institutional features of China's monetary policy, this paper aims at identifying the most data favored monetary policy rule for China within a dynamic stochastic general equilibrium (DSGE) model framework. In a canonical New-Keynesian DSGE model, we carry out a positive analysis by employing Bayesian methods to estimate three main categories of monetary policy rules, namely a Taylor-type interest rate rule, a money growth rule and an expanded Taylor rule with money. Based on China's quarterly data from 1996Q2 to 2015Q4, our estimation shows that the expanded Taylor rule obtains the best empirical fit to the data. Moreover, impulse responses and forecast error variance decompositions demonstrate that monetary policy rules with or without money provide very different implications for the policy behavior. Our results ultimately suggest that money has so far been more closely targeted than nominal interest rate and still plays an important role as a monetary policy target in China. Furthermore, a conventional Taylor-type interest rate rule is not good enough yet to describe China's monetary policy behavior.     

The Inflation-Output Variability Tradeoff and Monetary Policy: Evidence from a GARCH Model

This paper empirically investigates the Taylor curve volatility tradeoff in light of the stochastic behavior of the conditional variances of output and inflation. Stressing structural instability between periods before and after the 1979-1982 monetary policy regime change, I implement a bivariate generalized autoregressive conditional heteroskedasticity model to capture the output-inflation variability tradeoff and to explore the plausible impact of a change in the federal funds rate on the two conditional volatilities. I further evaluate the impacts of anticipated and unanticipated policy actions measured by two alternative policy reaction functions—one from a vector-autoregression-based reduced-form equation and another based on the Taylor rule. In addition to showing a volatility tradeoff relationship, the empirical model reveals different magnitudes of policy effects on output and inflation volatility across the two sample periods.     

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.     

Testing the Taylor Model Predictability for Exchange Rates in Latin America

Exchange rates forecasting performance is tested by a model which incorporates endogenous monetary policy through a Taylor rule reaction function. Other usual monetary and equilibrium empirical exchange rate models are also evaluated for comparison purposes. Predictability is tested by comparing the models to a benchmark random walk specification. We contribute to the recent literature in many ways. First, we include models of forward-looking endogenous monetary policy to the exchange rate forecasting exercise, the Taylor model. Second, our data, set across countries, is uniform in terms of economies adopting both inflation targeting and a flexible exchange rate. Third, our study sheds light on exchange rate determinants for emerging economies: Brazil, Chile, Colombia, Peru and Mexico. Our results show strong predictability evidence for the Taylor model and indicate that assuming models of endogenous monetary policy and the present value of expected fundamentals is a rewarding strategy to model exchange rate determination.     

开放经济条件下中国泰勒规则及其拓展形式的实证研究

文章从标准泰勒规则的内涵和适用条件出发,应用中国1995年第1季度到2010年第1季度的数估计了标准的线性泰勒规则,逐步从利率平滑、前瞻性变量、汇率因素和资产价格等方面放宽适用条件,根据开放经济条件下的货币政策数据对泰勒规则的拓展模型进行实证检验并验证泰勒规则在我国的适应性。     

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.     

The liquidity effect in a flexible-price monetary model

This paper examines the impact of macroeconomic policy shocksin a flexible-price dynamic stochastic general equilibrium (DSGE)model with money. Rather than adopting a money supply rule,monetary policy is modelled as a central bank using a simpleinterest rate rule (Taylor rule). Without assuming price stickinessor frictions in financial markets, this model is found to accountfor liquidity effects, generate higher persistence in outputand inflation, and capture the positive unconditional cross-correlationsrelating inflation and output.     

Optimal Exchange Intervention in an Inflation Targeting Regime: Some Cautionary Tales

Devaluations and fiscal retrenchments coming from developed countries are buffeting less developed countries. Many emerging market countries have adopted inflation targeting as “best practice,” but now they are being advised to enhance their inflation targeting regimes with foreign exchange intervention. Here we use a DSGE model to tell some cautionary tales about this advice. A Taylor rule guides interest rate setting, while foreign exchange interventions are used as a second tool of monetary policy. These interventions are effective in our model since domestic and key currency bonds are imperfect substitutes. We derive optimal (Ramsey) intervention policies in response to foreign devaluations and fiscal retrenchments, and find that they are rather complex. So, we compare the optimal responses to policies that simply smooth real or nominal exchange rate movements. Our results suggest that discretion may be the better part of valor: pure inflation targeting may come closer to the optimal policy than exchange rate smoothing. A secondary result may also be of some interest: foreign exchange interventions have a stronger impact on inflation and output in an inflation targeting regime than do sterilized interventions; the Taylor rule augments the effects of a given intervention.     

One Money and Sixteen Needs: Has the ECB’s Monetary Policy Become More Balanced Towards the Needs of the Member States?

In this paper we analyze whether the ECB’s monetary policy has become more balanced towards the needs of the individual member states with the passage of time. We assume that the ECB’s monetary policy stance is in line with a Taylor rule and based on the overall situation in the Euro area, more specifically on the Euro area inflation rate and the overall business cycle position in the area. The question therefore boils down to investigating whether inflation and business cycles have converged since the start of the monetary union. We show that the ECB, if in existence in the 1990s, would have had an impossible task. This is because inflation and business cycles still strongly differed in that time, although convergence substantially increased in the run up to the monetary union. In this respect, the decade under EMU drastically differs from the preceding one. This being said, the evidence for a further improvement in the course of the first decade of the new millennium is mixed. This is because although inflation has further converged, business cycles have shown a tendency for increased divergence. If, however, we are willing to put weights on inflation and output gap divergence (as implied by the Taylor rule), we conclude that also in the course of the period under EMU in general the ECB’s monetary policy has become more in line with the needs of the individual members. Looking at individual countries, we show that during the first decade of its existence the ECB’s interest rate was most fitted to the needs of France and Italy, and least to the needs of Ireland and Greece (both too low) and Germany (too high). To a lesser extent there were also mismatches for Spain and Portugal (both too low). In the more recent period since 2005, the mismatch between the desired domestic interest rate and the desired ECB rate has come down for most countries (most noticeable Germany). For Belgium (for which a higher interest rate was more appropriate), on the other hand, the mismatch increased. These overall positive findings, however, offer no guarantee that the task of the ECB will become easier in the future.