A Poole Analysis in the New Open Economy Macroeconomic Framework*

This paper evaluates simple monetary policy rules in the tradition of the Poole analysis within a general two‐country model for a large economy and a small open economy. The results for the large economy resemble those of the original Poole scenario and also extend to the welfare measure. In particular, an interest rate rule is preferable to a money supply rule when liquidity shocks dominate, whereas a money supply rule fares better with real shocks. For the small open economy, the stabilization properties of the large‐economy case continue to hold for domestic shocks, but a money supply rule performs better than an interest rate rule using the welfare measure. If shocks originate in the foreign economy, a money supply rule turns out to be superior both in terms of its stabilization properties as well as in terms of welfare.     

Structural VAR models for Malaysian monetary policy analysis during the pre- and post-1997 Asian crisis periods

This article conducts an in-depth investigation into building a Structural Vector Autoregression (SVAR) model and analysing the Malaysian monetary policy. Considerable attention is paid to: (i) the selection of foreign, policy and target variables; (ii) establish identifying restrictions and improve the estimates of impulse response functions; (iii) assess the importance of intermediate channels in transmitting monetary policy mechanism; and (iv) the way in which the 1997 Asian financial crisis affected the working of monetary policy. Malaysia is an interesting small open economy to study because, following this crisis, the government imposed capital and exchange rate control measures. The overall results suggest that the crisis and the subsequent major shift in the exchange rate regime have significantly affected the Malaysian ‘Black Box’. In the pre-crisis period, domestic variables appear to be more vulnerable to foreign monetary shocks. Further, the exchange rate played a significant role in transmitting the interest rate shocks, whereas credit and asset prices helped to propagate the money shock. In the post-crisis period however, asset prices play a more domineering role in intensifying the effects of both interest rate and money shocks on output, and the economy was insulated from foreign shocks.     

Why has US monetary policy become ineffective lately?

Some recent studies show that US monetary policy has lost its stimulative traction, especially since the early 1980s. They argue that the Fed’s forward guidance has enabled economic agents to anticipate the changes in interest rates more accurately. As a result, it is harder to find truly exogenous monetary policy shocks, which has made monetary policy ineffective. In this article, we find that anomalous economic behaviours of financial institutions might be the true reason for the ineffective monetary policy. Our structural vector autoregressive model shows that increases in the US money supply mostly flowed into the financial sector to increase its profits instead of stimulating the real sector of the economy through business investment.     

Tracing the causes of the banking crisis

We add the Bernanke–Gertler–Gilchrist model to a modified version of the Smets–Wouters model of the U.S. in order to explore the causes of the banking crisis. The innovation of this article is estimating the model using unfiltered data allowing for non-stationary shocks in order to replicate how the model predicts the crisis. We find that ‘traditional shocks’ account for most of the fluctuations in macroeconomic variables; the non-stationarity of the productivity shock plays a key role. Crises occur when there is a ‘run’ of bad shocks; based on this sample they occur on average once every 64 years and when they occur around 10% are accompanied by financial crisis. Financial shocks on their own, even when extreme, do not cause crises – provided the government acts swiftly to counteract such a shock as happened in this sample.     

股票价格、实体经济与货币政策研究——基于我国1997-2011年的经验证据

本文运用格兰杰因果关系检验和向量自回归方法分析了1997年1月至2011年6月我国股票价格、GDP、通货膨胀率和货币政策的关系,实证结果表明,在中国,股票价格对通货膨胀的效应为正向,即股市上涨能带动通货膨胀水平的上涨。股票市场对GDP的影响短期内主要表现为替代效应,长期来看,则是财富效应和投资效应占主导;同时,货币供应量和利率对股票价格均有影响,但影响均不显著。通过格兰杰因果关系检验发现,利率变动导致货币供应量和股票价格发生变化。而货币供应量的变化影响着通货膨胀,也一定程度影响利率和股票价格。通过广义脉冲响应发现,中国人民银行紧缩性的利率政策并不能抑制股票价格上涨。增加货币供给短期内能够推动股市上涨,但长期对股市仍没有效果。     

The relative importance of demand and supply shocks some international evidence

In this paper the contribution of demand and supply shocks of the fluctuation of output and employment is analyzed using quarterly data for four countries (USA, UK, FRG and Switzerland) covering the period 1966 to 1988 in a long run restricted VAR framework for employment, output, the interest rate and inflation. For the USA output and employment fluctuations seem to be dominated by supply shocks in theshort and long run, whereas interest and price level variations are dominated by demand shocks. The result obtained with German and Swiss data are, however, different with two respects: The contribution of demand shocks to output and employment fluctuations are substantial up to a time horizon of eight quarters and price level variations, are at least in the short run, dominated by supply disturbances. Finally, the analysis of the UK data shows the US pattern of results for employment and the price level, but demand shocks are important for output up to four quarters and interest rate movements are dominated by supply shocks.     

货币政策组合规则

本文建议在泡沫高涨时将货币政策由利率规则转为货币量规则。在本文设定的CIA模型经济中，外生泡沫通过金融渠道对经济发生影响。本文证实，即使是遵循了泰勒原则的利率规则也会因为对融资活动的增长提供相应的货币支持而实际上起到助长泡沫经济的作用；而货币量规则由于对货币供应的控制而能起到缩短并稳定泡沫经济影响的效果。本文的模拟实验表明，在大型泡沫经济中将利率规则与货币量规则组合使用能取得更好的宏观经济成果。同时，将不同规则进行组合使用的思想在货币政策的研究中是新颖的，本文还发展了模型对接的技术处理方法。     

The asymmetric effects of monetary shocks: the case of Turkey

This paper examines whether there is an asymmetry in the effects of positive versus negative and small versus big money supply shocks, and whether the effects of the shocks on output and prices vary over the business cycles in the case of Turkey. Negative shocks to money are found to have greater output and smaller price effects compared to the effects of positive shocks, irrespective of the initial state of the economy. It is also found that monetary shocks of different size affect output growth and inflation rates proportionately. These findings can be interpreted as evidence for the view that the short run aggragate supply curve is convex in such a country like Turkey.     

货币政策组合规则

本文建议在泡沫高涨时将货币政策由利率规则转为货币量规则。在本文设定的CIA模型经济中,外生泡沫通过金融渠道对经济发生影响。本文证实,即使是遵循了泰勒原则的利率规则也会因为对融资活动的增长提供相应的货币支持而实际上起到助长泡沫经济的作用;而货币量规则由于对货币供应的控制而能起到缩短并稳定泡沫经济影响的效果。本文的模拟实验表明,在大型泡沫经济中将利率规则与货币量规则组合使用能取得更好的宏观经济成果。同时,将不同规则进行组合使用的思想在货币政策的研究中是新颖的,本文还发展了模型对接的技术处理方法。     

Disinflation costs in China and monetary policy regimes

This paper investigates the real effects of a disinflationary policy in China, in which we conduct a disinflation experiment in a medium-scale New Keynesian model. We highlight two key features of China's economy: the relevance of money to monetary policy rules and household inequality. For the former, we consider two monetary policy regimes: an expanded Taylor rule with money and a money supply rule. For the latter, we take into account a share of the population that is limited in its ability to participate in assets markets. Our analysis suggests that a disinflation policy is more costly when the central bank controls the money supply than the case in which the nominal interest rate is the policy instrument. Our results are driven by the different impacts of disinflation on nominal and real interest rates under the two regimes.     

Money,output and income velocity

This paper attempts to assess empirically the contribution of three structural shocks – monetary, institutional (financial and fiscal), and technological – to output and velocity fluctuations in the national bank era and the post-1973 period. To identify these shocks we impose only long–run restrictions, derived from a monetary growth model. We find that higher money growth increases (decreases) velocity in the first (second) period, depending crucially on the resulting changes in the transactions frequency. Credit–enhancing financial or expansionary fiscal shocks have a permanent positive effect on velocity and a himp–shaped effect on output, whereas technological shocks cause velocity to decrease in the short run and output to move to a permanently higher level.     

Financial shocks,financial stability,and optimal Taylor rules

We assess the performance of optimal Taylor-type interest rate rules, with and without reaction to financial variables, in stabilizing an economy following financial shocks. The analysis is conducted in a DSGE model with loan and bond markets, each featuring financial frictions. This allows for a wide set of financial shocks and transmission mechanisms and can be calibrated to match the bond-to-bank finance ratio featured in the US financial system. Overall, we find that monetary policy that reacts to credit growth, a form of the so-called “leaning against the wind”, improves the ability of the central bank to achieve its mandate in the wake of financial shocks. The specific policy implications depend partly on the origin and the persistence of the financial shock, but overall not on the assignment of a mandate for financial stability in the central bank’s objective function.     

Managed Exchange Rates*

Managed exchange rates have become a tool of macroeconomic stabilization policy. Much of the previous emphasis on parametrically chosen exchange rate regimes has missed the advantages of a strategy of a variable target exchange rate when the central bank tries to maintain equilibrium output in the face of various shocks to the economy. Based on a standard IS-LM-AS macromodel, optimal combinations of exchange rate and money supply changes are found that insulate the economy against all stipulated shocks. However, these combinations vary from one shock to another; therefore recognition signals are necessary. Continuous information on some variables allows the central bank to identify shocks if they can be guaranteed to occur individually, but not otherwise. As a second-best strategy, ‘defensively managed exchange rates’ appear suitable. The paper also discusses some side effects and other practical difficulties of a managed exchange rate as an automatic stabilizer.     

A K% MONEY GROWTH LEADERSHIP RULE IN AN INTERNATIONAL MONETARY POLICY GAME

This paper examines a version of the Friedman k% money growth rule in an open economy monetary policy game. Using the two-country model proposed by Canzoneri and Henderson (1991), we show that, in response to asymmetric aggregate demand shocks, the Pareto-efficient outcome can be achieved by a policy that we call a k% money growth leadership rule. Following that rule, one country, the leader, sets her money supply growth rate, and the follower sets her money supply growth rate so as to keep the sum of nominal money supply growth at k%. We show that this policy yields the same outcome as does cooperative equilibrium. We also show that alternative policy rules, such as keeping exchange-rate adjusted money supply growth at k%, or forming a currency union, will not lead to the Pareto-efficient outcome in response to these demand shocks. ( JEL E5, F3)     

NOMINAL WAGE INDEXATION,QUASI‐EQUILIBRIA AND REAL WAGE DYNAMICS

In contrast to the traditional static approach to indexation, this paper analyses the dynamic consequences for real wages of the mechanism that links nominal wages to inflation. Revisiting a contribution by Dehez and Fitoussi on macroeconomic fluctuations , I analyse a monetary overlapping generations small open economy in which full indexation is interpreted as the occurrence of a dynamic ‘quasi‐equilibrium’. In the suggested framework, the nominal wage is linked to the inflation rate by a specific indexation formula whose shape relies on unions' bargaining positions. Assuming a constant peg for the real interest rate and the superneutrality of money, I show that the economy has a unique long‐run quasi‐equilibrium allocation whose stability depends only on the behaviour of the monetary authority. Moreover, I show how the operating of a ‘wage‐aspiration effect’ might lead to the persistence of involuntary unemployment.     

Optimal Weights in a Check-List of Monetary Indicators*

A stylized representation of the check-list approach to monetary policy is developed. In order to examine this approach in a formal framework the literature on optimal money supply rules is extended with the check-list being interpreted as an optimal money supply rule that depends on many variables and attempts to keep the economy on a preplanned path despite unexpected shocks. The strengths and weaknesses of the check-list approach are then examined     

Poole in the New Keynesian model

We study the properties of alternative central bank targeting procedures within the standard New Keynesian model. We find that Poole's famous insights concerning the output stabilization properties of money and interest rate targeting obtain when intertemporal substitution is low. And that output volatility rankings do not induce similar welfare rankings. Unlike the popular presumption, money targeting always fares better for money demand shocks. For fiscal shocks, money targeting does better for low and worse for high degree of intertemporal substitution. The opposite pattern obtains for supply shocks.     

Money,Investment and Consumption: Keynes's Macroeconomics Rethought

The dominant supply-side foundation for explanations of the growth potential of an economy is losing its persuasive power in the face of persistent losses in output and employment experienced by mature economies in the aftermath of the financial crisis. There is now an opening for eclectic approaches that consider the interaction between supply-side and demand-side factors in shaping macroeconomic outcomes. In this paper, we develop a model that reflects such an approach to interpreting differential productivity growth over the long run, and then present empirical results for several countries. On the supply-side, the model considers the linkage between the intensity and efficacy of the accumulation process and the gains of productivity in terms of a Kaldorian Technical Progress Function. Then, drawing on the Evsey Domar's Keynesian notion of dynamic equilibrium as the growth rate that reconciles additions to capacity with the absorption of aggregate output by demand, we derive a locus for a ‘Domar equilibrium path’. Imbalances caused by excess aggregate supply or demand, and by the effects of ‘shocks’ are presented and discussed using a simple graphical framework. In the empirical analysis, an error-correction model is applied to the fundamental relationship between the rate of growth of product per work-hour and the rate of capital accumulation. The results suggest that the differences in productivity growth among countries are can be explained in terms of the efficiency of their ‘accumulation paths’.     

The First and Second Stage Pass‐through of Exchange Rates: A Developing Country Perspective

This paper investigates the validity of the conventional wisdom that, unlike in developed countries, exchange rate pass‐through (ERPT) should be ‘complete’ for developing economies. To test this hypothesis, we construct new variables as well as original data sets, which are not readily available in the literature, and employ an alternative error correction model technique for a typical small open developing economy—Bangladesh. The transmission of exchange rate movements to import prices is found to be ‘complete’; however, the ‘second stage pass‐through’ is ‘partial’ both in the short and long run. The response of traded goods prices to exchange rate shocks is found to be significant and larger in the long run compared with the short run. Trade liberalization is also a significant phenomenon for ERPT. The analysis has wider applicability to other small open economies.     

Asymmetric information, financial intermediation, and business cycles

Summary. This incorporates a debt contracting problem with asymmetric information into a standard monetary business cycle model. The model incorporates a limited participation assumption in order to induce a liquidity effect of monetary shocks and propagate monetary disturbances. The model economy shows that a positive money supply shock generates a decrease in nominal interest rates and an increase in output level. Asymmetric information amplifies the response of capital to the money supply shock, but does not propagate them in other ways. When the monetary shock is an innovation in reserve requirements, it induces a persistent response of the economy. Received: March 20, 1998; revised version: 1 April 1998