Optimal monetary growth with accommodating fiscal policy in a small open economy

This paper emphasizes how the choice of the optimal monetary growth rate in a small open economy under perfect capital mobility depends upon the accommodating policy chosen to maintain the overall budget constraint in the economy. When this occurs through lump sum taxation, the optimal monetary growth rate is shown to be the ‘distorted’ Friedman monetary rule. If the adjustment occurs through the income tax rate, the optimal monetary growth rate involves a Phelps-type tradeoff between the income tax rate and the inflation tax rate. The framework is suited for analyzing optimal macroeconomic policy in general and the latter part of the paper considers an optimal monetary-fiscal package.     

Bank behavior and monetary policy

As a rule, economists have studied the interaction between bank behavior and monetary policy in the case of a ‘monetary base’ target. In many countries (among which France), this is not an adequate analysis of monetary policy: rather, the Central Bank pegs the interest rate at a desired level and supplies whatever amount of central money is needed at this rate. This paper presents a model where both the usual and the ‘French’ case can be analysed; both short- and long-run implications of monetary policy are considered in a partial equilibrium framework.     

Optimal inflation policy

This paper considers the problem of optimal long-run monetary policy. It shows that optimal inflation policy involves trading off two quite different considerations. First, increases in the rate of inflation tax the holding of many balances, leading to a deadweight loss as excessive resources are devoted to economizing on cash balances. Second, increases in the rate of inflation raise capital intensity. As long as the economy has a capital stock short of the golden rule level, increases in capital intensity raise the level of consumption. Ignoring the second consideration leads to the common recommendation that the money growth rate be set so that the nominal interest rate is zero. Taking it into account can lead to significant modifications in the ‘full liquidity rule’. Interactions of inflation policy with financial intermediation and taxation are also considered. The results taken together suggest that inflation can have important welfare effects, and that optimal inflation policy is an empirical question, which depends on the structure of the economy.     

Optimal fiscal and monetary policy in an economy without capital

This paper is concerned with the structure and time-consistency of optimal fiscal and monetary policy in an economy without capital. In a dynamic context, optimal taxation means distributing tax distortions over time in a welfare-maximizing way. For a barter economy, our main finding is that with debt commitments of sufficiently rich maturity structure, an optimal policy, if one exists, is time-consistent. In a monetary economy, the idea of optimal taxation must be broadened to include an ‘inflation tax’, and we find that time-consistency does not carry over. An optimal ‘inflation tax’ requires commitment by ‘rules’ in a sense that has no counterpart in the dynamic theory of ordinary excise taxes. The reason time-consistency fails in a monetary economy is that nominal assets should, from a welfare-maximizing point of view, always be taxed away via an immediate inflation in a kind of ‘capital levy’. This emerges as a new possibility when money is introduced into an economy without capital.     

Investment and Monetary Policy: Learning and Determinacy of Equilibrium

We explore determinacy and expectational stability (learnability) of rational expectations equilibrium (REE) in New Keynesian (NK) models that include capital. Using a consistent calibration across three different models—labor‐only, firm‐specific capital, or an economy‐wide rental market for capital, we provide a clear picture of when REE is determinate and learnable and when it is not under a variety of monetary policy rules. Our findings make a case for greater optimism concerning the use of such rules in NK models with capital. While Bullard and Mitra’s (2002, 2007) findings for the labor‐only NK model do not always extend to models with capital, we show that determinate and learnable REE can be achieved in NK models with capital if there is (i) plausible capital adjustment costs, (ii) some weight given to output in the policy rule, and/or (iii) a policy of interest rate smoothing.     

The role of expectations in stabilization policy

This paper develops and tests a theory of the process by which private agents in an economy form expectations about government policy. Agents form and update their beliefs about the true state of government policy in a Bayesian fashion. The ‘credibility’ of a policy is defined to be the subjective probability that the government is pursuing a 'reform' policy rule. The ‘credibility’ of a reform of monetary or exchange rate policies is a function of the parameters of both monetary and fiscal policies. The theory is applied to the Chilean and Argentine exchange reforms of the late 1970's.     

Oman's monetary policy transmission process under the fixed peg: some empirical puzzles

This paper highlights that an open economy, like Oman, could often enjoy partial monetary policy independence despite operating with a fixed peg, which may appear as a clear violation of the ‘macroeconomic trilemma'. While explaining the country-specific factors that create the scope for partial monetary policy independence, the paper underscores that for meaningful use of this partial monetary policy independence to attain domestic goals of inflation and output, the transmission mechanism of monetary policy must work effectively. Empirical analyses presented in this paper for Oman, however, suggest the presence of not only the ‘interest rate puzzle’ but also the ‘IS puzzle’ and the ‘Phillips curve puzzle’, which together signal the presence of significant transmission weaknesses. The paper, thus, concludes that costs stemming from loss of any monetary policy independence because of the fixed peg may not be very significant for Oman, and hence, any alternative exchange rate regime cannot be viewed as appropriate just on the grounds that an alternative regime could deliver greater monetary policy independence.     

Explaining exchange rate volatility: an empirical analysis of ‘the holy trinity’ of monetary independence, fixed exchange rates, and capital mobility

This paper uses a panel of data from twenty-two countries between 1967 and 1992 to explain exchange rate volatility, focusing on potential tradeoffs between fixed exchange rates, independent monetary policy, and capital mobility. I use monetary models to parameterize monetary divergence and factor analysis to measure capital mobility. Exchange rate volatility is loosely linked to both monetary divergence and the degree of capital mobility. Interestingly, exchange rate volatility is significantly correlated with the width of the explicitly declared exchange rate band, even after taking monetary divergence and capital mobility into account.     

Macroeconomic factors and yield curve for the emerging Indian economy

This article investigates the dynamic linkages between the estimated parameters of a zero coupon yield curve and macroeconomic variables like inflation, gross domestic product growth in the presence of a monetary policy indicator in India for the period July 1997 to February 2004. The study finds that there exists strong causality from financial factors, defined by three parameters of the yield curves (‘Level’, ‘Slope’, ‘Curvature’) to macroeconomic factors; growth, inflation and monetary policy indicators (changes in the call money rate). However, the causality in the opposite direction is found to be weaker. It is found that theyield and macro factors do not cause each other before the launch of a liquidity adjustment facility, so the evidence of causality from financial to macroeconomic factors can be attributed to the introduction of a liquidity adjustment facility in June 2000. The causality from yield factors to macro factors is primarily driven by the fact that the ‘changes in level’ of yield curve brings an impact on inflation through the changes in monetary policy. This finding suggests that monetary policy plays a key role in driving the causality. This also implies that the indirect instrument of monetary policy mechanism is becoming increasingly important to influence the aggregate demand in the economy.     

我国货币政策风险承担渠道存在吗？--基于GMM方法的实证研究

本文收集了2004—2013年我国45家商业银行的微观数据和相关宏观数据,并运用差分GMM回归方法对我国货币政策风险承担渠道的存在性做了实证检验。研究结果表明：我国的货币政策风险承担渠道确实存在,且宽松的货币政策会刺激银行承担更多的风险;价格型货币政策工具对银行风险承担的影响大于数量型货币政策工具;银行的规模大小、盈利水平和资本充足性与银行风险承担呈反比;人均GDP增长率、银行业竞争性与银行风险承担呈正比。     

Measuring Compliance with the Golden Rule

The golden rule of public finance is based upon the notin that intergenerational equity requires that the cost of public expenditures be spread over time in a manner that reflects the intertemporal distribution of the benefits generated by those expenditures. This is often translated into a rule that the budget be structurally balanced in accrual accounting terms. This article considers the form of accrual accounting that is most suited to the task of measuring the consistency of fiscal policy with the golden rule. It recommends a combination of the real capital maintenance approach (also known as ‘current purchasing power accounting’) and annuity depreciation. Such an approach differs from ‘current cost accounting’, which has dominated public sector models of accrual accounting in recent years. The meaning of balance-sheet measures is also considered, and it is concluded that the golden rule is more appropriately expressed as an accrual balanced budget requirement than as a requirement for the maintenance of constant net worth. JEL classification: H6, M40.     

货币政策操作需要考虑银行资本监管吗

持续宽松的货币政策与巴塞尔协议下银行资本监管的共同作用,可能是本次美国次贷危机产生和经济持续波动的主因之一。巴塞尔协议下的银行资本监管,较大地改变了信贷资金的流向和经济运行规律,从而必然影响到货币政策发挥作用的基础条件与传导途径。本文结合经济周期对银行资本约束下的IS-LM模型进行了扩展分析,发现银行资本约束会通过影响银行信贷渠道使货币政策产生非对称性效果,从理论上论证了货币政策的操作必须考虑银行资本监管。本文还运用随机前沿分析(SFA)方法检验了2000～2009年我国货币政策与银行资本监管联合效率,表明在引入银行资本监管后货币政策实现经济目标的联合效率下降。因此,为了达到稳定物价与产出的总体目标,在货币政策反应函数中必须考虑银行资本及其监管状况。     

On the effectiveness of monetary policy under fixed rates of exchange

The IS-LM framework traditionally used to discuss the role of monetary policy under fixed rates of exchange has several weaknesses. The theoretical findings based on such a model cannot be accepted uncritically. The paper reassesses the role of monetary policy by appropriately modifying the IS-LM apparatus so that its resilts can be easier to compare with much of the existing literature. The meaning and effectiveness of monetary policy is analysed in short-run equilibrium, stock-flow equilibrium and full long-run equilibrium. Dynamical equations linking the short to the long run are specified. The notable implication is that monetary policy is effective in the short run and need not be ineffective in the long run. Complete emasculation of monetary policy occurs when the central authorities relinquish control over the flow distribution of government debt between money and bonds in favour of an independent use of a set of fiscal instruments. Perfect capital mobility requires that the central authorities decide whether monetary or fiscal policy become totally dependent on external forces. Whether one or the other is chosen is more a matter of specific circumstances than theoretical necessity. Critical comments are directed at the literature on offsetting capital flows.     

经常账户冲击、资本账户管理与中央银行货币政策操作

经常账户负向冲击及引发的宏观变量联动性通常对各经济体央行货币政策操作构成挑战。本文构建了融入经常账户冲击的小型开放经济DSGE模型,比较了采取不同资本账户管理工具(数量型和价格型)情景下,央行执行数量型货币政策规则、盯住CPI通胀泰勒规则、盯住PPI通胀泰勒规则下,经常账户负向冲击对货币政策操作的异质性影响及传导机制,并进行了福利分析。主要结论如下：第一,经常账户负向冲击将对本国央行货币政策操作构成一定影响;第二,资本账户管理可以成为缓冲经常账户负向冲击的防火墙,价格型资本账户管理工具与盯住PPI通胀泰勒规则相结合造成的福利损失较小;第三,经常账户贸易端与收益端双重负向冲击对一国货币政策操作的影响更大,但公众预期到的经常账户恶化对货币政策操作的影响将有所减弱。本文认为,转型经济体央行应倾向于执行价格型货币政策规则,最优货币政策应在稳定价格水平与缓释风险方面进行权衡,适度降低对名义汇率的关注度,稳慎推进资本账户开放进程,并可优先选择价格型资本账户管理工具。     

The balance sheet channel of monetary policy: the panel evidence of Egypt

This paper examines the effects of monetary policy on firms’ investments in Egypt using disaggregated data and generalized method of moments (GMM) technique. It develops the neoclassical investment model by adding the interaction between user cost of capital and cash flow (CF). Therefore, monetary policy affects investment through three effects: user cost of capital, CF and interaction between them. Using a sample of 124 firms, the empirical finding supports the relevance of balance sheet channel (BSC) and the heterogeneous effect of monetary policy on investment. This finding signals that monetary authority should take cognizance of the stability of interest rate to stabilize firm-level investment.     

Monetary policy, taxes, and the business cycle

This paper analyzes the interaction of inflation with the tax code and its contribution to aggregate fluctuations. We find significant effects operating through the tax on realized nominal capital gains. A tax on nominal bond income magnifies these effects. Our innovation is to combine monetary policy shocks with non-indexed taxes in a model where the central bank implements policy using an interest rate rule. Monetary policy had important effects on the behavior of the business cycle before 1980 because policymakers did not exert effective control over inflation. Monetary policy reform around 1980 led to better control, and with more stable inflation, the effect of the interaction between monetary policy and the nominal capital gains tax has become negligible.     

Self-oriented monetary policy,global financial markets and excess volatility of international capital flows

This paper explores the nature of macroeconomic spillovers from advanced economies to emerging market economies (EMEs) and the consequences for independent use of monetary policy in EMEs. We first empirically document that a US contractionary monetary policy shock leads a retrenchment in EME capital flows, a fall in EME GDP, and an exchange rate depreciation. We construct a theoretical model that can help to account for these findings. In the model, macroeconomic spillovers may be exacerbated by financial frictions. Absent financial frictions, international spillovers are minor, and an inflation targeting rule represents an effective policy for the EME. With frictions in financial intermediation, however, spillovers are substantially magnified, and an inflation targeting rule has little advantage over an exchange rate peg. However, an optimal monetary policy markedly improves on the performance of naive inflation targeting or an exchange rate peg. Furthermore, optimal policies don't need to be coordinated across countries. A non-cooperative, self-oriented optimal policy gives results very similar to those of a global cooperative optimal policy.     

Central banks and macroeconomic policy choices: Relaxing the trilemma

Macroeconomic policy choices in open economies are constrained by the trilemma according to which the objectives of exchange rate stability, monetary independence and capital mobility cannot be attained jointly. This paper shows that foreign exchange interventions provide an effective instrument to relax the trilemma. An active reserve policy allows central banks to pursue independent monetary and exchange rate policies when the capital account is liberalised.We use the framework of the portfolio balance model to show that exchange market interventions may substitute for capital controls. Both allow a country to achieve the other two objectives of the trilemma. Our empirical analysis of a large country panel data set covering the period 1970–2010 confirms this theoretical insight: the weighted sum of the three trilemma objectives increases in the degree of foreign exchange market intervention. The capacity to relax the trilemma constraint has increased over time and has been most effective in emerging markets.     

货币政策对流动性风险的影响——基于银行信贷行为视角

本文基于我国现实背景和《巴塞尔协议Ⅲ》,利用2008年至2017年间194家商业银行的相关数据,对我国银行净稳定资金率进行了度量,并在此基础上,检验了货币政策对我国商业银行流动性风险的影响,探究了其影响机理和传导渠道。研究表明:扩张型货币政策会提高商业银行的流动性风险;不同经济环境下,货币政策对流动性风险的影响存在差异但不具备异质性;不同类型的商业银行中,货币政策对流动性风险的影响不具有异质性;在货币政策对流动性风险的影响中,银行信贷行为是重要的传导渠道。因此,央行可基于货币政策对流动性风险的影响差异进行相机抉择;商业银行则要加强信贷规模和质量的管理,优化资产结构,通过弱化信贷渠道作用来降低货币政策对银行流动性风险的不良影响。     

Monetary instruments and policy rules in a rational expectations environment

This paper explores the implications of rational expectations and the aggregate supply theory advanced by Lucas (1973) and Barro (1976) for analysis of optimal monetary policy under uncertainty along the lines of Poole (1970), returning to a topic initially treated by Sargent and Wallace (1975). Not surprisingly, these two ‘classical’ concepts alter both the menu of feasible policy choice and the desirability of certain policy actions. In our setup, unlike that of Sargent and Wallace (1975), the systematic component of monetary policy is a relevant determinant of the magnitude of ‘business fluctuations’ that arise from shocks to the system. Central bank behavior — both the selection of monetary instruments and the framing of overall policy response to economic conditions — can work to diminish or increase the magnitude of business fluctuations. However, the ‘activist’ policies stressed by the present discussion bear little (if any) relationship to the policy options rationalized by the conventional analysis of monetary policy under uncertainty. In particular, in contrast to Poole's analysis, money supply responses to the nominal interest rate are not important determinants of real economic activity. Rather, the central bank should focus on policies that make movements in the general price level readily identifiable by economic agents.