Competing macro-hypotheses in the United States: A Kalman filtering approach

The empirical validity of alternative views about the short-run determinants of real output growth in the United States is investigated. A nested framework is used to test the macro rational expectations (MRE) hypothesis directly against two competing hypotheses - the neo-Keynesian view that anticipated and unanticpated monetary policy both matter,and Friedman's (1977) proposition that increased inflation uncertainty reduces real output at least temporarily. The unobservable explanatory variables are obtained from time-varying-parameter models of inflation and money growth, which generate forecast errors and their conditional variances consistent with rational expectations under a continuously chaning policy regime. The empirical results strongly support Friedman's view. The MRE hypothesis must be rejected since both anticipated and unanticipated monetary changes matter. The results prove robust across different model specifications and estimation techniques.     

Financial market imperfections and monetary policy strategy

In a model with imperfect money, credit and reserve markets, we examine if an inflation-targeting central bank applying the funds rate operating procedure to indirectly control market interest rates also needs a monetary aggregate as policy instrument. We show that if private agents use information extracted from money and financial markets to form inflation expectations and if interest rate pass-through is incomplete, the central bank can use a narrow monetary aggregate and the discount interest rate as independent and complementary policy instruments to reinforce the credibility of its announcements and the role of inflation target as a nominal anchor for inflation expectations. This study shows how a monetary policy strategy combining inflation targeting and monetary targeting can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. Friedman's k-percent money growth rule, which can generate dynamic instability, and two alternative stabilizing feedback monetary targeting rules are examined.     

Household debt,macroprudential rules,and monetary policy

Today's Canadian economy features a historic high of household debt and persistently low growth rate. The average debt-to-GDP ratio has reached the level experienced in the U.S. just prior to the recent financial crisis. In this paper, we ask whether monetary policy should lean against the household indebtedness or macroprudential policies are better suited for the task. To provide a quantitative answer, we develop a small open economy dynamic stochastic general equilibrium model featuring a micro-founded banking sector. We estimate the model using Canadian data and conduct policy experiments. Our findings favor macroprudential approach to reining in indebtedness: using monetary policy that reacts to household debt increases inflation volatility and lowers borrowers' welfare, while using macroprudential policies such as lowering the loan-to-value ratio limit increases borrowers' welfare.     

CAPITAL ADEQUACY REQUIREMENTS AND THE FINANCIAL ACCELERATOR CAUSED BY BANK CAPITAL

This paper develops a computable dynamic general equilibrium model with heterogeneous banks, a portion of which may be constrained by capital adequacy requirements and the remainder of which may not, in order to examine what effects the capital requirements and bank capital induce in the macroeconomy. Applying the parameterized expectations algorithm, the model economy shows that binding bank capital constraints induce the financial accelerator, the hump‐shaped dynamic behaviour of output, and ineffectuality of monetary policy, and that all the results are derived from the individual banks’ cross‐sectional asymmetric responses that are consistent with the empirical evidence.     

Potential ECB reaction functions with time-varying parameters: an assessment

This paper analyses the behaviour of the European Central Bank over the period 1999–2014 through the estimation of monetary policy reaction functions with time-varying coefficients and heteroskedastic error terms. This allows to evaluate whether relevant shifts in the conduct of monetary policy occurred and whether the current financial crisis had an influence on that. The paper considers two different specifications, one with contemporaneous regressors and one with regressors from surveys. The Taylor rule is then enriched with a set of macroeconomic and financial variables with the aim of testing their significance. Results show that forward-looking variables have a better explanatory power over interest rate policy. All the coefficients are found to be stable along the sample so that no shift in the reaction function can be identified and the financial crisis is found to only lead to a change in the size of the shock. Finally, we also provide evidence about the fact that the ECB has been actually constrained by the zero lower bound during the recent crisis.     

Do the ECB's introductory statements help predict monetary policy? Evidence from a tone analysis

In this paper, we examine whether a tone shock derived from European Central Bank communication helps predict ECB monetary policy decisions. To this purpose, we first use a bag-of-words approach and several dictionaries on the ECB's Introductory Statements to derive a measure of tone. Next, we orthogonalise the tone measure on the latest data available to market participants to compute the tone shock. Finally, we relate the tone shock to future ECB monetary policy decisions. We find that the tone shock is significantly and positively related to future ECB monetary policy decisions, even when controlling for market expectations of monetary policy and the Governing Council's inter-meeting communication. Further extensions show that the predictive ability of the tone shock is robust to (i) the normalization of the tone measure, (ii) alternative market expectations of monetary policy, and (iii) the horizon of macroeconomic variables used in the Taylor-type monetary policy rule. These findings highlight an additional channel through which ECB communication improves monetary policy predictability, suggesting that the ECB may have private information that it communicates through its Introductory Statements.     

Interest-rate policy and rational expectations

The choice of monetary instrument under rational expectations is discussed in a general equilibrium model for the financial sector. It is shown that a supply rule leads to indeterminate asset prices, whereas the prices are determinate under an appropriately formulated interest-rate policy.     

Timeless perspective versus discretionary policymaking when the degree of inflation persistence is unknown

One major strand in optimal monetary policy analysis considers the robustness of alternative policies under model uncertainty. Another has focused on the appropriate perspective for optimal monetary policy, namely discretion or the timeless perspective (TP). The paper bridges these two parallel lines of research by assessing the welfare consequences of both policy perspectives in the presence of misperceptions about the degree of intrinsic inflation persistence. Contrary to most standard results, discretion can be the more robust perspective, the reason being that the TP exploits the expectations channel. With misperceptions this leads to large deteriorations in welfare.     

A dynamic approach to analysing the effect of the global crisis on nonperforming loans: evidence from the Turkish banking sector

This article analyses the effect of the global crisis on the determinants of nonperforming loans (NPLs) in the Turkish banking sector by using dynamic panel estimation techniques. Empirical findings suggest that NPLs present persistence, which is more evident after the crisis, while other regressors have also persistent effects in the post-crisis period. Moreover, NPLs are mostly shaped by bank-specific variables before the crisis, whereas, after the crisis, NPLs are also driven by macroeconomic and policy-related variables. In particular, the post-crisis significance of GDP, policy rate and sovereign debt shows that robust economic activity, tight monetary policy and strong fiscal balances restrict NPLs, thereby enhancing financial stability. The significance of inflation in both sub-periods shows that commitment to price stability objective is indispensable for limiting NPLs and promoting financial stability. In the period ahead, the speed and the direction of normalization in global monetary policies may determine the course of financial conditions, which, therefore, have implications regarding NPL dynamics and financial stability.     

The macrodynamics of financial fragility within a hard peg arrangement

The paper presents an open-economy macrodynamical growth model with the aim of giving an endogenous characterisation to the process that leads a small country with a currency-board arrangement to accumulate dangerously high levels of external debt and become vulnerable to macroeconomic instability. The macrodynamics of the model results from the combination of the commitment to maintain the peg - that makes liquidity closely dependent on the dynamics of foreign reserves - and the non-linear real and financial interactions that drives the pro-cyclical behaviour of the economy. Within this context, the external financing ease during an economic upswing leads to debt-supported growth and financial fragility; the consequent deterioration of profitability expectations brings about a capital reversal that, in the absence of monetary stabilisation tools, makes the currency arrangement unsustainable. A financial crisis may thus turn into a currency crisis.We run a continuous-time estimation of a non-linear differential equations system for Argentina during the years of the currency-board arrangement. We find that two steady-state solutions exist. The local stability and sensitivity analysis show that both equilibria are unstable and that the qualitative nature of the equilibria depends in particular on lenders' responsiveness to the degree of leverage. We also show that relaxing the assumption on the currency arrangement and allowing for an autonomous monetary policy makes both equilibria stable.     

Fiscal Policy,Expectations, and Exchange-Rate Dynamics*

This paper uses the sticky-price monetary model to analyze the effects of fiscal policy on the exchange rate under alternative assumptions about exchange-rate expectations. the use of different expectations mechanisms-specifically the perfect-foresight model and the popular models tested by Frankel and Froot: regressive, adaptive, and distributed-lag-is based on recent empirical evidence suggesting that exchange-rate expectations may not be rational. the most surprising finding in the paper is that with adaptive and distributed-lag expectations, fiscal expansion has no initial impact on the exchange rate, and the same may be true for regressive expectations.     

Central banks' voting records,the financial crisis and future monetary policy

We examine whether central banks' voting records help predict the future course of monetary policy in the Czech Republic, Hungary, Poland, Sweden and the United Kingdom, controlling for financial market expectations. Unlike previous research, we first examine the period of the global financial crisis, characterized by a high level of uncertainty, and second, examine the predictive power of voting records over longer time horizons, i.e., the next monetary policy meeting and beyond. We find that voting records predict the policy rate set at the next meeting in all central banks that are recognized as independent. In some central banks, voting records are found—before, but not during, the financial crisis—to be informative about monetary policy at even more distant time horizons.     

Asset Prices and the Financial Crisis of 2007–09: An Overview of Theories and Policies

The financial crisis of 2007–09 has led to a rethinking of the role of monetary and financial regulatory policy. It has also called into question the benefits of financial innovation and monetary policy that focuses solely on inflation and the output gap. This paper discusses financial instabilities in general, the recent financial crisis as well as the appropriate role of monetary and financial regulatory policy in dealing with asset bubbles. The paper concludes by evaluating appropriate policies to reduce the economic impact of future financial crises.     

Asset Prices and the Financial Crisis of 2007–09: An Overview of Theories and Policies

The financial crisis of 2007–09 has led to a rethinking of the role of monetary and financial regulatory policy. It has also called into question the benefits of financial innovation and monetary policy that focuses solely on inflation and the output gap. This paper discusses financial instabilities in general, the recent financial crisis as well as the appropriate role of monetary and financial regulatory policy in dealing with asset bubbles. The paper concludes by evaluating appropriate policies to reduce the economic impact of future financial crises.     

How justified is abandoning money in the conduct of monetary policy in Australia on the grounds of instability in the money‐demand function?

The role of money in the design and conduct of monetary policy has reemerged as an important issue in both advanced and developing economies, especially since the 2007 global financial crisis. A growing body of recent literature suggests that the causal relationship between money supply growth and inflation remains intact across countries and over time and that this relation is not conditional on the stability of the money‐demand function or whether money is endogenous or exogenous. Moreover, critical for a rule‐based monetary policy is the presence of a long‐run stable money‐demand function, rather than a short‐run money‐demand model that may exhibit instability for many reasons, including problems with estimating a money‐demand model with high‐frequency data. Provided that a stable money‐demand function exists, it could be useful to establish long‐run equilibrium relations among money, output, prices, and exchange rates, as the classical monetary theory suggests. Within this analytical framework, this paper addresses the question of whether money has any role in the conduct of monetary policy in Australia. The conventional wisdom is that the money‐demand function in Australia has been unstable since the mid‐1980s due to financial deregulation and reforms; this led to a change in the strategy of monetary policy for price stability in the form of inflation targeting that ignores money insofar as inflation and its control are concerned. This paper reports empirical findings for Australia, obtained from a longer quarterly data series over the period 1960Q1–2015Q1, which suggest that instability in the narrow‐money‐demand function in Australia was primarily due to the exclusion of variables which have become important in the deregulated environment since the 1980s. These findings are confirmed by an expanded form of the narrow‐money‐demand function that was found stable over the past two decades, although it experienced multiple structural breaks over the study period. The paper draws the conclusion that abandoning the monetary aggregate as an instrument of monetary policy in Australia, under a rule‐based monetary policy such as inflation targeting, cannot be justified by instability in the money‐demand function or even by lack of a causal link between money supply growth and inflation.     

Real and nominal effects of monetary policy shocks

Abstract.  We employ the identification scheme of Kahn, Kandel and Sarig (2002) to analyse the impact of Canadian monetary policy on ex ante real interest rates and inflationary expectations. First, we decompose nominal interest rates into ex ante real rates and inflationary expectations using the methodology of Blanchard and Quah (1989) . Then we estimate a recursive VAR model with innovations in a monetary aggregate and the overnight target interest rate as alternative measures of monetary policy shocks. We find that a negative policy shock raises both nominal and ex ante real interest rates, lowers inflationary expectations and real industrial output, and appreciates the Canadian dollar.     

Market‐Based Measures of Monetary Policy Expectations and Their Evolution Since the Introduction of the Euro

The paper considers the relation between monetary policy expectations and financial markets in the case of Europe. A number of money market instruments are compared, with the result that the 1‐month forward interest rates extracted from the Libor yield curve has the best prediction power of the future monetary policy path. These forward rates have been used to study the evolution of market expectations regarding the monetary policy of the European Central Bank (ECB). The sharp increases and the following decreases in interest rates during 2000–2001 have reduced the predictive power of money market instruments, but smoother management of interest rates and better communication from the ECB has helped to improve the forecasting power of money market instruments.     

新凯恩斯主义总需求理论的微观基础——一个基本模型及其在货币政策中的应用

宏观经济学正在迈向新一次综合.在这个进程中,一些前沿经济学家为总需求理论构建了坚实的微观基础,使其成为新新古典综合框架的一块基石.它与同样建立在微观基础上的总供给理论相结合,就成为当前主流宏观经济学进行货币政策分析的标准工具.利用这个工具,经济学家对货币政策的研究得出了很多富有启发性的结论.本文梳理了总需求理论的上述新近发展,并讨论它在货币政策中的一些应用.特别地,本文的分析表明,这些应用对于中国的货币政策操作具有重要的借鉴意义.     

What determines simultaneous asset bubbles? An empirical analysis

The recent global financial crisis demonstrated that the simultaneous collapse of asset bubbles in different countries is a major challenge for monetary policy. In order to evaluate determinants of these simultaneous asset bubbles, we detect rational asset bubbles in corporate equity and real estate markets worldwide using forward recursive right-sided ADF tests. Then we create dummy variables for simultaneous asset bubbles and analyse potential determinants using gravity models and spatial economics. Our empirical analysis suggests that simultaneous asset bubbles depend positively upon potential asset demand, capital account openness, monetary conditions, cultural similarities and negatively upon informational frictions and exchange rate flexibility. These findings imply that monetary policy can impede the probability of simultaneous asset bubbles by ensuring sound monetary conditions and choosing a flexible exchange regime.     

Macroeconomic dynamics in Macedonia and Slovakia: Structural estimation and comparison

This paper estimates a structural macroeconomic model using data for Macedonia and Slovakia to characterize possible challenges Macedonia can face concerning macroeconomic stabilization during its transition process. A comparison of the estimated model parameters suggests that, in Slovakia, the output gap is less sensitive to real interest rate movements and prices experience greater inertia. The estimated monetary policy reaction functions show Macedonia and Slovakia as inflation targeters, with Macedonia as the more conservative one, despite its officially applied exchange rate targeting regime. The differences in the estimated parameters imply differing transmission mechanisms for Macedonia and Slovakia. Consequently, the variance of domestic variables in Slovakia is most influenced by monetary policy shocks, while there is no single dominating shock explaining the volatility of Macedonia's macroeconomic variables. The exchange rate shock, the monetary policy shock and the demand shock are jointly important in determining the volatility of Macedonia's variables. The model simulations indicate that Macedonia experiences lower output gap and inflation volatility than Slovakia. This comes, nevertheless, at the cost of higher interest rate and real exchange rate volatility in Macedonia, which could be an indication of more volatile financial markets with possible negative implications for financial stability.