The Conduct of Monetary Policy Without Monetary Aggregates

A central dilemma for the monetary authorities is how to determine monetary policy. The increasing unreliability of monetary aggregates has led over the past few years to less concern for monetary targeting, both in the UK and elsewhere, and a greater influence for the exchange rate on monetary policy. But in the UK, most recently, there has been a move away from setting monetary policy in relation to the exchange rate and external considerations in favour of setting monetary policy in relation to domestic demand. Not surprisingly, this shift has occurred at a time of rising concern about domestic overheating. It illustrates the dilemma of whether monetary policy should be driven by domestic demand considerations or by external, exchange rate considerations. This dilemma is not just confined to the UK for it is a real source of conflict underlying the Louvre Accord and its successors that seek to determine G7 exchange rates in a cooperative manner. In what follows, we argue that exchange rate developments should have an appreciable influence on monetary policy, since this is helpful in attaining stable inflation. But we also suggest that this influence should not go too far, since this stability of inflation may be at the expense of stability of domestic demand and output. Targeting of exchange rates within narrow bands is unlikely to be desirable, unless fiscal policy can be used more flexibly to stabilize domestic demand. This suggests that, in the period up to the spring, the use of monetary policy to hold the £/JDM exchange rate within narrow limits may have been overdone. More seriously, international exchange rate agreements among the G7 countries are likely to founder under adverse market pressures, unless current imbalances in fiscal policy are adjusted. In the absence of greater flexibility in fiscal policy, policy makers will have to trade off domestic and exchange rate considerations in determining monetary policy. An important outstanding issue that needs further consideration is what indicators should be used for monetary policy, in a world in which monetary aggregates provide unreliable signals.     

Time-frequency effect of crude oil and exchange rates on stock markets in BRICS countries: Evidence from wavelet quantile regression analysis

This study examines the effects of oil prices and exchange rates on stock market returns in BRICS countries (Brazil, Russia, China, India and South Africa) from a time–frequency perspective over the period 2009–2020. We use wavelet decomposition series to develop a threshold rolling window quantile regression to detect time–frequency effects at various scales. The empirical results are as follows. First, our findings confirm that the effects of both crude oil prices and exchange rates on BRICS stock returns are asymmetric. Positive shocks of crude oil have a greater impact on a bull market, whereas negative shocks have a greater impact on a bear market. Second, there is a short-term enhancement effect of crude oil and exchange rate on BRICS stock markets. In addition, volatility in the macro financial environment also exacerbates the impacts of oil prices and exchange rates on the stock market, and these fluctuations are heterogeneous. Overall, these findings provide useful insights for international investors and policy makers.     

Macroeconomic responses of emerging market economies to oil price shocks: An analysis by region and resource profile

We analyze the impact of oil price shocks on the macroeconomic fundamentals in emerging economies in three regions that have different resource endowments. The existing literature on emerging economies remains inconclusive on how regional factors and resource characteristics affect the response of macroeconomic variables to oil price shocks. We show that (1) exports in Europe and Central Asia are driven by oil more than East Asia and the Pacific and that (2) policy makers in East Asia and the Pacific should be concerned about real exchange appreciation following a positive oil shock to mitigate losses in the non-oil export market. Analysis by resource endowment further reveals that, in less-resource-intensive economies, an oil price shock causes large variations in consumption and has a negative and persistent impact on the real gross domestic product (GDP). In mineral-exporting economies, real GDP and interest rates are driven largely by oil price shocks. The response of real GDP in mineral-exporting economies is short lived. In oil-exporting economies, only real GDP has a large variation in response to oil price shocks. Our findings highlight the need for customized policy responses to oil price shocks, depending on resource endowments, as we show that a “one size fits all" policy does not exist.     

Economic Viewpoint: Towards Exchange Rate Stability?

At their recent meeting in Washington the Group of Seven reafirmed their desire to hold exchange rates at about their current level. In this Viewpoint we consider the prospects for success. We conclude that although current rates are feasible in terms of competitiveness, the system will remain under strain as long as there are major inconsistencies between jiscal policy in the US and the rest of the world. The present conjuncture of interest rates and inflation points to a further dollar depreciation. It would be better, in our view, to enact this quickly and to attempt to stabilize exchange rates at sustainable levels: the policy of holding the dollar is misguided.     

Towards Exchange Rate Stability?

At their recent meeting in Washington the Group of Seven reafirmed their desire to hold exchange rates at about their current level. In this Viewpoint we consider the prospects for success. We conclude that although current rates are feasible in terms of competitiveness, the system will remain under strain as long as there are major inconsistencies between jiscal policy in the US and the rest of the world. The present conjuncture of interest rates and inflation points to a further dollar depreciation. It would be better, in our view, to enact this quickly and to attempt to stabilize exchange rates at sustainable levels: the policy of holding the dollar is misguided.     

Local Linear Impulse Responses for a Small Open Economy*

Traditional vector autoregressions derive impulse responses using iterative techniques that may compound specification errors. Local projection techniques are more robust to this problem, and Monte Carlo evidence has suggested they provide reliable estimates of the true impulse responses. We use local linear projections to investigate the dynamic properties of a model for a small open economy, New Zealand. We compare impulse responses from projections to those from standard techniques, and consider the implications for monetary policy. We pay careful attention to the dimensionality of the model, and focus on effects of policy on gross domestic product, interest rates, prices and exchange rates.     

ANALYSING IMPLICATIONS OF LIMITED WATER AVAILABILITY FOR GREAT BARRIER REEF CATCHMENTS

Dependence on water is one of the factors that can determine regional vulnerability in Australia. Climate change is predicted to change rainfall patterns in the Great Barrier Reef (GBR) region, and scarce water resources have the potential to make regional Queensland economies increasingly vulnerable. Understanding which economic sectors depend on water as an input factor helps in understanding sectoral and regional vulnerability, and thus in guiding regional policy aimed at structural change. Using a regional Queensland Input–Output (IO) model, this paper integrates water consumption of the GBR region and then compares monetary IO multipliers with water consumption multipliers. We argue that these IO multipliers can inform regional decision makers about potential future regional vulnerability by taking into account limited water resources.     

Generalized long memory processes,failure of cointegration tests and exchange rate dynamics

This paper presents evidence that the equilibrium relationship in a system of nominal exchange rates is best described as a stationary GARMA process. The implementation of the GARMA methodology helps explain conflicting and puzzling results from the use of linear cointegration and fractional cointegration methods. Furthermore, we use Monte Carlo analysis to document problems with standard cointegration tests when the attraction process is distributed as a long memory GARMA process. Copyright © 2006 John Wiley & Sons, Ltd.     

The Dollar, the Oil Price and Policy Divergence

There is currently a clear divergence of policy between the United States, Japan and Germany. With the US in recession and concern growing over the severity of the slump, interest rates have been cut in a move to revive the economy. In contrast Japan and Germany are both experiencing strong growth and monetary policy remains tight to combat inflation. This divergence was seen most clearly when the Federal Reserve Board lowered its discount rate to 6 per cent on 1 February, the day after the Bundesbank had raised its Lombard rate to 9 per cent. With G7 increasingly concerned about domestic factors, less emphasis is placed upon stable exchange rates and as a result the dollar is at an all-time low. The last two G7 communiqués have stressed ‘stability oriented monetary policies’, an ambiguous phrase which fails to define ‘stability’ either in terms of exchange rates, inflation or growth. Thus both the German and Japanese policy of high interest rates to reduce inflation and low US interest rates aimed at stimulating the economy can be termed as ‘stability oriented’. This analysis focuses on these divergent policy responses in two alternative scenarios to the world forecast we presented last month. The first scenario considers what might happen if the Federal Reserve Board were to stimulate the US economy by further cuts in interest rates, whilst Japanese and German rates were unchanged in the face of inflationary pressures. This case may be relevant if the recent US loosening of monetary policy is not sufficient to encourage growth because of a ‘credit crunch’, so that a more expansionary policy is required by the Fed. As a consequence, policy diverges further and the dollar weakens. The second scenario focuses upon a reduction in inflationary pressures in Japan and Germany brought about by an oil price fall. In this case we assume that US policy is already loose enough to avoid a prolonged recession, but that German and Japanese monetary policy is relaxed as inflationary forces recede. In this case policies converge. Each scenario thus concentrates on one of !he two features which are causing the policy divergence amongst G3 countries: recession in the US, inflation in Germany and Japan.     

Defining efficient policies in a general equilibrium model: a multi-objective approach

Macroeconomic policy makers are typically concerned with several indicators of economic performance. We thus propose to tackle the design of macroeconomic policy using Multicriteria Decision Making (MCDM) techniques. More specifically, we employ Multi-objective Programming (MP) to seek so-called efficient policies. The MP approach is combined with a computable general equilibrium (CGE) model. We chose use of a CGE model since it has the dual advantage of being consistent with standard economic theory while allowing one to measure the effect(s) of a specific policy with real data. Applying the proposed methodology to Spain (via the 1995 Social Accounting Matrix) we first quantified the trade-offs between two specific policy objectives: growth and inflation, when designing fiscal policy. We then constructed a frontier of efficient policies involving real growth and inflation. In doing so, we found that policy in 1995 Spain displayed some degree of inefficiency with respect to these two policy objectives. We then offer two sets of policy recommendations that, ostensibly, could have helped Spain at the time. The first deals with efficiency independent of the importance given to both growth and inflation by policy makers (we label this set: general policy recommendations). A second set depends on which policy objective is seen as more important by policy makers: increasing growth or controlling inflation (we label this one: objective-specific recommendations).     

Assessment and development centers: judgment biases and risks of using idiographic and nomothetic approaches to collecting information on people to be evaluated and trained in organizations

Assessment center and development center are two procedures that organizations can use in order to evaluate and train people. They make use of different methods and techniques, some (i.e. interviews) descending from the so called idiographic (or clinical) approach, and some (i.e. standardized instruments) descending from the so called nomothetic (or psychometric) approach. The idea is that different methods and techniques allow assessors and decision makers to collect as much information as possible, in order to come to an integrated judgment of people to be evaluated. Regarding this idea, psychological research has already discovered that it is not the amount of information collected that makes the difference between expert and non-expert assessors and decision makers. Besides, too much information is difficult to manage; and while it increases the confidence of assessors and decision makers about their judgments, it unfortunately does not increase their accuracy as well, since relevant information is mixed with irrelevant one and this makes it difficult to decide which one to consider and which one not. So, the article wants to be a critical review of what psychological science has found, and not so recently, in the field of assessment and development of psychological characteristics, in terms of risks and biases. Finally, it wants to underline the fact that, in spite of risks and biases, nowadays different methods and techniques are actually used to assess one person’s psychological characteristics, which is certainly questionable but also methodologically appropriate if they are appropriately used.     

Incorporating the RMB internationalization effect into its exchange rate volatility forecasting

Recently, the Chinese government has launched the renminbi (RMB) internationalization policy as an impetus to foster China’s global economic integration. The RMB internationalization effect on China’s economy and the RMB exchange rate has attracted massive attention in recent financial research. In this paper, we adopt a genetic programming (GP) method to generate new RMB exchange rate volatility forecasting models incorporating the RMB internationalization effect. Our models are proved to have significant accuracy improvement in predicting both RMB/US dollar and RMB/euro exchange rate volatilities, compared with standard GARCH volatility models, which are incapable of capturing the RMB internationalization effect. Furthermore, our models display salient practical implications for policy makers to formulate monetary policies and currency traders to design effective trading strategies.     

BARGAINING FOR LOWER INFLATION

Industrialists are concerned about the high level of interest rates. The government is refusing to take deliberate steps to cut them, particularly at a time when the exchange rate has been falling in response to events in oil markets. However, the government has suggested that wage moderation offers the best chance of a fall in interest rates. Can this be interpreted as a promise of a reward for good behaviour? The idea of a policy bargain, whereby the authorities promise some kind of fiscal or monetary stimulus as a reward for moderation in wage settlements, is not new. An explicit bargain of this type was offered by Mr Healey in 1976 and again in 1977. In each year he offered tax cuts contingent on the negotiation of a new pay policy. Some have interpreted Mr. Lawson's comments at the recent NEDC meeting as offering a similar type of bargain on interest rates. As far as we can tell, that interpretation is incorrect; there are however interesting and important questions about whether policy should respond to lower inflation. We argue that, in general, lower inflation will itself produce favourable automatic responses for real demand within a nominal policy framework. The question of the effects of wage moderation is rather more complex. We believe that no policy adjustment is necessary. This also appears to be the government's view.     

Bond market co-movements,expected inflation and the GBP-USD equilibrium real exchange rate

Since the end of the fixed rates in 1973 and after the European Monetary System (EMS) sterling dismissal in 1992, the value of the pound has undergone large cyclical fluctuations on average. Of particular interest to policy makers is the understanding of whether such movements are consistent with the lack or not of a correction mechanism to some long-run equilibrium. The purpose of the present study is to understand those dynamics, how the external value of the British sterling (GBP) relative to the US dollar (USD) evolved during the recent floating experiences, and what have been the driving forces. In this paper we assume the real exchange rate to be determined by forces relating to the goods and capital market in a general equilibrium framework. This entails testing the purchasing power parity (PPP) and the uncovered interest parity (UIP) together. In doing so, we model inflation expectations explicitly. Our findings have two important implications, both for monetary policy. First, we show that some of the observed changes in the bilateral real exchange rate cannot be solely attributed to changes in inflation rates, but, also to capital markets. Secondly, we find a weaker behavior of the US bond rate on international markets, possibly explained by the special US dollar status of World reserve currency.     

Monetary convergence to the Euro

This special issue of Economic Systems includes seven papers about various aspects of monetary convergence to the Euro. It includes both policy discussion papers examining a wide range of issues and empirical studies evaluating specific areas of monetary convergence. From a policy strategy view, the selected papers examine the ways of combining the two key objectives of monetary convergence, i.e., price stability and exchange rate stability. In addition, the papers analyze the interplay between monetary policies and financial market stability. The findings provide new insights on monetary policy transmission channels, market equilibrium exchange rates, interest rates pass through effects, the importance of real relative to nominal convergence, and other intricacies encountered on the passage toward the Euro.     

Choosing an Accounting Method to Explain Public Policy: Social Return on Investment and UK Non-profit Sector Policy

We examine why certain accounting methods are chosen by government policy-makers to explain and rationalize their policy actions. We focus on the case of social return on investment (SROI), an accounting methodology that aims to capture and quantify the value created by social purpose organizations, and employs techniques of monetization and the expression of value as a ratio of benefits for investments [see REDF. (2000). SROI methodology: Analyzing the value of social purpose enterprise within a social return on investment framework. San Francisco: REDF; New Economics Foundation (NEF). (2007). Measuring real value: A DIY guide to social return on investment]. In particular, we examine how and why SROI was chosen for explaining and rationalizing the UK Government's policy of greater involvement of non-profit sector organizations in public service delivery. Our central contribution is to propose two important factors, which we identify as the capturability and communicability of accounting methods, that help to explain why a particular accounting method would be chosen by policy actors to explain and rationalize their public policy choices. The research helps further our understanding of the intersection between accounting and public policy by focusing explicitly on accounting's important role in explaining and rationalizing public policy.     

The relative size of exchange rate and interest rate responses to news: An empirical investigation

This paper examines the relative size of the effects of macroeconomic news on the spot exchange rate, and interest rate differentials (2- and 5-year swap rate differentials), and the synthetic forward exchange rate schedule, for the high-frequency New Zealand data. We find that the spot exchange rate and 5-year swap rates respond by a similar magnitude to monetary surprises, implying there is little response of the forward exchange rate to this type of news. In contrast, the spot exchange rate responds by nearly three times as much as 5-year interest rates to CPI and GDP surprises, implying that forward rates appreciate to higher than expected CPI or GDP news. This is in contrast to standard theoretical models and US evidence. Lastly, we show that exchange rates but not interest rates respond to current account news. The implications of these results for monetary policy are considered.     

POST-BUDGET ASSESSMENT AND ANALYSIS OF OIL PRICE CHANGES

In this Forecast Release we update our February forecast to take account of the Budget and other new information, particularly about oil prices and the exchange rate. This updated forecast is then used as the basis for a set of three simulations in which we explore the consequences of lower oil prices, a fall in the exchange rate and a tightening of fical and monetary policy. The main conclusions are first that the Budget (the contentr of which we broadly anticipated) has not significantly changed our assessment of the short-term prospects for output and inflation. However, a detailed examination of the Government's revenue and expenditure estimates suggests that fiscal policy in 1983-4, though broadly in line with the Medium-Term Financial Strategy, has been loosened compared with 1982-3 by rather more than appears from the PSBR projections. We ako believe that there is a risk that the PSBR will be significantly higher than officially forecast in 1983-4.
Our simulations show the size of the PSBR overshoot in the event of a further sharp fall in the oil price. I f this were accompanied by a fall in the exchange rate, inflation would quickly be back in double figures. Whether the exchange rate falls or not a lower oil price gives significant output gains. However, if the authorities reacted by tightening fiscal and monetary policy, inflation would be broadly the same as in the Post Budget forecast, but there would still be output gains from the lower oil price.     

Economics,economists, and public policy☆

This article examines the role of economics and economists in shaping public policy by, first, examining the employment of economists in government, academe, and the private sector. In the United States, only a minority of Ph.D. economists (about 12 percent) are employed in government, and several important departments of the federal government employ few economists. The article goes on to illustrate the pitfalls that economists face in assisting and advising with public policy by examining the adoption of statistical profiling in Unemployment Insurance. The article concludes that, if the economics profession and economic research are to be effective in shaping public policy, then academic economists must become more directly involved with policy makers in government and decision makers in business.     

Cointegration and joint efficiency of international commodity markets

This paper investigates the semi-strong efficiency hypothesis in the international commodity markets of four industrialized countries, using vector autoregression (VAR) and cointegration techniques. Efficiency in these markets requires the corresponding real exchange rates to be martingales with respect to any information set available in the public domain. In the context of a VAR consisting only of real exchange rates, we show that necessary and sufficient conditions for joint efficiency of all the markets under consideration amount to the VAR being of order one (Markovness) and non-cointegrated. On the contrary, in a VAR extended by other potentially “relevant” variables, such as the corresponding real interest rates, non-cointegration and Markovness are only sufficient conditions for the same commodity markets to be characterized as jointly efficient. We also suggest methods for efficiency testing in each individual market within a cointegrated VAR and, finally, we discuss possible long-run linkages among the real exchange rates and real interest rates in association with efficiency in the commodity markets. JEL Classification Number: F31