Monetary policy credibility and macrodynamics: evidence from Ghana

We compute a time-varying metric of monetary policy credibility based on Ghana’s experience, using both symmetric and asymmetric approaches. We then follow-up with some empirical evidence to address the linkages between macroeconomic developments and central bank credibility. The empirical results reveal high and low credibility cycles with an average duration of 2 years over the study period. Particularly, higher levels of credibility were associated with stable domestic currency and lower nominal interest rates. This reinforces the notion that efficient monetary policy delivers higher central bank credibility with better outcomes for macroeconomic variables. In contrast, the level of credibility tends to worsen in the wake of weakening macro fundamentals which are not adequately countered by monetary policy decisions. There is therefore the need for efficient monetary policy formulation to achieve a stable macroeconomic environment in Ghana. This will in the long-run build policy credibility towards attaining the central bank’s medium-term inflation target.     

Commitment or discretion? An empirical investigation of monetary policy preferences in China

This paper offers a first attempt to estimate the policy preferences of China’s central bank by confronting a small-scale microfounded New Keynesian model in which monetary policy is described by commitment or discretion with the Chinese macroeconomic data over the period from 1992Q2 to 2017Q4. Bayesian model comparison reveals that the data favor discretionary monetary policy. Estimates of the loss function weights under both cases show that the leading policy goal is price stability, followed by output stability and then interest rate smoothing. Finally, through counterfactual analyses we assess how macroeconomic outcomes might improve, had the Chinese central bank been able to commit. These findings shed new light on the opaque Chinese monetary policy, and are robust to subsample analysis.     

Model Uncertainty, Optimal Monetary Policy and the Preferences of the Fed

Monetary policy in the US is characterized by a substantial degree of inertia. While in principle this may well be the outcome of an optimizing central bank behaviour, the ability of any derived policy rule to match the data relies on so large weights for interest rate smoothing into policy makers' preferences as to be theoretically flawed. In this paper we investigate whether such a puzzle can be interpreted as resulting from the concern of monetary authorities for potential misspecifications of the macroeconomic dynamics. Accordingly, we propose a novel thick modelling approach that incorporates model uncertainty into the identification of central bank's preferences. The thick robust policy rule shows the kind of smoothness observed in the data without resorting to implausible values for the preference parameters.     

金融状况、通胀不确定性与通胀预测——基于Markov机制转换模型的分析

一国的金融状况一般通过信贷传导机制、利率传导机制、汇率传导机制和资产价格传导机制来影响通胀水平并决定通胀趋势,但高通胀水平伴随着较大的通胀不确定性。FCI能有效预测我国的通胀趋势,高通胀状态下FCI对通胀趋势的预测能力强于低通胀状态;低通胀状态下FCI对通胀趋势的短期预测效果优于中长期。我国应尽快指定相关部门制定并定期公布FCI,充分发挥FCI的通胀预测功能,并以此帮助国家实施宏观经济监测、完善调控政策、提高通胀治理效率。要提高央行政策制定的透明度,应避免频繁的政策方向变动,政策调控应尽量平滑操作,从而维持货币政策的稳定性和连贯性、降低通胀不确定性。要充分利用低通胀环境赋予的有利时机推进价格等各项体制的改革。     

Asymmetric monetary policy rules for the euro area and the US

We analyse the implications of asymmetric monetary policy rules by estimating Markov-switching DSGE models for the euro area (EA) and the US. The estimations show that until mid-2014 the ECB’s response to inflation was more forceful when inflation was above than below the central bank’s aim. Since then, the ECB’s policy can be characterised as symmetric, and we quantify the macroeconomic implications of this policy change. We uncover asymmetries also in the Fed’s policy, which has responded more strongly in times of crisis. We compute optimal simple rules for the EA and the US in an environment with the effective lower bound and a low neutral real rate, and find that it prescribes a stronger response to inflation and the output gap when inflation is below target compared to when it is above target. We document its stabilisation properties had this optimal rule been implemented over the last two decades.     

Macroeconomic environment,country risk and stock market performance: Evidence for Brazil

The paper aims at providing empirical evidence about (i) the influence of macroeconomic variables and economic policies on country risk and (ii) the influence of macroeconomic variables and country risk on the main Brazilian index of the stock market (Ibovespa). The study analyzes the role that macroeconomic fundamentals plays, but also the role that the credibility of the regime of inflation targeting and the reputation of the central bank play in lessening country risk and in the improvement of the stock market performance. The empirical evidence was obtained through the application of ordinary least squares (OLS), generalized method of moments (GMM) and GMM systems. The results found suggest that monetary policy and public debt management, as well as credibility and reputation affect country risk and the performance of the Brazilian stock market.     

Learning from Japan: The European Central Bank and the European Sovereign Debt Crisis

What shapes central banks’ learning from the policy experiments of their peers? Both economic ideas and organizational interests play important roles. Thus, New Keynesian ideas led central banks to interpret Japan's experience with quantitative easing (2001–2006) through the impact on risk spreads, although the Japanese central bank never intended such effects. In turn, scholars and policy-makers alike ignored one critical lesson: successful policy innovations depend on banks’ funding models. It is argued here that this was a crucial omission because the shift to market-based funding impairs the effectiveness of the traditional crisis toolkit. Central banks must intervene directly in asset markets of systemic importance for funding conditions, as the Bank of Japan did by buying government bonds. Hence, market-based finance engenders a trade-off between financial stability and institutional stability defined through central bank independence. During critical periods, central banks cannot preserve both. The ECB illustrates this trade-off well. Early in the crisis, it outsourced financial stability to a (largely) market-dependent banking system to protect its independence. With the introduction of Outright Monetary Transactions in September 2012, the Bank recognized that the market-based nature of European banking required outright purchases of sovereign bonds. This new instrument gave the ECB additional powers to shape national fiscal decisions in the name of an independence that no longer has theoretical justifications.     

Stabilization policy in a Keynes–Goodwin model with debt accumulation

In this paper, we investigate the macroeconomic impact of government's stabilization policy by using an analytical framework of Keynes–Goodwin model of growth cycle with debt accumulation. Formally, our model is formulated as a five-dimensional system of non-linear differential equations. We consider both of private debt and public debt, and we explicitly formulate the budget constraint of the ‘consolidated government’ including the central bank. We mainly study the case of ‘liquidity trap’ under money and debt financing of the government deficit.We study the local stability/instability of the system and the conditions for the existence of cyclical fluctuations analytically by means of the linear approximation method. We show that the sufficiently active monetary/fiscal policy can stabilize the intrinsically unstable economy if the inflation targeting by the central bank is sufficiently credible. We also present some numerical examples, which support our analysis.     

The BMW Model: A New Framework for Teaching Monetary Economics

Abstract: Although the IS/LM-AS/AD model is still the central tool of macroeconomic teaching in most macroeconomic textbooks, it has been criticized by several economists. Colander (1995) demonstrated that the framework is logically inconsistent, Romer (2000) showed that it is unable to deal with a monetary policy that uses the interest rate as its operating target, and Walsh criticized that it is not well suited for an analysis of inflation targeting. The authors present a framework that develops the Romer approach into a very simple but, at the same time, comprehensive macroeconomic model. In spite of its simplicity, it can carry the main insights of the New Keynesian macroeconomics to an intermediate level and deal with issues like inflation targeting, monetary policy rules, and central bank credibility.     

Sovereign credit ratings and central banks: Why do analysts pay attention to institutions?

This paper studies the effect of the governance of modern central banks on the ratings assigned by the credit rating agencies Standard and Poor's and Moody's. Until recently, the rating process was not public. Even still, the factors or precise methodologies used by the agencies remain uncertain and analyst judgment remains important. We argue that, given uncertainty over the future paths of countries, the quality of the central bank governance serves as a useful heuristic for a stable and favorable country trajectory. In particular, the central bank's independence signals that the government is committed to general macroeconomic stability, including debt repayment. Additionally, central bank transparency clarifies who is the principal of the bank and provides information about how the central bank understands the economy and monetary policy. Finally, tensions between the central bank and the government, as reflected by irregular turnover of central bank governors, raise doubts about countries’ future prospects. Empirically, we use a variety of models, including mediation analysis, to ensure that the effect we identify stems from the central bank governance itself, as a heuristic for the future paths of countries, and not the central bank's direct contribution to the macroeconomy, as reflected in the available data.     

The Macroeconomic Management of Increased Aid: Policy Lessons from Recent Experience

The authors investigate the macroeconomic challenges created by a surge in aid inflows. They develop an analytical framework for examining possible policy responses to increased aid, in terms of absorption and spending of aid—where the central bank controls absorption, through monetary policy and the sale of foreign exchange, and where the fiscal authority controls spending. Different combinations of absorption and spending lead to different macroeconomic consequences. Evidence from five countries that recently experienced an aid surge (Ethiopia, Ghana, Tanzania, Mozambique, and Uganda) shows no support for aid-related real exchange rate appreciation in these countries, but it does indicate that the fear of Dutch disease played an important part in the policy reaction to aid surges. Fiscal and monetary authorities should coordinate their responses to an aid surge, because an uncoordinated response—typically when the fiscal authority wants to spend aid while the central bank wants to avoid exchange rate appreciation—can have serious negative macroeconomic consequences.     

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.     

信用视角下的货币政策有效性研究

信用是市场经济的基石,信用制度的完善与否关系到国家各项宏观调控政策能否真正得到贯彻落实。本文以我国的信用现状为出发点,分析了信用制度的缺失对中央银行在通过实施货币政策进行宏观调控时货币政策工具、货币政策中介目标、货币政策传导机制等方面的影响,认为信用缺失是造成我国货币政策效果不明显的关键因素。     

ROBUST MONETARY POLICY UNDER UNCERTAINTY ABOUT CENTRAL BANK PREFERENCES

In this paper, we study the impact of central bank opacity on macroeconomic performances in a new Keynesian framework with model uncertainty using robust control techniques. We identify a new source of central bank opacity, which refers to the lack of information about the central bank's preference for robustness in the sense of Hansen and Sargent . We find closed‐form solutions for the robust control problem, analysing the impact of the lack of transparency about the central bank's preferences for robustness. We show that an increased transparency about the central bank's preference for robustness makes monetary policy respond less aggressively to cost‐push shocks, thus reducing the inflation and output gap variability. As a consequence, inflation and output gap are less volatile than under central bank opacity about its preference for robustness.     

The effects of monetary policy in a small open economy: the case of Portugal

In this article, I analyse the macroeconomic effects of monetary policy on the Portuguese economy. I show that a positive interest rate shock leads to: (i) a contraction of real GDP and a substantial increase of the unemployment rate; (ii) a quick fall in the commodity price and a gradual decrease of the price level and (iii) a downward correction of the stock price index. It also produces a ‘short-lived liquidity effect’ and helps explain the negative comovement between bonds and stocks. In addition, I find evidence suggesting the existence of a money demand function characterized by small output and interest rate elasticities. By its turn, the central bank’s policy rule follows closely the dynamics of the money markets. Finally, both the real GDP and the price level in Portugal would have been higher during almost the entire sample period if there were no monetary policy surprises.     

关于中国人民银行独立性的研究--来自独立性指数和政策反应函数的证据

本文的目的在于 :(1 )根据GMT和CWN的方法 ,将中国人民银行有关法律指数化 ,并通过独立性指数的纵向和跨国家比较来分析中国人民银行在法律层面上的独立性变化和独立性程度 ;(2 )构建中国人民银行政策反应函数 (policyreactionfunction) ,并通过政策工具变量 (instrumentvariables)和政治事件虚拟变量 (dummyvariables)的变化来反映中国人民银行的实际独立性。     

Lending conditions in EU: The role of credit demand and supply

We analyse the bank lending activity after the financial crisis and focus on bank-specific supply factors. Using a rich microeconomic dataset from Bankscope and macroeconomic shocks data, we employ OLS and 2SLS fixed effects models with banking controls, macroeconomic shocks and institutional quality. The banks’ loan-rate spreads increased despite the recent policy of low interest rates and quantitative easing. We use the bank asset quality as instruments to capture exogenous changes in loan supply. The empirical evidence shows that loan-rate spread and through this the supply of loans is negatively affected by a low asset quality and capital ratios.     

External Shocks and Business Cycle Fluctuations in Mongolia: Evidence from a Large Bayesian VAR

This paper examines macroeconomic effects of external shocks and their transmission mechanisms in one of the most commodity-abundant countries-Mongolia using a large Bayesian vector autoregression (BVAR) based on the approach proposed by Bańbura, Giannone, and Reichlin [(2010). Large Bayesian Vector Auto Regressions. Journal of Applied Econometrics, 25, 71–92]. Nine structural shocks (five external and four domestic shocks) are identified using a recursive ordering. Results show that external shocks are important sources of macroeconomic volatility in Mongolia. Commodity price shocks affect the economy through exchange rate and budget expenditure channels, while China’s growth and FDI shocks are primarily transmitted through the real sector and bank lending channels.     

Monetary policy rules with PID control features: evidence from the UK,USA and EU

ABSTRACT

This paper considers the extent to which the monetary policy operations of three major central banks can be regarded as an application of Proportional-Integral-Derivative (PID) control rules. The paper outlines the general PID framework and estimates a series of dynamic models to identify how interest rate policy adjustments are affected by the rate of inflation and the level of macroeconomic activity. The paper examines data for the UK, the USA and the Eurozone. The results suggest that the PID rules can provide a useful theoretical and empirical framework for estimating central bank responses to the inflation and macroeconomic activity variables by improving the explanatory power of the Taylor rule model and determining the effect of the parameters.     

Teaching Inflation Targeting: An Analysis for Intermediate Macro

Over the last decade, many central banks have adopted policies known as inflation targeting. If intermediate-level macroeconomics students are to be prepared to think about current policy issues, it is important to provide them with an introduction to the macroeconomic implications of inflation targeting. Unfortunately, the standard aggregate demand-aggregate supply frameworks commonly used to teach intermediate macroeconomics are not well suited for this task because they are expressed in terms of output and the price level and because they fail to make explicit the policy objectives of the central bank. The author provides a simple graphical device involving the output gap and the inflation rate that overcomes these problems and that can be used to teach intermediate macroeconomics students about inflation targeting.