Alternative monetary policies and fiscal regime in new EU members

I investigate the relevance of a fiscal regime for disinflation in new EU member states (NMS). I generalize the framework of [Obstfeld, M., Rogoff, K., 1995. Exchange rate dynamics redux. Journal of Political Economy 103, 624–660] to incorporate the non-Ricardian fiscal regime and two monetary feedback rules: inflation targeting and depreciation targeting. Euro accession requires disinflation and stabilization of the exchange rate and thus restrictive monetary policy. The model illustrates that a sustainable and prudent fiscal policy is a necessary condition for successful stabilization of inflation. Thus, the lack of prudent fiscal policy, through its effects on inflation, may undermine the EMU accession of large NMS even when their fiscal outcomes fall within the Maastricht range.     

THEORETICAL APPROACHES TO MONETARY DISINFLATION

Abstract. During the 1980s many countries adopted tight monetary policies to reduce high inflation rates which were the legacy of the 1970s. As inflation threatens to rise at the beginning of this decade, this paper provides a survey of the 1980s literature which sought to provide theoretical understandings of how monetary disinflation is achieved. Four models are presented—monetarist, neo-Keynesian, new classical and post-Keynesian. Each model's explanation of the recession which accompanies the monetary disinflation is outlined, as well as possible policy measures to reduce the extent of the recession and to hasten the return to full employment.     

Disinflation in a DSGE perspective: Sacrifice ratio or welfare gain ratio?

When used to examine disinflation monetary policies, the current workhorse dynamic stochastic general equilibrium model of business cycle fluctuations is able to quantitatively account for the main stylized facts in terms of recessionary effects and sacrifice ratio. We complement the transitional analysis of the short-run costs with a rigorous welfare evaluation and show that, despite the long-lasting economic downturn, disinflation entails non-zero overall welfare gains.     

Monetary policy in a small open economy with fixed exchange rate: The case of Macedonia

This paper empirically applies the New Keynesian model for monetary policy analysis in a small open economy with a fixed exchange rate. Official reserves are included in the interest rate rule to account for the constraint that these impose on monetary policy when the exchange rate is fixed. Also, the foreign interest rate is included in order to reflect the necessity of following the foreign monetary policy. The model is applied to Macedonian data from the period 1997 to 2011. In general, results indicate that monetary policy has been focused on domestic objectives during this period, despite the fixed currency. In addition, there seem to have been significant differences in the conduct of the monetary policy in the first and second half of this period. The response to inflation has been more aggressive in the earlier period, at a time when reserves appear less important, while the output gap is found to be important only in the latter period, possibly due to the stronger monetary policy transmission. Finally, results indicate that the monetary policy has likely moved from adaptive in the first period to rational in the second period.     

Coordination and non-coordination risks of monetary and macroprudential authorities: A robust welfare analysis

This study compares a central bank’s leaning against the wind approach with a mix of monetary and macroprudential policies under parameter uncertainty in an estimated DSGE model with two financial frictions. We show that uncertainty of the economic environment is an essential constituent in properly designing macroprudential policy. Although coordination between monetary and macroprudential policies minimizes the policymakers’ Bayesian risk, coordination and non-coordination risks threaten the goals of both authorities. The former describes the situation where the authorities partly resign from implementing the monetary policy objectives to stabilize macroprudential risk. The latter is when conducting a non-coordinated macroprudential policy induces higher total Bayesian risk than when only the central bank minimizes the expected total welfare loss. The robust Bayesian macroeconomic rules show that when financial shocks shrink the banks’ or entrepreneurial net worth, a contractionary macroprudential policy should be combined with an expansionary monetary policy. However, if capital adequacy ratio or risk shocks strike the economy, such a conflict in macroeconomics policy instruments disappears, thus synchronizing both policies.     

Financial conditions and monetary policy in the US

We examine the FED’s monetary policy rule with financial stability considerations and under asymmetry. We use the National Financial Conditions Index constructed by the Chicago FED in order to test whether financial stability concerns enter monetary policy formulations in the US. We model nonlinearity in monetary policy by a Markov regime-switching model. The results show that the monetary policy implemented by the FED can be characterized as a two-state Markov process and financial instability significantly increases the likelihood of regime-switching from a “tranquil” to a “distressed” regime. Moreover, the likelihood of a switch in the FED’s monetary policy regime between tranquil and distressed seems to increase when a certain threshold level of the financial conditions index is reached. Finally, our results seem to be robust to alternative specifications of the reaction function and different forms of non-linearity.     

Effect of monetary policy shocks on the racial unemployment rates in the US

This study analyzes the effect of monetary policy shocks on the unemployment rate of different racial groups in the US, using data from 1969Q2 to 2015Q4. Employing a narrative approach to identify monetary policy shocks and local projections, we find that although an expansionary monetary shock affects White workers positively and significantly, the effect on Black workers is larger, and for Hispanic workers it is not statistically different from zero. These results are robust when considering unconventional monetary policy measures in the specification, and when exploring the impact of monetary policy on different genders and age groups. We also highlight how recession affects the transmission channel of monetary policy to the labor market for White and Hispanic workers. Finally, further extensions suggest that the Fed’s monetary policy is effective in reducing the racial unemployment gap, particularly between Whites and Blacks, and during economic booms.     

Monetary policy in deflation: the liquidity trap in history and practice

The experience of the U.S. economy during the mid-1930s, when short-term nominal interest rates were continuously close to zero, is sometimes taken as evidence that monetary policy was ineffective and the economy was in a “liquidity trap.” Close examination of the historical policy record for the period indicates that the evidence does not support such assertions. The incomplete and erratic recovery from the Great Depression can be traced to a failure to pursue consistently expansionary policy resulting from an incorrect understanding of monetary policy in an environment of very low short-term nominal interest rates. Commonalities with the Japanese experience during the late 1990s, and the inadequacy of short-term interest rates as indicators of the stance of monetary policy are discussed and a robust operating procedure for implementing monetary policy in a low-interest-rate environment by adjusting the maturity of targeted interest-rate instruments is described.     

Impacts of Monetary, Fiscal and Exchange Rate Policies on Output in China: A Var Approach

Applying the VAR model and using the interest rate as a monetary policy variable, we find that in the long run, output in China responds negatively to a shock to the interest rate, the real exchange rate, government debt, or the inflation rate, and it reacts positively to a shock to government deficits or lagged own output. When real M2 is chosen as a monetary policy variable, long-term output in China responds positively to a shock to real M2 or lagged own output, and it reacts negatively to a shock to the real exchange rate, government debt, or government deficits. Its response to a shock to the inflation rate is negative when government debt is used and is positive when government deficits are considered. In the short run, fiscal policy is more important than monetary policy in three out of four cases. In the long run, monetary policy is more influential than fiscal policy in three out of four cases. Therefore, the government may consider conducting monetary and fiscal policies differently in the short run and long run. The government needs to be cautious in pursuing deficit spending as its long-term impacts depend on the monetary variable employed. The policy of maintaining a relatively stable exchange rate is appropriate as the depreciation of the Yuan may hurt the economy in the short run.JEL Classifications: E5, F4, H6     

The inflation aversion of the Bundesbank: A state space approach

A simple backward-looking Taylor rule is estimated in a time-varying coefficient framework with quarterly German data for the period 1975–1998. The main finding is that the inflation aversion of the Bundesbank was not constant over time and exhibits some sudden and large shifts during the period of monetary targeting. There are phases with low and with high inflation aversion. These findings provide an explanation why the estimated inflation coefficient in backward-looking Taylor rules often does not exceed one and violates the implications of theoretical models. Moreover, the results provide evidence that the Bundesbank followed the so-called ‘opportunistic approach’ to disinflation.     

Monetary policy shocks: We got news!

We assess the role of monetary policy news shocks in the context of a medium scale DSGE model estimated on US data. We estimate several versions of the model and find decisive evidence in favour of the inclusion of monetary policy news shocks over a two-quarter horizon. According to our results, monetary policy news shocks account for a non-negligible fraction of the variance of real variables, especially at shorter forecast horizons. Further, we document that the importance of monetary policy news shocks goes beyond what was observed in recent years. The historical importance of monetary policy news shocks dates back to the 1999–2006 period when the official FOMC statements provided information about both the current policy setting and the expected future policy path. We also show that adding monetary policy news shocks to the model does not lead to identification problems.     

国际货币政策协调:理论研究、实践进展及中国的选择

开放经济下一国货币政策会产生溢出效应,因此各国需要通过货币政策的国际协调来增进共同福利;目前,国际货币政策协调的实践已形成了几种重要的区域协调模式,并在解决国际经济事务中发挥关键作用;对于我国而言,在新一轮汇率制度改革后,也更加需要通过货币政策的国际协调来解决与其他国家或经济区的政策冲突。     

Learning about monetary policy rules when the cost-channel matters

We study how monetary policy may affect determinacy and expectational stability (E-stability) of rational expectations equilibrium when the cost channel of monetary policy matters. Focusing on instrumental Taylor-type rules and optimal target rules, we show that standard policies can induce indeterminacy and expectational instability when the cost channel is present. A naïve application of the traditional Taylor principle could be misleading, and expectations-based reaction function under discretion does not always induce determinate and E-stable equilibrium. This result contrasts with the findings of Bullard and Mitra [2002. Learning about monetary policy rules. Journal of Monetary Economics 49, 1105–1129] and Evans and Honkapohja [2003. Expectations and stability problem for optimal monetary policies. Review of Economic Studies 70, 807–824] for the standard new Keynesian model. The ability of the central bank to commit to an optimal policy is an antidote to these problems.     

From inflation targeting to the euro-peg: A model of monetary convergence for transition economies

This study proposes a sequence of monetary convergence to the eurozone, based on autonomous monetary policy rather than on an early application of the euro-peg. The gradual adjustment process begins with a relatively strict variant of inflation targeting, followed by flexible inflation targeting, and ends with exchange rate targeting. A model outlining the optimal mode of policy adjustment is presented. The analysis warns against a premature peg to the euro, which may instigate real currency appreciation, large capital inflows and their costly sterilization. The euro-peg can be introduced only when the candidates’ monetary authorities reach a certain degree of “foundational credibility”. The model of monetary convergence is followed by the empirical assessment of inflation targeting in the Czech Republic and Poland.     

Monetary Policy; Questions of Adequacy, Design and Presentation

In this article John Flemming considers three possible modifications to the presentation and design of monetary policy. He argues first that it is odd to forecast the target variable – inflation – when it is policy to do what is necessary to deliver the target. What would be interesting would be a forecast of what interest rates might prove necessary. Secondly he considers the possibility that with monetary policy dedicated to price stability and fiscal policy to paying for public expenditure – and stabilising output – a third control might be appropriate to stabilise the financial system. Finally, and overlapping with the last, he explores ways in which asset price changes might be reflected in a broader measure of inflation – as recently suggested by Charles Goodhart and the IMF.     

证券市场的货币政策传导功能实证研究

货币政策是货币当局对经济进行宏观调控的重要工具，政策的有效性首先取决于金融领域的传导机制。长期以来我国的货币政策一直以银行信贷为主要传导枢纽，但随着资本市场的发展，其传导功能将日益强化。本文通过实证分析，建议实施货币政策时应充分考虑资本市场对货币政策传导功能的影响。     

Monetary Policy and Macroprudential Policy: New Evidence from a World Panel of Countries

The event of the recent financial crisis raises the question of whether policy makers could have done more or something different to prevent the build‐up of financial imbalances. This paper contributes to the field of regulatory impact by tackling the debate on whether central banks should ‘lean against the wind’, while in case the response is positive, how macroprudential policies should be combined with monetary policy. Using an augmented Taylor rule and a sample of 127 global economies, the results provide evidence on the importance of macroprudential issues for the implementation of an effective monetary policy. They also document that the type of adopted macroprudential instrument has a substantial effect on such effectiveness, with this policy mix being less ‘integrated’ when the monetary rule aims at primarily safeguarding inflation stability. The results survive robustness checks under alternative assets.     

Private Sector Debt,Financial Constraints,and the Effects of Monetary Policy: Evidence from the US

We characterize the response of U.S. real GDP to monetary policy shocks conditional on the level of private sector debt and the degree to which financial constraints are binding. To incorporate state-dependent effects of monetary policy, we use the local projection framework. We find that although the amount of private sector debt potentially weakens the monetary policy transmission mechanism, policy shocks exert substantially larger effects on output when high private debt coincides with binding financial constraints.     

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.     

Durable goods, inter-sectoral linkages and monetary policy

Durable goods pose a challenge for standard sticky-price models because the near constancy of their shadow value and their apparent price flexibility lead to perverse and counterfactual economic implications, such as the tendency of the durables and nondurables sectors to move in opposite directions following a monetary policy shock. This paper introduces input-output interactions and limited input mobility into an otherwise standard sticky-price model with durable and nondurable goods. The extended model generates substantial aggregate effects and positive sectoral comovement following a monetary policy shock, even when durable goods have flexible prices. The latter result is consistent with empirical evidence on the sectoral effects of monetary policy.