Policy commitment and market expectations: Lessons learned from survey based evidence under Japan's quantitative easing policy

The Bank of Japan conducted its quantitative easing policy (QEP) from 2001 to 2006, with the policy commitment to maintaining its QEP until the CPI inflation rate became stably zero or higher. We evaluate its effects by using individual survey data on inflation expectations as well as interest rate expectations. Our analysis reveals a kinked relationship between interest rate expectations and inflation rate expectations at around the 0% threshold level of inflation expectations, in tune with this policy commitment. In addition, we evaluate the effects of the policy commitment on market expectations for the future path of short-term interest rates after the termination of the QEP. We find that, even when inflation expectations exceeded the threshold, interest rate expectations responded only gradually to inflation rate expectations.     

Real exchange rate misalignment and business cycle fluctuations in the Asia-Pacific

Real exchange rate (RER) misalignment, which is the deviation between the actual real exchange rate from its equilibrium, occurs frequently among developing countries. Studies have shown that RER misalignment may have negative economic implications, such as a decline in economic growth, exports, and export diversification and an increased risk of currency crises and political instability. Using quarterly data for 22 sample countries from 1990 to 2018, this paper investigates the impact of RER misalignment on business cycles in the Asia-Pacific by employing a panel vector autoregression involving consumer price index (CPI) inflation, output gap, short-term interest rates, and RER misalignment. We find that RER overvaluation may reduce CPI inflation and short-term interest rates. We also find that the Asia-Pacific region is highly heterogeneous in that the output gaps of some countries, particularly from the Southeast Asian region, are more susceptible to RER misalignment shocks.     

The interest rate–inflation relationship under an inflation targeting regime: The case of Turkey

This paper examines the relationship between nominal interest rates and the expected inflation rate for the Turkish economy between 2002 and 2009, a period when the inflation-targeting regime was implemented as monetary policy. We use the test of cointegrating rank with a trend-break (a method introduced by Inoue, 1999) and we also apply exogeneity tests. Empirical findings indicate that monetary policy rates depend on inflationary expectations; long-term interest rates are affected by monetary policy; and the weak form of the Fisher effect is valid. This evidence implies that monetary policy has actually influenced the real long-term interest rates; the inflation targeting regime pursued by the Central Bank of Turkey is reliable; and hence realized inflation has remained close to its targeted level.     

Monetary policy and the yield curve at zero interest

In contrast to affine term structure models, Black’s (1995) model of interest rates as options has properties suitable to examine the yield curve when the short-term interest rate is near zero. We estimate a Black’s model with Japan’s data to extract market expectations about duration of zero interest. We find that expectations about duration have substantially varied, which contradicts with the assumption utilized in the literature. We also find a tight link between expectations about duration and survey measures of inflation expectations, which appears to be attributable to the Bank of Japan’s commitment conditional on inflation.     

我国CPI重回2时代背景下的货币政策调整

2012年我国再度迎来CPI的2时代,证明在2012年我国的通货膨胀水平开始回落。然而由于短期的季节性原因和长期国际国内环境的制约,在未来的一段时期内仍然存在着高通货膨胀预期。我国应该抓住此次通货膨胀走低的机会,同时也要审慎考虑高通货膨胀率的预期,与时俱进,根据上一阶段的货币政策执行情况审时度势,调整我国货币政策的实施重点。以经济增长为首要目标,配合适度的通货膨胀容忍度,采取调控存款准备金率、改革利率制度、优化信贷支持结构等措施,促进宏观经济又好又快发展。     

INFLATION TARGETING AND THE FISHER EFFECT IN SOUTH AFRICA: AN EMPIRICAL INVESTIGATION

The paper analyses the relationship between expected inflation and nominal interest rates during a period of inflation targeting in South Africa, i.e. from 2000 to 2005. Specifically, it investigates the Fisher hypothesis that nominal interest rates move one‐to‐one with expected inflation, leaving the real interest rate unaffected. The analysis distinguishes between a short‐run Fisher effect and a long‐run Fisher effect. Using cointegration and error correction models (for monthly data for the period April 2000 to July 2005), it was found that the short‐run Fisher hypothesis did not hold during the relevant period under the inflation targeting monetary policy framework in South Africa. This is attributed to a combination of the South African Reserve Bank's (SARB) control over short‐term interest rates and the effects of the monetary transmission mechanism. The long‐run Fisher hypothesis could not be confirmed in its strictest form: while changes in inflation expectations move in the same direction as the nominal long‐term interest rate. This suggests that monetary policy has an influence on the real long‐term interest rate, which has positive implications for general economic activity, thus confirming the credibility of the inflation targeting framework.     

1992-2010年中国信贷供给结构与经济波动——基于VAR模型分析

文章选取1992—2010年的季度数据,通过建立各变量的VAR模型和VEC模型,对我国信贷供给结构与经济波动的关系进行实证分析。研究结果表明:中长期贷款、短期贷款与产出没有格兰杰因果关系,其它贷款与产出存在着相互因果关系,同时,信贷供给结构各变量均不引起通货膨胀的变化,而通货膨胀是中长期贷款、短期贷款变化的原因;从信贷供给结构各变量来看,其它贷款是引起我国经济波动的主要原因;中长期贷款、短期贷款、其它贷款三者之间存在不同程度的相互影响。基于这些分析结论,文章提出若干信贷政策的建议。     

Central bank credibility and the expectations channel: evidence based on a new credibility index

This article investigates the relationship between central bank credibility and the volatility of the key monetary policy instrument. First, we propose a time-varying measure of central bank credibility based on the gap between inflation expectations and the official inflation target. While this new index addresses the main limitations of the existing indicators, it also appears particularly suited to assess the monetary experiences of a large sample of inflation-targeting emerging countries. Second, by means of EGARCH estimations, we formally prove the existence of a negative effect of credibility on the volatility of the short-term interest rate. In line with the expectations channel of monetary policy, the higher the credibility of the central bank, the lower the need to move its instruments to effectively fulfill its objective.     

Forecasting French and German long-term rates using a rational expectations model

Forecasting French and German Long-Term Rates Using a Rational Expectations Model. — In this paper, the authors study a forecasting model for long-term rates based on the expectations hypothesis of the term structure. The long-term rate is expressed as an average of expected short-term rates, which are modelled using three models: two univariate models (with stationary and nonstationary rates) and one model in which the short-term rate terminal boundary is specified as a function of agents’ expectations. These approaches are used to forecast French and German long-term rates from 1960 to 1996. The authors find that the model based on agents’ expectations gives the best forecasts, especially for short horizons.     

Long- and short-term interest rates in 19 countries: Tests of cointegration and parameter instability

This paper examines the long-run relationship between short-term and long-term interest rates (both nominal and real) in 19 countries, and explores the possibility that the relationship is statistically stable using Lc, MeanF, and SupF statistics suggested by Hansen [1992]. Empirical results obtained from various cointegration techniques (Johansen, Phillips and Hansen, Stock and Watson, and Park) and quarterly data (1973–1998) show considerable support for the expectations hypothesis in all countries (except the United Kingdom). In a majority of cases, it is also found that a stable relationship exists between the short-term and long-term interest rates.     

Causes of Inflation in China： Inflation Expectations

This paper argues that the main causes of inflation in China since the early 21st century are changes in the public's inflation expectations. The conventional wisdom, the quantity theory of money, may not be adequate to capture the relationship between price changes and money supply growth, as the economic system evolves and people's income and wealth grow. An examination of China's GDP deflator and broad money supply relative to nominal GDP shows that the relationship between the two series is relatively weak. A further examination of China's monthly CPI series over the period 2001–2010 reveals that the autoregressive models are a better fit than the moving average models, which suggests that the role of CPI expectations has been significant and important. Because of the importance of inflation expectations in CPI movement, we believe the Central Bank's monetary policy that targets CPI inflation should emphasize the use of policy instruments that have direct and strong communication links with the public. Quantitative measures would have their own use, but their effectiveness would be unlikely to match that of interest rate measures, especially from a short‐term perspective.     

Estimates of the fisher effect: A neo-Keynesian approach

Conclusion This paper has presented estimates of a structural model designed to study the processes by which inflationary expectations affect nominal interest rates. The theoretical framework expands upon previous analyses of the effects of expected inflation primarily by analyzing a wider range of resulting substitution effects both among financial assets as a group, and between financial assets and commodities. A possible substitution effect between leisure and both these groupings (commodities and financial assets) was also considered. The empirical work differs from previous studies in that we estimate the effects of inflationary expectations on nominal interest rates within the structure of a complete macroeconomic system rather than using the single-equation approach outlined in section II above. The results provide evidence on the magnitude of the Fisher effect and the market mechanisms which comprise this effect as estimated within the neo-Keynesian system. These market mechanisms were found to consist of direct effects in the long-term bond market and on the aggregate demand for and supply of commodities. The total adjustment consists of changes in all the endogenous variables with the final outcome being an increase in each of the nominal interest rates in the model. The implied increase in nominal interest rates is less than a full-adjustment to the increase in the expected inflation rate, thus for the time period considered here, the estimates imply a fall in the real rate of interest. Prices and nominal income were also found to vary positively with the expected inflation rate. The authors wish to thank an unknown referee of this journal for helpful comments.     

Inflation expectations and the recovery from the Great Depression in Germany

A regime shift toward increased inflation expectations is credited with jump-starting the recovery from the Great Depression in the United States. What role did inflation expectations play in Germany that experienced a similarly successful economic upturn in the 1930s? We study inflation expectations in the German recovery across several methods: we conduct a narrative study of media sources; we estimate inflation expectations from a factor-augmented vector autoregression model, real interest rate forecasts, and quantitative news series. Consistently across these approaches, we do not find a shift to increased expected inflation. This recovery was different, and its causes lie elsewhere.     

The credibility of the European exchange rate mechanism

Using a panel data approach and three different credibilitymeasures, we argue that unemployment, inflation, and budgetdeficits in participating countries have affected the credibilityof the Exchange Rate Mechanism of the EMS. In contrast to mostprevious research, which focuses upon the credibility of exchangerate policies of individual member states, the analysis focusesupon the credibility of the system. The credibility indicatorsused are short- and long-term interest differentials vis-à-visGermany and short-term interest differentials which have beenadjusted for expected exchange rate movements within the band.Both long-term and error-correction models are estimated.     

Central Bank Balance Sheet Policies and Inflation Expectations

We analyse the empirical effects of credit easing and quantitative easing on inflation expectations and exchange rates. Both monetary policy strategies are summarised in measures for composition and size of the central bank balance sheet and are included in a VAR model. The results show that changes in balance sheet size had positive, albeit weak effects on inflation expectations in Japan, while the effects were negligible in the euro area. By contrast, an increasing balance sheet size is associated with reduced short-term inflation expectations in the US and UK, pointing at negative signalling effects. Shocks to balance sheet size or composition have no substantial effects on long-term inflation expectations in the euro area, US and UK. An expanding balance sheet size is associated with a depreciation of the euro, pound sterling and Japanese yen.     

Forward-looking agents and inflation in an oil-producing country: Evidence from Iran

A monetary model of inflation was estimated on the oil-producing country of Iran for the period 1984:1–2016:4. It was found that expectations are formed rationally and that agents are forward-looking and adjust their behavior based on changes in government expenditure. Consequently, it was found that higher fiscal variables result in lower price levels over the long run. A higher oil price leads to a lower price in the country but to a higher money supply and interest rate over the long run. Furthermore, a higher domestic interest rate results in a higher price level, while the reverse is true for a higher foreign interest rate. Another cause of inflation in Iran is the foreign price level. It was found that over the short run a higher growth of the real government expenditure results in a lower inflation rate in the country but a positive change in the foreign interest rate brings in a higher inflation rate.     

Prepayment behaviors of Japanese residential mortgages

We investigate full prepayments of Japanese residential mortgages during a ten-year period from 1996 to 2005. This investigation is important because the amount of mortgages outstanding in Japan is huge, yet the study on their prepayments is very limited. This period from 1996 to 2005 was characterized by two distinct features of the evolution of interest rates that might have significant effects on mortgage refinancing. First, interest rate fluctuations were limited to a narrow range of a little over 1%. Surprisingly, full prepayments of Japanese mortgages were sensitive to small changes in interest rates. Second, long-term refinance rates did not fall well below the contract rates of most mortgages in our sample during the ten-year period, while short-term refinance rates did. With this interest rate relationship, if mortgagors ever refinanced, it was likely that they rolled over short-term mortgage rates several times until they repaid mortgages completely. Hence, we examine the sensitivity of full prepayments to short-term vs. long-term interest rates, mortgagors’ expectation of future course of interest rates (by the slope of yield curve), and that of interest rate volatility. Our analysis shows that short-term interest rates have a slightly greater explanatory power for full prepayments than long-term interest rates. In addition, our analysis confirms that full prepayments are sensitive to both the slope of yield curve and interest rate volatility. Other issues we look into are the patterns of full prepayments in relation to loan age and seasonality. We find that the pattern of full prepayments relative to loan age is comparable to that of mortgages in the U.S., and that the seasonal pattern of full prepayments is attributable to relevant institutional arrangements in Japan.     

What influences aggregate inflation expectations of households in India?

We analyse the factors influencing Indian households’ inflation expectations and draw out implications for inflation targeting. The literature finds news on inflation affecting expectations. Using quarterly data from India over 2008–2019, we find: (i) in estimated epidemiological models of learning in expectation formation, the response coefficient on inflation news in the shape of central bank forecasts exceeds coefficients estimated for advanced economies, implying official views having a relatively greater weight on expectations; (ii) error variance decompositions of expectations to shocks in variables including commodity and core inflations, demand and policy variables in a series of SVARs, also show policy communications affecting expectations in the short-term. Food inflation has a significant short-run effect on expectations, but demand determined core inflation dominates over the long run; (iii) impulse responses show a rise in the policy rate raising expectations. The above results show communications as more effective than policy rates in influencing inflation expectations.     

Interest rate policy of the deutsche bundesbank: An econometric analysis for 1975 to 1992

Summary Internal and external economic targets which a monetary authority tries to achieve make its interest rate policy partly endogenous. This article analyses the Bundesbank's interest rate policy since 1975, the year the Bundesbank published its first intermediate money growth target based on estimates of an inevitable inflation rate and expectations about economic development. Estimation of a discount rate reaction function suggests that German monetary policy responds primarily to the final objective of price level stability and to a smaller extent, to the intermediate money supply target. Moreover, cyclical movements and balance-of payments equilibria are found to significantly influence the Bundesbank's discount rate policy. Both the inflation rate and the current account enter the reaction function in a non-linear way. When inflation is above the targeted rate or when there is a current account deficit, discount rate responses are much stronger than in the case of below target inflation or a current account surplus. Internationally, the Bundesbank discount rate policy is limited by US short-term interest rate movements.     

Why floating exchange rates fall: A reconsideration of the liquidity trap

In the international capital market, interest rates would seem to be natural shock absorbers for balancing currency risk associated with expected inflation or differential taxation. Under a floating exchange rate, however, short-term interest rates in each national money market behave as if caught in a liquidity trap. The problem arises because the domains for national monetary circulation remain somewhat disjoint even though the bond market is fully integrated internationally. The national rate of interest is ncapable of equilibriating the domestic money market on the one hand and the international bond market on the other. The result is excessively high exchange-rate volatility that distorts the flow of international commodity trade and causes cycles of inflation and deflation in open economies.