Oil shocks and monetary policy rules in emerging economies

We examine the effects of shocks in the oil market on key macroeconomic variables in small open economies using a dynamic stochastic general equilibrium model with sticky prices and imperfect competition under different monetary policy rules. The numerical solutions show that the types of exchange rate regimes and monetary policies could partly explain the trends in macroeconomic volatilities considering negative shocks to oil supply (Hamilton, 1983) and positive shocks to oil demand (Kilian, 2009). These findings are confirmed in vector autoregressive responses for Chile and Israel with inflation targeting under flexible exchange regimes and Hong Kong with fixed regime.     

Optimal monetary policy in a small open economy with inflation and output persistence

We study optimal monetary policy for a small open economy in a model where both inflation and output show persistence. We incorporate habit formation into intertemporal consumption decision and modify the Calvo price setting to include indexation to past inflation. The message conveyed from this study can be viewed as twofold. First, full stabilization of domestic prices or the output gap is not optimal policy. This is because stabilization of the output gap leads to serial correlation in domestic inflation, whereas under full stabilization of domestic prices the output gap displays some serial correlation. It is, however, shown that at the zero inflation steady state, stabilizing domestic prices is equivalent to stabilizing the output gap. Second, in the presence of foreign income shock inflation and the output gap are more stable under flexible CPI inflation targeting than under other alternative policy regimes considered.     

OPTIMAL MONETARY POLICY WITH THE STICKY INFORMATION MODEL OF PRICE ADJUSTMENT: INFLATION OR PRICE‐LEVEL TARGETING?

I investigate the optimal monetary policy in a New Keynesian macroeconomic framework with the sticky information model of price adjustment. The model is solved for optimal policy, and welfare implications of three alternative monetary policy regimes under this optimal policy are compared when there is a cost‐push shock to the economy. These monetary policy regimes are the unconstrained policy, price‐level targeting and inflation targeting regimes. The results illustrate that optimal policy depends on the degree of price stickiness and the persistence of the shock. Inflation targeting emerges as the optimal policy if prices are flexible enough or the shock is persistent enough. However, the unconstrained policy or price‐level targeting might be preferable to inflation targeting if prices are not very flexible and the shock is not very persistent. The results also show that as prices become more flexible, the welfare loss usually gets bigger.     

The unbearable tightness of being in a monetary union: Fiscal restrictions and regional stability

We study how constrained fiscal policy can affect macroeconomic stability and welfare in a two-region model of a monetary union with sticky prices and distortionary taxation. Both government spending and taxes can be used to stabilize regional variables; however, the best welfare outcome is obtained under some tax variability and constant regional inflations. We use a variety of rules to characterize constrained fiscal policy and find that strict fiscal rules coupled with a monetary policy that targets union-wide inflation result in regional inflation stability and the welfare costs of such rules are not as unbearable as one would expect. Fiscal authorities can enhance welfare by targeting the regional output gap, while targeting regional inflation is less successful since inflation stability is guaranteed by the central bank.     

Cyclical fiscal rules for oil-exporting countries

Budget-balance tax-gap rules are preferred to other fiscal policy rules to stabilize the macroeconomic volatility and welfare in oil-exporting countries. The output-inflation trade-off is of particular concern for oil exporters relative to non-oil commodity exporters due to the pass through of oil prices into headline inflation which warrants fiscal reaction to crude oil revenue. This result is robust to several instruments satisfying the rule but with reduced efficiency for those instruments that impact potential output such as government investment and capital taxes. These rules are desirable for fixed exchange rate regimes but are unable to achieve the same degree of stability as when coordinated with inflation-targeting monetary policy. Even under optimal inflation-targeting regimes, the adoption of budget-balance tax-gap rules can produce reductions in macroeconomic volatility and welfare gains.     

Inflation Targeting versus Nominal Income Targeting

In this paper we analyze two different target regimes, flexible inflation targeting and nominal income targeting, under discretion in a simple dynamic macro model. The key results of our paper are: First, for both targeting regimes optimal monetary policy response leads to a shock-dependent feedback rule. Second, a demand shock is completely offset by both monetary strategies. Third, in case of a supply shock there is a significant difference between the two different targeting regimes. Under inflation targeting the policy makers face a trade-off between inflation and output stabilization. This trade-off depends on the weight Φ the policy makers attach to output stabilization relative to inflation stabilization in the loss function. In contrast, under nominal income targeting policy makers face a constant trade-off between inflation and real output growth: an increase in inflation leads to a fall in real output growth by an equal amount. Furthermore, in Appendix A we analyze a (linear) commitment solution for inflation targeting and compare it with the discretionary case. Under commitment, inflation is smaller and the output gap is larger than under discretion. In Appendix B, we investigate inflation targeting in a two-period time-lag version of the model. The qualitative results on the trade-off between inflation and output growth remain the same as in the basic model without time lag. Received May 3, 2000; revised version received December 3, 2001 Published online: February 17, 2003     

Monetary Integration in East Asia: Evidence from Real Effective Exchange Rates

This paper investigates the feasibility of forming a monetary union in East Asia by examining the cointegration and causality of the real effective exchange rates of local currencies. A “pentagon” group of five countries is found—South Korea, the Philippines, Thailand, Indonesia, and Malaysia—which may have potential for success for further monetary integration. Singapore is loosely tied to this group. The Greater China area—China, Hong Kong and Taiwan—does not show any significant degree of integration either internally or externally. Neither a yen bloc nor a US dollar bloc is forming in East Asia.     

Intra-competition between the Asian Four Little Dragons in US Markets

Using an optimizing model of import demands, the degree of competition between the Four Little Dragons in the US market are examined. This paper finds that the exports by Hong Kong can be substituted by Taiwan, and vice versa. Hong Kong and Singapore have some degree of substitution, although Singapore tends to have low elasticities of substitution with Taiwan and South Korea. Moreover, the relatively low own-price elasticities for Singapore and South Korea indicate their exporting goods are up-scaled. This suggests that non-price factors like product quality may be of importance in penetrating the US market.     

油价冲击、货币政策调整与产出波动——基于中国的经验证据

本文基于我国2001-2010年宏观经济月度数据,采用SVAR模型分析了国际油价波动时,央行货币政策在排除回应油价干扰与未排除干扰下的反应差异及油价波动对产出的影响。研究发现,在排除货币政策回应油价波动干扰后,通过脉冲响应函数反映的油价波动对产出的短期负面影响消失。方差分解结果显示,长期内产出波动由油价冲击和货币政策解释的比例分别为5716%和32480%,比排除干扰前分别下降了2569%和4560%。这说明我国油价冲击带来的经济衰退主要是因为货币政策及其回应油价冲击紧缩所致。此外,面对油价的短期冲击,CPI指数并未随着生产者购进价格指数上升而上升,产出也未发生明显的衰减;但在较长时间内,油价上升会因为相对价格的改变,而影响CPI水平和货币政策,从而对产出产生显著的负面影响。     

我国资产价格波动与货币政策关系研究

随着金融自由化的逐步推进,资本市场存量日益增大.这既体现了金融深化程度的提高,又意味着货币供应与国民经济主要指标之间稳定性的弱化.资产价格对货币政策的制订和执行会产生深刻的影响.其中股价、房价等资产价格在货币政策传导机制中扮演的角色越来越重要.本文从实证角度出发,通过构建VAR模型检验我国资产价格对货币政策的反应以及资产价格对货币政策目标的影响,发现资产价格、货币政策及货币政策目标间存在长期协整关系,资产价格对产出有正向冲击作用,股市显著影响通货膨胀,但房地产市场对通货膨胀推动作用不明显,资产价格受货币政策的冲击影响显著,其中股市对货币政策冲击的反应明显大于房地产市场.     

Time‐Varying Dynamics of the Norwegian Economy

We use time‐varying parameter vector autoregressive models to investigate possible changes in the time‐series properties of key Norwegian macroeconomic variables since the 1980s. Notably, we find that inflation persistence falls during the inflation targeting period, while the volatility of inflation and nominal exchange rates increases. The observed time‐variation in the correlations between the interest rates and the macro variables largely reflects the prevailing monetary policy regimes. An increase in the correlations between oil prices and other macro variables over time is also documented. Using a counterfactual analysis, we discuss the observed time‐varying dynamics of the Norwegian economy in the light of monetary policy and oil price shocks.     

Inflation volatility,economic growth and monetary policy in Bangladesh

This article provides an overview of the trends and movements of CPI-inflation in Bangladesh since the early 1950s and examines the key issues in rule-based monetary policy for price stability, implying low and stable inflation, in this country. Under a fixed exchange rate system, inflation in Bangladesh was moderately high and volatile during the 1950s and 1960s. Since the country’s independence from Pakistan in 1971, inflation in Bangladesh has remained moderately high on average and highly volatile and persistent under a fixed-pegged exchange rate system or under a managed floating system since 2003. Using data from the early 1970s or earlier depending on data availability, the article undertakes both Granger-causality and the structural vector autoregression (SVAR) analysis with two models. The first model is comprised of such variables as inflation, the real interest rate, the real exchange rate and output growth, and the second model is comprised of the volatilities of money growth, real output growth and inflation. Then, based on the empirical findings, the article concludes that a rule-based monetary policy, namely monetary targeting or inflation targeting, remains appropriate for Bangladesh provided that it adopts a more flexible, if not freely floating, exchange rate system. The article suggests that the use of monetary policy to achieve multiple objectives under a fixed-pegged exchange rate system creates a time-inconsistency problem, reduces monetary policy credibility and makes it (monetary policy) ineffective in lowering inflation and its volatility. Low credibility of monetary policy in particular raises inflation persistence. Within the present monetary-policy framework in Bangladesh, the article illustrates how the fixed-pegged exchange rate system has generated money growth volatility in the presence of large-scale inflows of overseas workers’ remittances and readymade garments export earnings. This does not seem to be a concern of the central bank of Bangladesh (Bangladesh Bank); rather, it (Bangladesh Bank) pursues monetary-base targeting to keep inflation low and stable after considering economic growth. The consequent diminishing credibility of monetary policy has kept inflation volatile and persistent, which has adversely affected economic growth.     

Real wage rigidities and optimal monetary policy in a small open economy

The main objective of the study is to provide a theoretical analysis of optimal monetary policy in a small open economy where households set real wage in a staggered fashion. The introduction of real wage rigidities plays a important role to resolve main shortcomings of the standard new Keynesian small open economy model. The main findings regarding the issue of monetary policy design can be summarized as three fold. First, the optimal policy is to seek to minimize variance of domestic price inflation, real wage inflation, and the output gap if both domestic price and real wage are sticky. Second, controlling CPI inflation directly or indirectly induces relatively large volatility in output gap and other inflations. Therefore, both CPI inflation-based Taylor rule and nominal wage-inflation based Taylor rule are suboptimal. Last, a policy that responds to a real wage inflation is most desirable.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

Should Commodity Exporters Peg to the Export Price?

To account for the specific situation of commodity exporters, pegging to export prices (PEP) has been proposed elsewhere as an alternative to other conventional monetary regimes such as an exchange rate peg or inflation targeting. PEP is supposed to deliver automatic accommodation to terms‐of‐trade shocks, while retaining the credibility gain from a nominal anchor. This paper analyzes the PEP proposal in a dynamic general‐equilibrium model and compares it with a standard Taylor rule, consumer price index (CPI)‐level targeting and a nominal exchange rate peg. Judged by the degree of output stabilization, PEP performs very similar to CPI targeting for export demand as well as domestic demand shocks and underperforms in the case of shocks to the export price. The results suggest that PEP is not superior to conventional CPI targeting from a macroeconomic stabilization perspective.     

Dynamic linkages between exchange rates and stock prices: Evidence from East Asian markets

This study examines dynamic linkages between exchange rates and stock prices for seven East Asian countries, including Hong Kong, Japan, Korea, Malaysia, Singapore, Taiwan, and Thailand, for the period January 1988 to October 1998. Our empirical results show a significant causal relation from exchange rates to stock prices for Hong Kong, Japan, Malaysia, and Thailand before the 1997 Asian financial crisis. We also find a causal relation from the equity market to the foreign exchange market for Hong Kong, Korea, and Singapore. Further, while no country shows a significant causality from stock prices to exchange rates during the Asian crisis, a causal relation from exchange rates to stock prices is found for all countries except Malaysia. Our findings are robust with respect to various testing methods used, including Granger causality tests, a variance decomposition analysis, and an impulse response analysis. Our findings also indicate that the linkages vary across economies with respect to exchange rate regimes, the trade size, the degree of capital control, and the size of equity market.     

Why the Tigers Roared: Capital Accumulation and the East Asian Miracle

Recent growth accounting studies of Hong Kong, Singapore, Taiwan and South Korea have found that the Solow residuals in these economies were relatively small. Given the high capital contributions, these results are often interpreted as evidence that factor accumulation, savings and investment were the principal cause of the East Asian miracle. This paper develops an alternative method of analysing these data, combining growth accounting methods with the linearized neoclassical growth model of Mankiw et al. (1992). The method explicitly quantifies the extent to which increases in productivity, as measured by the Solow residual, induced capital accumulation in these economies. It shows that in Hong Kong, Taiwan and South Korea, productivity growth contributed between half and two-thirds of the growth in GDP per worker over a 20-year period.     

Optimal monetary policy regime for oil producing developing economies: Implications for post-war Iraq

This paper theoretically investigates optimal monetary policy regime for oil producing developing countries. We analyze credibility and reputation of the Central Bank and macroeconomic dynamics under alternative monetary policy regimes. We construct a detailed and realistic model that can be used to analyze macroecomic structure and expectation dynamics of an oil producing open economy. We take into account the asymmetric information between the public and the central bank and theoretically investigate how this asymmetric information impacts the real economy and the credibility of the central bank. The simulation results indicate that central bank achieves higher credibility and lower inflation under dollarization and higher output levels under currency board regime. The model constructed in this paper has many policy implications for oil producing open economies. Using the implications of the model, we make monetary policy regime recommendations for post-war Iraq.     

Policy futures markets with multiple goals

Previous work in monetary policy futures markets under a single policy goal have shown this approach to be effective at eliminating the circularity problem inherent with private-sector targeting strategies. We extend this monetary policy setting framework to a typical multiple goal policy objective: inflation and output stabilization. We also demonstrate how the prices in policy futures markets can help resolve debates over important policy questions.     

Monetary Policy in a Very Open Economy: Some Major Analytical Issues

This paper develops three considerations relevant to the possibility of modification of the Hong Kong currency board system for conducting monetary/exchange‐rate policy. The first concerns the system employed by Singapore, an economy similar in several ways to Hong Kong's, whereby the exchange rate is adjusted periodically in activist response to inflation and output developments. The second concerns a generalization, one that calls for adjustments of a weighted average of exchange rate and interest rate instruments, so designed to be effective whether the economy is, or is not, in a liquidity‐trap situation. Finally, the third topic concerns political‐economy aspects of policy, which tend to incline against the use of the activist systems.