The opportunistic approach to monetary policy and financial market conditions

We test the concept of the opportunistic approach to monetary policy in South Africa post-2000 inflation targeting regime. The article contributes to the current debate on central banks having additional objectives over and above inflation and output by incorporating a measure of financial conditions in the modelling framework. Our findings support the two features of the opportunistic approach. First, we find that the models that include an intermediate target that reflects the recent history of inflation rather than simple inflation target improve the fit of the models. Second, the data supports the view that the South African Reserve Bank (SARB) behaves with some degree of nonresponsiveness when inflation is within the zone of discretion but react aggressively otherwise. Recursive estimates from our preferred model reveal that overall there has been a subdued reaction to inflation, output and financial conditions amidst the increased economic uncertainty of the 2007–2009 financial crisis.     

Macroeconomic effects of monetary policy in Korea: A time-varying coefficient VAR approach

Using a time-varying coefficient vector autoregressive (TVC-VAR) model, we assess how the efficacy of monetary policy innovations in stimulating real activity has evolved over time in Korea, as an example of emerging market countries, since 2000. We show that the responsiveness of output toward monetary policy innovations has decreased gradually since the early to mid-2000s, but monetary policy remains effective in boosting output even for the most recent sample. In addition, we find that the volatility of exogenous disturbances has decreased dramatically in the post-2000 period, and that this is the main driver of the recent volatility reductions of both output and inflation.     

Reliability of policy announcements and the effects of monetary policy

Monetary authorities regularly announce targets for monetary growth, but the market may not completely trust these announcements because they may not always be truthful. Hence, the market does not have perfect knowledge about future monetary policy and must form its expectations on the basis of information it can extract from the announcements and its observations of the actual money supply. This paper asks how the macroeconomic effect of monetary policy might be altered by more reliable policy announcements, in the setting of a medium-sized open economy. It is found that, contrary to the full-information case, a reduction in monetary growth of 1% may lead on impact to a reduction in inflation of much less than 1%, if the announcements are not very credible. The output costs of lowering inflation are smaller both in the short run and the long run, the more reliable the announcements. However, the plausibility of announcements does not affect the output loss for a given appreciation of the currency. Fluctuations in the exchange rate that are attributable to monetary disturbances beyond the policy-makers' control can nonetheless be dampened by making announcements that are more highly correlated with the truth.     

Measuring the effects of monetary policy in Pakistan: a factor-augmented vector autoregressive approach

This paper examines the effects of monetary policy on macroeconomic variables in Pakistan’s economy using a data-rich environment. We used the factor-augmented vector autoregressive (FAVAR) methodology, which contains 115 monthly variables for the period 1992:01 to 2010:12. We compared the results of VAR and FAVAR model and the results showed that FAVAR model explains the effects of monetary policy which are consistent with the theory and better than the VAR model. VAR model shows the existence of price puzzle and liquidity puzzle in Pakistan while FAVAR model did not provide any evidence of puzzles. Interest rate negatively influences prices, hence interest rate is a good instrument for controlling inflation in Pakistan but it takes a lag of 5 months. The transmission of monetary policy shock is faster in case of prices as compared to output in Pakistan. FAVAR model supports the effectiveness of interest rate channel in Pakistan.     

Transparency in monetary policy: A general equilibrium approach

We study a general equilibrium model with a central bank (CB) and two groups of agents, producers and workers. The CB maximizes a weighted average of utilities of the two groups. The CB has two possible types, one favoring workers and the other favoring producers. The CB's type is private information. We compare two possible monetary policy regimes, transparent and opaque. For realistic values of parameters, it is shown that workers are better off under the opaque regime, whereas producers are better off under the transparent regime. This result is shown to hold in two cases, when the range of possible monetary transfers is small and when the range of possible monetary transfers is large.     

Asymmetric effects in the Polish monetary policy rule

In this paper we investigate whether the reaction function of the National Bank of Poland (NBP) is asymmetric according to the level of inflation gap and the level of output gap. Moreover, we test whether these asymmetries might possibly stem from nonlinearities in the Phillips curve. Threshold models are applied and two cases of unknown and known threshold values are investigated. Our results show that the Polish central bank responds more strongly to the level inflation when the level of inflation is relatively high. We find very weak evidence that the level of inflation reacts more strongly to the output gap when the output gap is relatively high. Thus, the asymmetries in the monetary policy rule seem to indicate asymmetric preferences of the central bank.     

Real and nominal effects of monetary policy shocks

Abstract.  We employ the identification scheme of Kahn, Kandel and Sarig (2002) to analyse the impact of Canadian monetary policy on ex ante real interest rates and inflationary expectations. First, we decompose nominal interest rates into ex ante real rates and inflationary expectations using the methodology of Blanchard and Quah (1989) . Then we estimate a recursive VAR model with innovations in a monetary aggregate and the overnight target interest rate as alternative measures of monetary policy shocks. We find that a negative policy shock raises both nominal and ex ante real interest rates, lowers inflationary expectations and real industrial output, and appreciates the Canadian dollar.     

Anticipated monetary and fiscal policy effects on output

This paper is a test of the LSW proposition. In a Sargent and Wallace model, two different formal money supply mechanisms are incorporated. One is based on the government budget restraint and the other on the Fed's reaction function. Neither is a pure feedback mechanism. The stochastic process of output is a function of the interaction of the monetary and fiscal policy parameters with the models' disturbances. Thus, the question of the LSW proposition comes down to an empirical issue. The models are then estimated by 3SLS. The results are not incompatible with the policy ineffectiveness proposition.     

Nonlinearity in monetary policy: A reconsideration of the opportunistic approach to disinflation

The proponents of the ‘opportunistic’ approach to disinflation suggest that, when inflation is close to the target, the central bank should not counteract inflationary pressures. Orphanides and Wilcox (2002) formalize this idea through a simple policy rule that prescribes a nonlinear adjustment to a history-dependent target for inflation. This embodies a regime change in monetary policy, which reacts to inflation only when this is far from the inflation target. Here we study the opportunistic approach in a New-Keynesian model with sizeable nominal and real rigidites in the form of a positive money demand and adjustment costs for investment. We find that the welfare gains delivered by the opportunistic rule arise from the time-varying inflation target, when welfare is measured by a quadratic approximation of household utility. The nonlinear zone of inaction on inflation improves welfare outcomes only when a central bank loss function with the absolute value of the output gap is used, as proposed by Orphanides and Wilcox (2002).     

A regime-switching approach to estimating the nonlinear quantity-based monetary policy rule in China

This article focuses on the quantity-based monetary policy rule in China. The article applies a Markov regime-switching approach to estimate the nonlinear policy rule using quarterly data from 1997Q1 to 2015Q2. Overall, the performance of the estimated two-state rule is significantly better than the performance of the linear rule. The regime-switching estimation suggests that the quantity-based policy tool displays a countercyclical response to the inflation gap but a pro-cyclical response to the output gap during recessions. In addition, this article provides notable evidence of the fact that China’s central bank has been targeting inflation over the gradual course of financial liberalization.     

International interdependence and the welfare effects of monetary policy

A vertical chain of production and trade along this chain have been found to be a characteristic feature of globalized markets. This paper examines how a multistage production process that involves more than one country affects the transmission of monetary policy changes. We assume that imported and domestic inputs are required to produce final consumption goods. Monetary policy may have adverse beggar-thyself effects if the mutual dependence between countries is considerably high. The foreign country benefits from a home monetary expansion unless the competitiveness of markets is too low.     

The effects of monetary policy using structural factor analysis

The traditional Vector Autoregression (VAR) method is widely used to trace out the effects of monetary policy innovations on the economy. However, this method suffers from the curse of dimensionality, so that in practice VARs are estimated on a limited number of variables, leading to a potential missing information problem. In this article we use the method of structural factor analysis to evaluate the effects of monetary policy on key macroeconomic variables in a data rich environment. This methodology allows us to extract information on monetary policy and its impact on the economy from a much larger data set than is possible with the traditional VAR method. We propose two structural factor models. One is the Structural Factor Augmented Vector Autoregressive (SFAVAR) model and the other is the Structural Factor Vector Autoregressive (SFVAR) model. Compared to the traditional VAR, both models incorporate information from hundreds of data series, series that can be and are monitored by the central bank in setting policy. Moreover, the factors used are structurally meaningful, a feature that adds to the understanding of the ‘black box’ of the monetary transmission mechanism. Both models generate qualitatively reasonable impulse response functions. For the SFVAR model, both the price puzzle and the liquidity puzzle are eliminated.     

Asymmetric expectation effects of regime shifts in monetary policy

This paper addresses two substantive issues: (1) Does the magnitude of the expectation effect of regime switching in monetary policy depend on a particular policy regime? (2) Under which regime is the expectation effect quantitatively important? Using two canonical DSGE models, we show that there exists asymmetry in the expectation effect across regimes. The expectation effect under the dovish policy regime is quantitatively more important than that under the hawkish regime. These results suggest that the possibility of regime shifts in monetary policy can have important effects on rational agents' expectation formation and on equilibrium dynamics. They offer a theoretical explanation for the empirical possibility that a policy shift from the dovish regime to the hawkish regime may not be the main source of substantial reductions in the volatilities of inflation and output.     

货币政策与财政政策的区域产业结构调整效应比较

本文运用1978—2007年东、中、西部的面板数据分析。货币政策和财政政策是否具有区域产业结构调整效应结果显示:第一,财政政策具有产业结构调整效应,而货币政策的产业结构调整效应并不明显。第二,货币政策在对第一和第三产业的效应方面强于财政政策,而财政政策则在对第二产业的效应方面具有优势。第三,货币政策和财政政策对三次产业的效应都存在比较明显的区域效应。第四,在东部地区货币政策和财政政策对第一产业和第二产业的效应相差非常悬殊,而对第三产业的效应则集中在高位;在中部地区货币政策和财政政策对第二产业的效应集中在高位;在西部地区货币政策对第一产业的效应集中在高位,而财政政策对第一产业的效应则集中在低位。     

A policy model to analyze macroprudential regulations and monetary policy

We construct a small‐open‐economy, new Keynesian dynamic stochastic general‐equilibrium model with real financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. The model incorporates rich interactions between the balance sheets of households, firms and banks, long‐term household and business debt, macroprudential policy instruments and nominal and real rigidities and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial and real shocks in the model economy and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan‐to‐value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.     

Introduction to monetary policy and capital accumulation

The papers in this symposium address the issue of multiple equilibria that can be induced by monetary policy in models with capital accumulation. In particular they examine how the “Taylor Principle”, under which interest rates respond more than proportionately to increases in inflation, can generate multiple equilibria. They also explore the design of policies to avoid the problem of multiple equilibria and indeterminacy.     

The effects of monetary policy changes on market interest rates in Greece: An event study approach

The operational procedures of the Bank of Greece underwent major changes during the 1990s. These shifts in operational strategy made interest rates the main tool of monetary policy for the first time in Greece. This paper examines the effects of changes in the bank's operational interest rates on market interest rates at eight maturities and for different operational regimes. A major feature of our study is the application of the event study methodology used in finance, which has not been employed in any previous study on this subject. We find that changes in official interest rates had a significant influence on short-term and intermediate-term rates and that this relationship was affected by the changes in the bank's operational procedure.     

Comparing monetary policy rules in CEE economies: A Bayesian approach

Using the Bayesian approach, a small open economy DSGE model was estimated using a sample of quarterly data for three Central and Eastern Europe economies, Czech Republic, Hungary and Poland. The hypothesis that central banks react to exchange rate movements was tested using posterior odds ratio. For these economies, evidence was found that central banks reacted to exchange rate changes. Evidence of similar monetary policy characterized by moderate or low gradualism as well as an active and conservative monetary policy was also found, for the selected countries. When a richer DSGE model featuring habit formation and imperfect pass-through is estimated, the results are generally similar. The inclusion of exchange rate in Taylor rule can also drastically change the dynamics of inflation and output following certain shocks.     

Growth and welfare effects of monetary policy with endogenous fertility

This paper investigates the economic growth and social welfare implications of monetary policy in an endogenous growth model with endogenous fertility. We show that, in the money-in-the-utility-function framework, endogenous fertility governs the validity of money superneutrality, the transitional dynamics of an anticipated monetary policy, and the optimal monetary policy. Along a balanced growth path, monetary growth increases fertility and reduces the economic growth rate if consumption and real balances are complements or are independent. However, monetary expansion may decrease fertility and increase economic growth if consumption and real balances are substitutes. Generally speaking, the superneutrality of money does not hold in the presence of endogenous fertility. More importantly, with endogenous fertility, the Friedman (1969) rule is no longer a welfare-maximizing monetary policy. We also show that an anticipated inflation induces the transitional dynamics of fertility and the economic growth rate even though the intertemporal elasticity of substitution equals unity. This differs from the conventional notion in the existing literature.     

China's regime-switching monetary policy

To understand Chinese monetary policy, we estimate a forward-looking Taylor-type monetary policy reaction function. The novelty of our paper lies in two aspects. The first is to use a composite overall indicator (the Sun-MP index) to tackle the measurement uncertainty and hence the model selection problem (i.e., a Taylor versus McCallum rule). The second is to capture nonlinearities in the PBC's policy responses with the multiple-regime threshold regression model. We find strong evidence that the PBC's policy reaction function is asymmetric during the post-2000 period and switches across three different regimes. When expecting high inflation, the PBC tightens by adjusting various policy tools; while facing an expected economic slowdown, it eases. However, it is tolerant to low inflation and economic overheating; it barely reacts to them. These findings highlight the importance of allowing for regime switches in modelling the policy response function of a “young” and fast evolving central bank in emerging countries like China.