Monetary policy, oil shocks, and TFP: Accounting for the decline in US volatility

An equilibrium model is used to assess the quantitative importance of monetary policy for the post-1984 decline in US inflation and output volatility. The principal finding is that monetary policy played a substantial role in reducing inflation volatility, but a small role in reducing real output volatility. The model attributes much of the decline in real output volatility to smaller TFP shocks. We also investigate the pattern of output and inflation volatility under an optimal monetary policy counterfactual. We find that real output volatility would have been somewhat lower, and inflation volatility substantially lower, had monetary policy been set optimally.     

Business Cycle Volatility in Germany

Abstract. Stylized facts suggest that output volatility in OECD countries has declined in recent years. The causes and the nature of this decline have so far been analyzed mainly for the United States. In this paper, we analyze whether structural changes in output volatility in Germany can be detected. We report evidence that output volatility has declined in Germany. It is difficult to answer the question whether this decline in output volatility reflects good economic and monetary policy or merely ‘good luck’.     

CROSS-COUNTRY EVIDENCE ON OUTPUT GROWTH VOLATILITY: NONSTATIONARY VARIANCE AND GARCH MODELS

This paper revisits the issue of conditional volatility in real gross domestic product (GDP) growth rates for Canada, Germany, Italy, Japan, the United Kingdom, and the United States. Previous studies find high persistence in the volatility. This paper shows that this finding largely reflects a nonstationary variance. Output growth in the six countries became noticeably less volatile over the past few decades. In this paper, we employ the modified iterated cumulative sum of squares (ICSS) algorithm to detect structural change in the variance of output growth. One structural break exists in each of the six countries after identifying outliers and mean shifts in the growth rates. We then use generalized autoregressive conditional heteroskedasticity (GARCH) specifications, modeling output growth and its volatility with and without the break in volatility. The evidence shows that the time-varying variance falls sharply in Canada and Japan, and disappears entirely in Germany, Italy, the United Kingdom and the United States, once we incorporate the break in the variance equation of output for the six countries. That is, the integrated GARCH (IGARCH) effect proves spurious and the GARCH model demonstrates misspecification, if researchers neglect a nonstationary variance. Moreover, we also consider the possible effects of our more correct measure of output volatility on output growth as well as the reverse effect of output growth on its volatility. The conditional standard deviation possesses no statistical significance in all countries, except a significant negative effect in Japan. The lagged growth rate of output produces significant negative and positive effects on the conditional variances in Germany and Japan, respectively. No significant effects exist in Canada, Italy, the United Kingdom, and the United States.     

Monetary policy volatility shocks in Brazil

This paper provides empirical evidence of the impact of changes in volatility of monetary policy in Brazil using a model where the time-varying volatility of shocks directly affects the level of observed variables. Contrary to the literature, an increase in monetary policy volatility results in higher inflation, combined with reduction in output. Qualitative differences of impulse responses functions are explained using a calibrated small-scale dynamic model, where the habit persistence in consumption, combined with the design of monetary policy, plays a key role in results. Firms tend to increase prices under higher volatility, in order to avoid costs of resetting over time. Working capital constraints amplify the effects of interest rate volatility shocks on prices.     

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.     

How robustness can change the desirability of speed limit policy

This paper investigates a robust monetary policy under speed limit policy when a central bank fears model misspecification. We reveal several points. First, the persistence of the output gap becomes small with the robust speed limit policy. The low persistence of the output gap contributes to mitigating the variance of the output gap. Second, for a robust policy, social losses are lower under the speed limit policy than under precommitment. Our results suggest that adding the growth of the output gap to the central bank’s objectives is effective when the worst-case scenario is realized.     

Exchange rate volatility and export performance: a cointegrated VAR approach

During the last decades Norwegian exporters have–despite various forms of exchange rate targeting–faced a rather volatile exchange rate which may have influenced their behaviour. Recently, the shift to inflation targeting and a freely floating exchange rate has brought about an even more volatile exchange rate. We examine the causal link between export performance and exchange rate volatility across different monetary policy regimes within the cointegrated Vector Autoregression (VAR) framework using the implied conditional variance from a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model as a measure of volatility. Although treating the volatility measure as either a stationary or a nonstationary variable in the VAR, we are not able to find any evidence suggesting that export performance has been significantly affected by exchange rate uncertainty. We find, however, that volatility changes proxied by blip dummies related to the monetary policy change from a fixed to a managed floating exchange rate and the Asian financial crises during the 1990s enter significantly in a dynamic model for export growth–in which the level of relative prices and world market demand together with the level of exports constitute a significant cointegration relationship. A forecasting exercise on the dynamic model rejects the hypothesis that increased exchange rate volatility in the wake of inflation targeting in the monetary policy has had a significant impact on export performance.     

Macroeconomic dynamics in Macedonia and Slovakia: Structural estimation and comparison

This paper estimates a structural macroeconomic model using data for Macedonia and Slovakia to characterize possible challenges Macedonia can face concerning macroeconomic stabilization during its transition process. A comparison of the estimated model parameters suggests that, in Slovakia, the output gap is less sensitive to real interest rate movements and prices experience greater inertia. The estimated monetary policy reaction functions show Macedonia and Slovakia as inflation targeters, with Macedonia as the more conservative one, despite its officially applied exchange rate targeting regime. The differences in the estimated parameters imply differing transmission mechanisms for Macedonia and Slovakia. Consequently, the variance of domestic variables in Slovakia is most influenced by monetary policy shocks, while there is no single dominating shock explaining the volatility of Macedonia's macroeconomic variables. The exchange rate shock, the monetary policy shock and the demand shock are jointly important in determining the volatility of Macedonia's variables. The model simulations indicate that Macedonia experiences lower output gap and inflation volatility than Slovakia. This comes, nevertheless, at the cost of higher interest rate and real exchange rate volatility in Macedonia, which could be an indication of more volatile financial markets with possible negative implications for financial stability.     

An overhaul of Federal Reserve doctrine: Nominal income and the Great Moderation

The Great Moderation is often characterized by the decline in the variability of output and inflation from earlier periods. While a multitude of explanations for the Great Moderation exist, notable research has focused on the role of monetary policy. Specifically, early evidence suggested that this increased stability is the result of monetary policy that responded much more strongly to realized inflation. Recent evidence casts doubt on this change in monetary policy. An alternative hypothesis is that the change in monetary policy was the result of a change in doctrine; specifically the rejection of the view that inflation was largely a cost-push phenomenon. As a result, this alternative hypothesis suggests that the change in monetary policy beginning in 1979 is reflected in the Federal Reserve’s response to expectations of nominal income growth rather than realized inflation as previously argued. I provide evidence for this hypothesis by estimating the parameters of a monetary policy rule in which policy adjusts to forecasts of nominal GDP for the pre- and post-Volcker eras. Finally, I embed the rule in two dynamic stochastic general equilibrium models with gradual price adjustment to determine whether the overhaul of doctrine can explain the reduction in the volatility of inflation and the output gap.     

Estimating general equilibrium models with stochastic volatility and changing parameters

This paper explores the importance of specification in estimated general equilibrium models with changing monetary policy parameters and stochastic volatility. Simulated data is used to estimate models with incorrectly specified exogenous shocks (time-varying vs. constant variance) and models misspecifying the way Taylor rule parameters change over time (constant vs. drifting vs. regime-switching). The model correctly identifies some changes in monetary policy parameters, even when misspecified. The inclusion of stochastic volatility greatly improves model fit even when the data is generated using constant variance exogenous shocks; this relationship is stronger in data generated from models with changing policy parameters.     

基于MS-VECM模型的我国货币政策非对称研究与启示

通过建立马尔可夫区制转移误差修正模型（MS-VECM）模拟我国货币政策对经济的非对称影响,以此分析我国货币政策的有效性。根据经济波动幅度,将我国经济划分为高波动和低波动两个区制状态,经济增长波动剧烈的区制下向均衡状态调整速度快于经济波动幅度较低区制下的调整,论证了我国货币政策对经济的影响在不同区制下存在非对称性。并用模型对我国经济状况进行了模拟预测,利用这种非线性的模型能够很好地预测货币与产出增长关系,表明现阶段我国经济运行状态是一低波动区制下的正常回落,目前不宜出台强扩张性的货币政策刺激经济增长。     

The end of Brazilian big inflation: lessons to monetary policy from a standard New Keynesian model

The paper analyzes economic stabilization in Brazil in the context of a New Keynesian model estimated with Bayesian techniques. Dataset covers the period 1975–2012. Our methodology is based on tests for multiple structural breaks at unknown dates and counterfactual exercises. The results show that inflation and output volatility present an inverted U-shape pattern, peaking at the 1985–1994 sample. Changes in the monetary policy stance and milder shocks accounted for the reduced inflationary volatility (about 50% each, in some specifications). However, some assumptions indicated that a sharp decline in the Phillips curve slope was also important for controlling inflation. Concerning to output, the sole explanation for its volatility fall seemed to be smaller shocks. Therefore, we conclude that a mix of the “good luck” and “good policy” hypotheses mainly originated the current period of increased stability in the country.     

我国经济周期波动率的成分分解及稳定性研究

随着世界经济周期波动的减缓,我国经济波动也呈现出稳定性趋势.文章通过建立具有货币政策干预的产品市场均衡模型,对我国实际产出波动率进行了成分分解,并将实际产出波动的来源归结为需求冲击、供给冲击和货币冲击的作用.通过这些经济冲击方差序列的度量,又对实际产出波动率进行了冲击方差序列的回归检验,发现我国需求冲击和货币冲击强度的逐渐平稳是经济周期波动率降低的主要原因,而供给冲击对实际产出波动率没有产生显著影响.因此,我国宏观经济调控仍然需要坚持需求管理的政策导向,以保持经济持续稳定增长.     

The impact of inflation targeting: Testing the good luck hypothesis

Starting in the mid‐1980s, the level and volatility of inflation decreased across industrial countries. The inflation stabilization can be explained by a shift in monetary policy or by a lucky period of low volatility in business cycle shocks. To test the “good luck hypothesis,” we examine the inflation experience of Canada, one of the earliest and most successful adopters of an inflation targeting monetary policy. We Kalman‐filter the historical structural shocks consistent with an estimated dynamic stochastic general equilibrium (DSGE) model of the Canadian economy. The estimated shocks are used to build counterfactual histories. The good luck hypothesis can explain only a minor portion of the change in the path and volatility of inflation after the shift in policy. Most of inflation and output stabilization is accounted by the impact on expectations. Unconditionally, the inflation targeting policy does not improve on the previous policy in terms of inflation volatility, but supports a more favourable trade‐off, reducing substantially output volatility.     

An evaluation of ECB policy in the Euro's big four

The Taylor curve can be viewed as an efficiency frontier displaying the trade-off between the volatility of output and volatility of inflation. We build on the existing literature in this area and view Taylor curves as a lens through which to gauge the deviations of actual ECB policy from the optimum. We employ data over the period 1999-2013 period to measure the orthogonal distance of the observed volatilities from the Taylor curve in Germany, France, Italy, Spain, and the Euro area using a recursive VARs. We find that the distance has substantially increased in all four countries suggesting that monetary policy has become less efficacious for Germany, France, Italy, and Spain since the financial crisis in 2007-2008. We also estimate counterfactual Taylor rules and find that a simple Taylor rule would have only substantially improved monetary policy efficacy in Germany.     

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。     

Imperfect credibility,sticky wages,and welfare

This paper studies optimal monetary policy under imperfect credibility in a New Keynesian model with staggered price and wage setting. In our imperfect credibility framework, the central bank commits to a policy plan but occasionally reneges on past promises with a given common knowledge probability. We find that the welfare gains from increasing credibility are approximately linear on the initial credibility level. We also find that the output-inflation stabilisation trade-off is nonmonotonic as higher credibility does not always reduce output volatility. The variance decomposition shows that wage markup shocks are the main driver of economic fluctuations and that these shocks are better contained, even in relative terms, when credibility is high. We then show that the degree of credibility impacts the effect of wage flexibility on welfare. When credibility is low, monetary policy is less potent and the economy can experience a feedback loop between wage volatility and price volatility. We show, though, that once wage markup shocks are taken into account, wage flexibility is usually welfare improving.     

The economics and politics of output volatility: evidence from Indian states

Employing data for 1981–2009, this paper examines the factors influencing the volatility of state output, using India as a case study. The analysis appears to suggest that high income states exhibit relatively higher output volatility. At the state-level, the proximate determinants of a decline in output volatility can be traced to financial deepening, government expenditures and institutional quality. Also, state-level political factors are also found to play an important role. In addition, at the macroeconomic level, monetary policy considerations are observed to be the most important factor impacting output volatility.     

宏观共同因子、特质因子以及货币政策对中国各线城市房价的影响——基于FAVAR模型

运用FAVAR模型,将中国各线城市房价分离出宏观共同因子和特质因子部分,研究了各因子及货币政策对房价的影响。研究发现:大城市的房价更易受宏观共同因子和地区特质因子的影响,且变动的持续性更大;共同因子可在很大程度上解释房价变动的持续性和波动性;共同因子对房价的影响较为持久,而地区特质因子只在短期内影响房价;利率和货币供应量可以有效地影响房价;相比利率,货币供应量对一线和二线城市房价水平的影响更大,对各线城市房价波动的影响更为持久;一线城市的房价水平及其波动对货币政策冲击的敏感度较高,二线城市的敏感度居中,三线城市的敏感度较低;未发现货币政策的"价格之谜"现象,表明本文模型设定的合理性较强。     

The financial accelerator and monetary policy rules

Comparing Bernanke et al.’s (1999) financial accelerator model to a comparable model without an operational financial accelerator mechanism, we find that financial acceleration is reduced when monetary policy reacts to the output gap and when firm-specific volatility rises.