Monetary policy and inflation in South Africa: A VECM augmented with foreign variables

We develop a structural cointegrated vector autoregressive (VAR) model with weakly exogenous foreign variables, known as an augmented VECM or VECX*, suitable for a small open economy like South Africa. This model is novel for South Africa in two ways: it is the first VECX* developed to analyse monetary policy and the first model that uses time‐varying trade weights to create the foreign series. We impose three significant long‐run relations (augmented purchasing power parity, uncovered interest parity and Fisher parity) to investigate the effect of a monetary policy shock on inflation. The results suggest the effective transmission of monetary policy.     

Monetary policy of the Bank of Japan—inflation target versus exchange rate target

This paper reviews the empirical evidence on the monetary policy of the Bank of Japan (BOJ). The main findings confirm [McKinnon, R., Ohno, K., Dollar and Yen, Resolving Economic Conflict between the United States and Japan. MIT Press, Cambridge, MA, USA, 1997] thesis that the BOJ has tried to stabilize exchange rate. The interest rate is counter-cyclical to the exchange rate and the coefficient of inflation, which is not weakly exogenous, is significantly smaller than 1. Impulse response analysis confirms the BOJ’s sensitivity not only to inflation and output gap but also to exchange rate. Finally, historical decomposition reveals a major role for exchange rate in explaining cyclical patterns of the interest rate, especially during the bubble period.     

Monetary policy and the behaviour of inflation in India: Is there a need for institutional reform?

Inflation rates in a number of developed countries follow a common trend over the past five decades: inflation starts out low in the 1950s, rises for a time before peaking in the 1970s, and then falls back to initial levels. Interestingly the behaviour of trend inflation in India broadly exhibits such a pattern. This similarity in the behaviour suggests that any explanation of inflation ought to apply across countries. To this end we construct a reduced-form inflation model for India that encompasses various well-known policy mistake theories as special cases. The restriction imposed by each of these theories on the behaviour of inflation is tested empirically. Reduced-form estimates lend support to all these theories. Although the reason for the inflation bias differs from one theory to the other, the mechanism at the heart of these theories are in fact quite similar. They all lay responsibility for inflation with the nature of monetary institutions. We use these results to interpret India's inflation experience over the past five decades and discuss the implications for institutional reform.     

Asset price inflation and monetary policy

It is crucial that central banks and regulatory authorities be aware of effects of asset price inflation on the stability of the financial system. Lending activity based on asset collateral during the boom is hazardous to the health of lenders when the boom collapses. One way that authorities can curb the distortion of lenders' portfolios during asset price booms is to have in place capital requirements that increase with the growth of credit extensions collateralized by assets whose prices have escalated. If financial institutions avoid this pitfall, their soundness will not be impaired when assets backing loans fall in value. Rather than trying to gauge the effects of asset prices on core inflation, central banks may be better advised to be alert to the weakening of financial balance sheets in the aftermath of a fall in value of asset collateral backing loans.William S. Vickery Distinguished Address presented at the Fifty-Fourth International Atlantic Economic Conference, Washington, D.C., October 10–13, 2002.     

Monetary policy under EMU

This paper considers a number of issues connected with the implementationof monetary policy in the Euro zone. These include: the techniquesof monetary control; whether to adopt an explicit inflationtarget and, if so, for what index; the politics of decision-makingwithin the Governing Council of the European System of CentralBanks; the likelihood of there being conflicts of interest betweenthe member countries of the Euro zone; the interaction of monetaryand fiscal policy; and the role of the ESCB in maintaining financialstability.     

基于非对称通胀偏好的最优货币政策规则

与传统的L-Q货币政策分析框架相异,本文通过Linex函数,在央行损失函数中引入非对称通胀目标偏好。新的货币政策动态优化模型分析结果表明,最优货币政策规则中,名义利率对通胀的反应是非线性的,利率工具不仅对通胀水平作出反应,而且对通胀的波动性也作出反应,利率对通胀的变化还产生符号与大小上的非对称。     

Monetary policy transmission and macroeconomic policy coordination in Pacific island countries

During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass‐through and credit growth. Weak credit demand and under‐developed financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks' efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.     

货币政策是迎风挥舞的魔杖

今年上半年,中国宏观经济似乎又出现了2003年6月“非典”疫情结束后的偏热增长势头:投资增速偏高、生产资料价格上扬、房地产投资过快、银行信贷和货币供应量超速增加。还有一个新的     

Monetary and fiscal policy in interdependent two-sector economies

Summary This paper considers a two-country-two-sector world with tradables and non-tradables, floating exchange rates, perfect capital mobility and sluggish labour markets. The model assumes either nominal or real wage rigidity and either perfect or imperfect substitution between home and foreign-produced tradables. The effects and spillover effects of fiscal and monetary shocks are compared with the standard results from well-known macroeconomic two-country counterparts of the model. The purpose is to establish the degree of robustness of the latter with respect to disaggregation and to gain insight into the sectoral transmissions of the shocks.The authors wish to thank Lans Bovenberg, Theo van de Klundert, Christian Mulder, Frederick van der Ploeg, Martin van Tuijl, Leo van Veldhuizen and two anonymous referees for helpful comments on an earlier draft.     

COVID-19 policy actions and inflation targeting in South Asia

In this paper, we examine the impact of policy actions undertaken by governments during the COVID-19 pandemic on Consumer Price Index (CPI) in five major South Asian nations, namely, Bangladesh, India, Nepal, Pakistan and Sri Lanka. Using panel fixed effects regression with robust standard errors, we show the relative importance of monetary and financial interventions on reducing CPI while fiscal interventions, direct grants and aid are insignificant. Further, delving into nature of policy interventions, our study finds evidence of negative impact of Credit Support, and Healthcare Support on CPI in South Asian nations. While our investigation is preliminary, it provides insights into additional understanding of effectiveness of policy actions on inflation targeting.     

Credit policy,real exchange rate volatility and moral hazard

We extend the well-developed theoretical literature on unconventional credit policy from a closed economy to a small open economy. Consistent with the literature, we find that credit policy has positive effects on output and consumption by raising investment demand. In terms of expanding output, it is more effective to extend government credit to banks than to the goods-producing sector because for each unit of credit supplied to banks, banks - through leverage - can supply greater than one unit of intermediation to firms. We find the welfare implications are ambiguous and depend on the type of policy chosen. A policy of providing funds to goods-producing firms tends to be welfare-improving because it dampens the responses of all variables after a negative shock, including the real exchange rate. However, providing government assistance to the banking sector may be a costly policy because it encourages greater risk-taking on part of banks, leading to higher bank leverage. All else equal, this increases the volatility of the economy, raising the variances of consumption and of the real exchange rate, which is welfare-deteriorating. We interpret this as indicative of the problem of moral hazard associated with a policy of providing support to failing banks.     

Monetary policy shocks and exchange rates in Asian countries

In this paper, we empirically investigate the effects of monetary policy shocks on exchange rates in Asian countries. To do so, we use VAR models which impose sign restrictions on impulse responses to identify monetary policy shocks. We find that contractionary monetary policy shocks lead to significant exchange rate appreciation in Malaysia, the People’s Republic of China, and the Republic of Korea. However, in India, Indonesia, the Philippines and Thailand, we find either a significant depreciation or no significant effect. These results suggest that an interest rate increase (or decrease) may not necessarily shield Asian countries from exchange rate depreciation (or appreciation) pressure following a U.S. interest rate increase (or decrease).     

Monetary theory and monetary policy a central banker's view

Summary In this article attention is paid to monetary theory, the relationship between the instruments of monetary policy and other important macro-economic policy instruments, and finally to the real possibilities of pursuing an effective monetary policy. The conclusion from the theoretical analysis is that the total money supply must be considered one of the most important macro-economic policy instruments. An excessive supply of money will sooner or later lead to inflation, to the debasement of money. Therefore the volume of money should be controlled. The use and effectiveness of monetary policy should always be seen in the context of other policy instruments, especially fiscal policy and, under circumstances, wage- and price policy. The possibilities to pursue an effective monetary policy are not unlimited. The effectiveness of such a policy can,e.g., be hampered by external factors. It is vital for a central bank to have the widest possible range of instruments at its disposal.     

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.     

Monetary policy responses of Asian countries to spillovers from US monetary policy

Regional integration in Asia has been considerably enhanced over the past 20 years or so. Whether integration helps Asian countries reduce their vulnerability to external shocks or is a channel for spreading external shocks remains an open question. This paper assesses the spillovers from US monetary policy shocks to Asian countries while taking into account country‐specific characteristics in explaining differences in timing and magnitude of responses across Asian countries. The results indicate that policy interest rates in Asian countries generally respond to innovations in the Fed rate in the same direction, but typically with a lag of one quarter. However, the size of the responses varies across Asian countries with respect to country‐specific characteristics. These results suggest that an independent monetary policy may not be feasible for an Asian developing country that adopts a pegged rate regime while being extensively integrated into the world economy. However, the hypothesis of the impossible trinity may not be relevant in the case of China.     

Country size and business cycle volatility: Scale really matters

In a recent study Andrew Rose found that country size does not matter for several economic outcomes [Rose, A.K., 2006. Size really doesn't matter: In search of a national scale effect. J. Japanese Int. Economies 4, 482–507]. However, he did not consider the effect that country size may have on business-cycle volatility. To investigate the empirical relationship between business cycle volatility and country size, we use a panel data set that includes 167 countries from 1960 to 2000. The results suggest very strongly that the relationship between country size and business cycle volatility is negative and statistically significant. This implies that smaller countries are subject to more volatile business cycles than larger countries. This holds both in a simple bivariate model and when we include Rose's control variables and openness. Moreover, the results are robust to different sample periods and several detrending methods. It follows that country size really matters, at least in terms of cyclical fluctuations. J. Japanese Int. Economies 21 (4) (2007) 424–434.     

Fiscal policy independence in a European Monetary Union

Do plans for a monetary union in Europe call for limits on the freedom of the country members of the union to use fiscal policy? In order to provide a tentative answer, we simulate the IMF model MULTIMOD, given various shocks, in the case of a European Monetary Union consisting only of France and Germany. The results clearly indicate the possible value of allowing unfettered use of fiscal policy in both countries. The reasons lie partly in differences in the initial position of the two, partly in differences in their preferences. We also examine the change in the policy significance of the current account in the monetary union. Current account imbalances clearly cease to have the same significance in a monetary union; but they do not therefore become irrelevant.