Duration of bankruptcy proceedings and monetary policy effectiveness

A common assumption in well-known costly-state-verification frameworks is that when a borrower defaults, creditors receive a payoff immediately (after incurring bankruptcy costs). While this assumption enhances tractability, it is unrealistic given the considerable delays in the actual practice of bankruptcy. In this paper, I identify the duration of bankruptcy proceedings as an additional source of friction in financial markets and investigate the relationship between this friction and the effectiveness of monetary policy by using U.S. state-level data. Consistent with the commonly-observed positive relationship between the degree of standard financial frictions and the amplitude of macroeconomic responses, I find that U.S. monetary policy is most effective in states with longer bankruptcy proceedings.     

The non-linear impact of monetary policy on international reserves: macroeconomic variables nexus

This paper employs panel smooth transition regression models to investigate the nonlinear effects of two monetary policy proxies (i.e., real exchange rate return and real interest rate differential) on the international reserves—macroeconomic variables nexus. The panel data set includes the fourteen G-20 countries during the period 1991–2012. Empirical results show that the marginal effects of the macroeconomic variables (savings, terms of trade, public debt, capital account liberalization, economic growth, and trade openness) on international reserves are non-linear and vary with time, the proxies and countries, not linear and constant derived from traditional linear model. Currency devaluation policy (against the US dollar) can non-linearly enlarge the positive contribution of trade openness and public debt on international reserves, and non-linearly reduce the negative impact of terms of trade on international reserves, as the Marshall–Lerner condition holds. Expansionary monetary policy (through the decrease in domestic interest rates) can strengthen the positive effects of public debt, trade openness, and economic growth on international reserves. The precautionary and mercantilist views of reserves holdings are partially supported.     

The evolution of monetary policy effectiveness under macroeconomic instability

This paper studies the evolution of the monetary policy transmission mechanisms in the US following the Great Recession. The implementation of a modified Dynamic Factor Model enables the identification of two different structural scenarios based on the information contained in a large dataset of 110 variables. Impulse Response Functions to an increase of official interest rate for this large dataset are estimated for each structural context. Three techniques are combined to deal with the dimensionality problems which emerge from an estimation procedure of this magnitude: (i) factor decomposition, (ii) an identification strategy independent of the number of variables included in the dataset and (iii) a blockwise optimization algorithm for the correct selection of the Bayesian priors. Results show the presence of a structural break in 2008 and the higher responsiveness of the economy to monetary policy after that date.     

The effectiveness of fiscal and monetary policy responses to twin crises

We study how effective fiscal and monetary policy responses are during a twin crisis. Using the dataset provided by Laeven and Valencia (2008 Laeven, L and Valencia, F. (2008) Systemic banking crises: a new database. IMF Working Paper No. 08/224 [Google Scholar]), we identify 57 episodes of twin crises. Following the methods proposed in Baldacci et al. (2009 Baldacci, E. 2009. Gupta, S. and Mulas-Granados, C., How effective is fiscal policy response in systemic banking crises?, IMF Working Paper No. 09/160 [Google Scholar]) and Hutchison et al. (2010 Hutchison, M. 2010. Noy, I. and Wang, L., Fiscal and monetary policies and the cost of sudden stops, Journal of International Money and Finance, 29, 973–87 [Google Scholar]), we construct the variables measuring the duration and output cost of a twin crisis. We find that fiscal policy does not seem to be associated with the shortening of a twin crisis. Regarding monetary policy, we find that monetary tightening is associated with the lengthening of a twin crisis duration, consistent with the result in Hutchison et al. (2010 Hutchison, M. 2010. Noy, I. and Wang, L., Fiscal and monetary policies and the cost of sudden stops, Journal of International Money and Finance, 29, 973–87 [Google Scholar]) dealing with a sudden stop crisis. In addition, our results show that while a mild monetary expansion is effective in reducing a twin crisis duration, over-expansionary monetary policy loses its effectiveness.     

Interest on reserves and inflation

The payment of interest on reserves has been a common practice in inflationary economies. This policy may seem paradoxical since it involves returning part of the seigniorage, generated by the inflation process, with the intention to finance the fiscal deficit. This paper argues that the motivation for this policy can be captured by the discretionary regime, where the policymaker pays interest on reserves because he is concerned with the erosion of real liquidity by inflation, which is in part beyond his control. However, this policy is an unlikely outcome in the commitment regime, where the policymaker is in full control of inflation.     

Measuring the effectiveness of US monetary policy during the COVID-19 recession

The COVID-19 recession that started in March 2020 led to an unprecedented decline in economic activity across the globe. To fight this recession, policy makers in central banks engaged in expansionary monetary policy. This paper asks whether the measures adopted by the US Federal Reserve (Fed) have been effective in boosting real activity and calming financial markets. To measure these effects at high frequencies, we propose a novel mixed frequency vector autoregressive (MF-VAR) model. This model allows us to combine weekly and monthly information within a unified framework. Our model combines a set of macroeconomic aggregates such as industrial production, unemployment rates, and inflation with high-frequency information from financial markets such as stock prices, interest rate spreads, and weekly information on the Fed's balance sheet size. The latter set of high-frequency time series is used to dynamically interpolate the monthly time series to obtain weekly macroeconomic measures. We use this setup to simulate counterfactuals in absence of monetary stimulus. The results show that the monetary expansion caused higher output growth and stock market returns, more favorable long-term financing conditions and a depreciation of the US dollar compared with a no-policy benchmark scenario.     

Does monetary policy lose effectiveness during a credit crunch?

This article investigates the effectiveness of monetary policy during a credit crunch by estimating a vector autoregression on the US economy. We present evidence that interest rate cuts have a diminished impact on growth, due to impairment in the relationship between monetary policy and the supply of intermediated credit.     

The effectiveness of monetary policy and output fluctuations: An asymmetric analysis

Previous studies have investigated asymmetries in the effects of monetary policy on the real economic activity by using either vector autoregressive (VAR)-based regime-switching models with smooth transition technique or Gaussian functions to parameterise the dynamic effects of structural shocks on the economy. These kinds of VAR models assume asymmetry as a short-run relationship between the series since the long-run neutrality hypothesis of money states that monetary policy can only affect productive capacity of the economy in the short run, but not in the long run. The recent theoretical literature shows that this hypothesis is not quite right. Thus, this paper examines the extent to which monetary policy has a long-run asymmetric effect on output in a number of Organisation for Economic Co-operation and Development countries by using a nonlinear hidden cointegration analysis within a likelihood-based panel framework. The findings indicate that there is a long-run relationship between the real interest rate as an indicator of monetary policy and the growth rate of real output in five countries out of nine under review. This gives support for the view that output has responded asymmetrically to the real interest rate changes. The economic implication of our results is that monetary policy affects positive and negative output fluctuations differently.     

The effectiveness of exchange-rate-based monetary policy: evidence from survey data

Singapore’s monetary policy is centred on the management of the exchange rate. We examine how macroeconomic forecasters perceive the effectiveness of this unconventional policy. We provide empirical evidence that forecasters’ expectations are consistent with a forward-looking exchange-rate-based Taylor-type policy rule. They expect monetary authorities to actively manage the currency against expected future changes in inflation and output.     

浅析稳健的货币政策

2011年12月举行的中共中央政治局会议定调2012年继续实行稳健的货币政策。理解稳健的货币政策,分析其实行效果已成为当务之急。归纳了稳健货币政策的演化史,分析了该货币政策的特征,并总结了其实行效果与面临的挑战。稳健货币政策的运行方式是逆向操作的相机抉择。该货币政策难以对CPI进行精确的控制,难以有效抑制经济过快发展。为提高货币政策的实施效果,央行应当增加基准利率调整频率,并减少对央行票据的依赖。     

Assessing the effectiveness of monetary policy in Kenya: Evidence from a macroeconomic model

This paper examines the effectiveness of monetary policy in Kenya based on policy simulations from a structural macroeconometric model. The analysis is conducted using the policy rate, i.e. the central bank rate (CBR) and the cash reserve ratio (CRR) with respect to the interest rate and bank lending channels, respectively. The results indicate that whereas a change in the policy rate is effective in influencing short term rates, the long term lending rates respond marginally. Consequently, the transmission to the real economy and the overall impact on inflation is minimal. However, a change in CBR has a comparatively higher impact on inflation while a change in CRR has a relatively larger impact on aggregate demand. Enhancing the effectiveness of the CBR and strengthening of the interest rate channel have the potential of anchoring inflation expectations and boosting the effectiveness of monetary policy in Kenya.     

The effectiveness of monetary policy in steering money market rates during the financial crisis

The financial crisis has deeply affected money markets and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area money market rates by looking at (i) the predictability of money market rates on the basis of monetary policy expectations and (ii) the impact of extraordinary central bank measures on money market rates. We find that during the crisis money market rates up to 12 months still respond to revisions in the expected path of future rates, even though to a lesser extent than before August 2007. We attribute part of the loss in monetary policy effectiveness to money market rates being driven by higher liquidity premia and increased uncertainty about future interest rates. Our results also indicate that the ECB’s non-standard monetary policy measures as of October 2008 were effective in addressing the disruptions in the euro area money market. In fact, our estimates suggest that non-standard monetary policy measures helped to lower Euribor rates by more than 80 basis points. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises.     

Recent monetary policy and the credit card-augmented Divisia monetary aggregates

The main objective of this paper is to examine the information content of the credit card-augmented Divisia monetary aggregates and credit card-augmented Divisia inside monetary aggregates, recently produced by the Center for Financial Stability. We compare the inference ability of the credit card-augmented Divisia monetary aggregates and credit card-augmented Divisia inside monetary aggregates to the conventional Divisia monetary aggregates, at all levels of monetary aggregation. Using cyclical correlations analysis and Granger causality tests, we find that both the conventional Divisia monetary aggregates and the credit card-augmented Divisia monetary aggregates are informative in predicting output. Moreover, during, and in the aftermath of the 2007–2009 financial crisis, the credit card-augmented Divisia measures of money are more informative when predicting real economic activity than the conventional Divisia monetary aggregates. We also find that broad Divisia monetary aggregates provide better measures of the flow of monetary services generated in the economy.     

Politics and the UK's monetary policy

This paper examines whether politics causes regime shifts in deviations from the optimal monetary policy in the United Kingdom. After using a dynamic stochastic general equilibrium model to construct the welfare-maximizing policy rule and deviations from the optimal Taylor rule, we show that politics does indeed play an important role in explaining these deviations. In addition to politics, unemployment rates account for regime shifts in the Taylor rule deviations.     

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.     

Distortionary fiscal policy and monetary policy goals

We reconsider the role of an inflation conservative central banker in a setting with distortionary taxation. To do so, we assume monetary and fiscal policy are decided by independent authorities that do not abide to past commitments. If the two authorities make policy decisions simultaneously, inflation conservatism causes fiscal overspending. But if fiscal policy is determined before monetary policy, inflation conservatism imposes fiscal discipline. These results clarify that in our setting the value of inflation conservatism depends crucially on the timing of policy decisions.     

Asset prices,nominal rigidities,and monetary policy

Should monetary policy respond to asset prices? This paper analyzes this question from the vantage point of equilibrium determinacy. A central bank responding to asset prices is indirectly responding to firm profits. In a model with sticky prices, increases in inflation tend to lower firm profits so that a central bank responding to share prices implicitly weakens its overall response to inflation. This is the novel source of equilibrium indeterminacy highlighted in the paper.