A role model for China? Exchange rate flexibility and monetary policy in Japan

A substantial number of papers have proposed to allow for more exchange rate flexibility of the Chinese yuan. But few papers have tried to project how Chinese monetary policy will behave under flexible exchange rates. As Japan provides an important role model for China, this paper studies the role of the yen/dollar exchange rate for Japanese monetary policy after the shift of Japan from a fixed to a floating exchange rate regime. In contrast to prior studies, we allow for regime shifts in the impact of the exchange rate on monetary policy. The results show that the exchange rate had a substantial impact on Japanese monetary policy in periods of appreciation. This implies that repeated attempts to soften the appreciation pressure by interest rate cuts have led Japan into the liquidity trap. The economic policy conclusion for China is to keep the exchange rate pegged (to the dollar).     

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).     

Can inflation targeting regimes be effective in developing countries? The Turkish experience

This paper examines the performance of Turkey's inflation targeting (IT) experience. We find the IT regime to be an effective framework. Our judgment is based on three broad conclusions supported by empirical analyses. First, fiscal stability is an effective tool for a successful monetary policy. Second, the overnight policy of the Central Bank of Turkey rate is a significant determinant of the changes in market lending rates, which is the preliminary step in the monetary transmission mechanism. Third, recent developments on the broader issue of the effectiveness of interest rate policy in controlling inflation through aggregate demand management and through other channels are encouraging. Based on our findings, we argue that the impact of policy rate changes on economic activity and inflation have become more predictable and changed in the direction in line with theory, improving the transmission capacity of monetary policy.     

Assessing the performance of inflation targeting in East Asian economies

This paper examines the implementation and performance of inflation targeting (IT) in four East Asian emerging market economies: Indonesia, Korea, the Philippines, and Thailand. It also examines monetary policy in Malaysia, a country that has not adopted IT. The study estimates policy reaction functions to test the links between the adoption of IT and use of a monetary policy rule. The impulse responses of prices to a monetary policy shock are also estimated to identify monetary policy impacts on prices. The findings on the monetary policies of the five economies can be summarised as follows. Korea has taken an inflation‐responsive and forward‐looking policy stance under inflation targeting, which has had an effect on the stability of prices. Indonesia and Thailand have conducted inflation‐responsive but backward‐looking policy stances, which have had no impact in terms of price stabilisation. The Philippines (which adopted IT but under a pegged exchange rate regime) and Malaysia have neither followed inflation‐responsive rules nor had policy impacts in terms of controlling inflation.     

International monetary arrangements in the Asia-Pacific before and after

This paper assesses the characteristics and policy implications of the international monetary arrangements in the Asia-Pacific pre- and post-July 1997. It first examines the literature on speculative attacks on fixed and managed exchange rate regimes. Since these speculative attacks are more likely to be successful when financial markets are well integrated, it then assesses the degree of financial market integration in the region. Furthermore, as the empirical evidence also suggests a possible role for real exchange rate overvaluation, we examine the evidence regarding misalignment. Using a purchasing power parity (PPP) criterion and a criterion based on a Balassa-Samuelson model, we find mixed evidence of exchange rate overvaluation. Given that our ability to determine the equilibrium real exchange rate is so limited, we caution against a return to a fixed or highly managed exchange rate regime. Finally, we assess how monetary policy and exchange rate policy have interacted over the pre- and post-crisis periods, using a monetary model of exchange rates. JEL classification: F31; F33; F34     

Lending Rate Spread Shock and Monetary Policy Arrangements: A Small Open Economy Model for ASEAN Countries

We investigate the welfare implications of monetary policy arrangements in a small open economy, considering firms' bank‐based finances that are widely observed in emerging ASEAN countries. The impact of an unexpected change in the lending rate spread, or a lending rate spread shock, depends on the presence of banking activity in the economy. This presence is important in Malaysia and Vietnam, where welfare effects of this type of shock are at least comparable to those of foreign monetary policy shocks. We also find that a rigid exchange rate arrangement amplifies the effect of a shock.     

Monetary policy rules for a developing country: Evidence from Pakistan

This paper estimates forward-looking monetary policy rules to examine the interest rate setting behavior of the State Bank of Pakistan. Considering the external constraints on monetary policy, core inflation and a country-specific measure of the output gap, we demonstrate that the State Bank of Pakistan reacts to changes in inflation, the output gap and the federal funds rate.     

Macroeconomic stabilization through monetary and fiscal policy coordination: Implications for European Monetary Union

In a two-country model, we consider the implications of monetary and fiscal policy coordination for macroeconomic stabilization. We show that the optimal regime is one of monetary and fiscal policy coordination under flexible exchange rates. In the context of the European Community, this suggests that the desire to fix exchange rates may not be costless. In addition, we show that fiscal coordination requires a relatively high degree of flexibility in fiscal policy. This result suggests that limits on the flexibility of fiscal policies, as suggested in the Delors Report, may hinder macroeconomic stabilization.     

The ‘trilemma’ hypothesis and policy implications for Fiji

This paper examines the trilemma constraint for Fiji; that is, we investigate how trilemma policy variables were used to address policy trade‐offs among the three objectives of exchange rate stability, monetary autonomy, and financial openness. Fiji makes an interesting case because of its policy orientation towards a stable exchange rate and adequate foreign reserves. Our results suggest that the trilemma constraint is binding for Fiji and policy priority is given to exchange rate stability and monetary policy independence, while less emphasis is placed on financial market openness. We also find that the actual policy levels do not deviate substantially from optimal levels, which evidences that Fiji's policy management has been efficient under the trilemma constraint. Finally, we also study the effects of various trilemma policy combinations and foreign reserve holdings on output growth and inflation.     

国际资本流动对我国货币政策有效性的影响

随着我国金融市场的对外开放,资本自由流动是大势所趋。目前,在我国实施有管理的浮动汇率制度前提下,在应对美国次贷危机不断蔓延的经济形势下,研究国际资本流动对我国货币政策有效性的影响,具有非常重要的意义。这里在界定国际资本流动定义、介绍其分类的基础上,分析了我国国际资本流动的现状,从对我国货币供给量的影响、对我国货币币值稳定的影响、对我国央行货币政策的影响三方面探讨了国际资本流动对我国货币政策有效性的影响,得出了六点结论。     

Post-crisis monetary and exchange rate policies in Indonesia,Malaysia and Thailands

This paper surveys the post-crisis monetary and exchange rate policies of Indonesia, Thailand and Malaysia. Malaysia has pegged the ringgit while Indonesia and Thailand have adopted heavily managed exchange rates. Under their IMF programs, Thailand and Indonesia set base money targets, but Thailand has moved, and Indonesia is now moving, to inflation targeting, using interest rates as the short-term instrument. Malaysia also sets interest rates. The ability of the three central banks to set interest rates and also pursue an exchange rate target with an interest rate target has been bolstered by restrictions on the internationalisation of the domestic currency. The three central banks have also had to sterilise the monetary effects of their foreign exchange interventions. It is argued that inflation targeting is now a good policy choice, but that a more freely floating exchange rate would be better than sterilisation of balance of payments surpluses or deficits.     

Policy Choices and Resilience to International Monetary Shocks

Abstract

The well-known trilemma theory states that the nominal exchange rate regime plays a crucial role in a country's ability to pursue monetary policy that is for its domestic objectives independent from other countries' influences. In particular, a flexible exchange rate is required for an independent monetary policy. Capital controls may help a country with a fixed exchange rate to gain some policy space but the effect of capital controls is leaky and often short-lived. We revisit these conventional wisdoms and find no strong evidence supporting them in practice. In particular, a flexible exchange rate does not reliably deliver monetary policy independence, but capital controls do. This is consistent with the view that most (developing) countries dislike either depreciation or appreciation of their currencies, and therefore would choose to follow US monetary policy moves even if they are on a flexible exchange rate regime. In other words, to build resilience to international monetary policy shocks, capital controls are a necessarily component.     

CAN A RULE‐BASED MONETARY POLICY FRAMEWORK WORK IN A DEVELOPING COUNTRY? THE CASE OF YEMEN

Monetary policy in Yemen is largely rudimentary and ad hoc in nature. The Central Bank of Yemen's (CBY) approach has been based on discretionary targeting of broad money without any clear target to anchor inflation expectations. This paper argues in favor of a new formal monetary policy framework for Yemen emphasizing a proactive and rule‐based approach with a greater direct focus on price stability in the context of a flexible management of the exchange rate. Although, as in many developing countries, institutional capacity is a concern, adopting a more formal framework could impel the kind of changes that are required to strengthen the ability of the CBY in achieving low and stable rates of inflation over the medium term.     

Inflation-targeting under a Managed Exchange Rate: the Case of the Chinese Central Bank

In 2004, the People's Bank of China (PBC) is reported to have abandoned the quantity of money as its intermediate goal and to adopt some elements of the apparatus of inflation targeting, without giving up the managed exchange rate regime for the renminbi (RMB), the Chinese currency. We show in this paper, using a dynamic setting, that partially implementing the apparatus of inflation targeting by the PBC to improve the performance of monetary policy encounters various difficulties from out-of-equilibrium dynamics to macro-economic and financial instability. In this context, some macro-economic measures can be helpful for reducing disequilibrium. Further development of internal monetary and financial markets and assigning balanced weights by the PBC to inflation and output targets are necessary conditions for the regime to be stable.     

CAN TUNISIA MOVE TO INFLATION TARGETING?

Inflation targeting has become an alternative monetary strategy that has been followed by many industrial and emerging countries. This study considers whether the adoption of inflation targeting would be relevant for Tunisia. More specifically, this paper aims at checking whether the necessary conditions for the successful implementation of such a strategy are fulfilled or not. It is found that fiscal dominance does not constitute the main hindrance to the adoption of inflation targeting. Other impediments have been identified, especially a weak financial system in general, the unsound and fragile banking system in particular, and the glaring lack of knowledge about the monetary transmission mechanism. Furthermore, it has been pointed out that if Tunisian monetary authorities continue to carry out the present exchange rate regime, namely, the constant real exchange rate rule, an inflation targeting regime will not be sufficient to properly contain the inflation pressures caused by demand shocks.     

Devaluation and monetary policy with import compression

The consequences of exchange rate and monetary policies are investigated under two foreign exchange regimes. The analysis is motivated by the experiences in sub-Saharan Africa. The supply side of the open economy model developed by Buffle (1986) is modified to take into account the import dependency of the region. In the first regime, with endogenous foreign savings, overvalued exchange rate and expansionary monetary policy tend to increase the current account deficit. In the second regime, when intermediate imports are rationed to handle the foreign exchange shortage, overvaluation and monetary expansion are shown to be likely sources of output contraction. The cost of policy reorientation is reduced investment.     

The interest rate–inflation relationship under an inflation targeting regime: The case of Turkey

This paper examines the relationship between nominal interest rates and the expected inflation rate for the Turkish economy between 2002 and 2009, a period when the inflation-targeting regime was implemented as monetary policy. We use the test of cointegrating rank with a trend-break (a method introduced by Inoue, 1999) and we also apply exogeneity tests. Empirical findings indicate that monetary policy rates depend on inflationary expectations; long-term interest rates are affected by monetary policy; and the weak form of the Fisher effect is valid. This evidence implies that monetary policy has actually influenced the real long-term interest rates; the inflation targeting regime pursued by the Central Bank of Turkey is reliable; and hence realized inflation has remained close to its targeted level.     

International monetary policy cooperation in economies with centralized wage setting

We consider a standard two-country monetary policy game with fixed nominal wage contracts. The policy regime is either non-cooperative or cooperative. We extend conventional analyses by deriving the natural rate of employment endogenously through monopoly union decision-making. As unions attempt to affect the real exchange rate, wages are set inefficiently high. Such attempts are shown to be strongest under monetary cooperation. Therefore, in comparison with non-cooperation, employment is lowest, and, in effect, consumer price inflation is highest, under monetary cooperation, i.e., international monetary cooperation is disadvantageous.     

Is monetary policy non‐linear in Indonesia,Korea, Malaysia,and Thailand? A quantile regression analysis

There is a growing literature on the linearity or otherwise of monetary policy in industrialised countries. The investigations have revealed that the reactions of central banks to economic variables depend on the level of the variables, confirming the non‐linearity of monetary policy in these countries. However, research into whether monetary policy is non‐linear in emerging markets has been hampered by the lack of data, as a stable, ‘modern’ monetary regime has existed in emerging markets for only a relatively short time. Employing quantile regression, which is not as constrained as other regression methods by the shortness of time series, we investigate the non‐linearity of monetary policy in four emerging Asian nations: Indonesia, Korea, Malaysia, and Thailand. Our results indicate that monetary policy in all four is non‐linear. All display a ‘hump‐shaped’ response to inflation across the quantiles—policy becomes tighter, going from lower to higher quantiles, reaches a peak, and then becomes looser. These results are similar to those found previously in Japan, and likely arise from a desire to limit exchange rate appreciation, as all four countries depend heavily on exports.     

Do Monetary Policy Announcements Affect Exchange Rate Returns and Volatility of Returns? Some Evidence from High‐Frequency Intra‐Day South African Data

This paper examines the temporal effect of domestic monetary policy surprises on both returns and volatility of returns of the South African rand/U.S. dollar exchange rate. The analysis in this “event study” proceeds using intra‐day minute‐by‐minute exchange rate data, repo rate data from the South African Reserve Bank's scheduled monetary policy announcements, and market consensus repo rate forecasts. A carefully selected sample over the period August 2003 to November 2017 ensures that the change in monetary policy is exogenous to the exchange rate. We find statistically and economically significant responses in intra‐day high‐frequency South African rand/U.S. dollar exchange rate returns and volatility of exchange rate returns to domestic interest rate surprises, but anticipated changes have no bearing on exchange rate returns and their volatility. The empirical results also indicate that there is an instantaneous response of the rand/dollar exchange rate to monetary policy surprises and that monetary policy news is an important determinant of the exchange rate until at least 42 minutes after the pronouncement – suggesting a high degree of market “efficiency” in its mechanical sense (although not necessarily in the deeper economic‐informational sense) in processing this information. Essentially, the asymmetric GARCH results exhibit no leverage effects – positive and negative information shocks have symmetric effects on conditional variance.