Financial market imperfections and monetary policy strategy

In a model with imperfect money, credit and reserve markets, we examine if an inflation-targeting central bank applying the funds rate operating procedure to indirectly control market interest rates also needs a monetary aggregate as policy instrument. We show that if private agents use information extracted from money and financial markets to form inflation expectations and if interest rate pass-through is incomplete, the central bank can use a narrow monetary aggregate and the discount interest rate as independent and complementary policy instruments to reinforce the credibility of its announcements and the role of inflation target as a nominal anchor for inflation expectations. This study shows how a monetary policy strategy combining inflation targeting and monetary targeting can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. Friedman's k-percent money growth rule, which can generate dynamic instability, and two alternative stabilizing feedback monetary targeting rules are examined.     

BUSINESS FAILURES AND MACROECONOMIC FACTORS IN THE UK

We examine the interactions between business failures and macroeconomic aggregates, and specifically the accounts of policy-induced changes in the macroeconomy for the observed fluctuations of UK business failures in the period 1966–2003 using the vector error-correction model (VECM). The results demonstrate that macroeconomic aggregates, i.e., interest rate, credit, profits, inflation and business births, exert differential impacts on business failures both in the short run and in the long run. The study reveals that structural changes in the financial and real sectors during the examined period have made an impact on the way in which the macroeconomy affects business failures. In particular, business failures are increasingly reacting to monetary policy changes in the post-1980 period. Furthermore, the shocks to business failures can generate large fluctuations in macroeconomic aggregates, suggesting the importance of corporate balance sheets in financial stability and economic growth. The paper's findings carry policy implications that are related to the survival of firms in distress and finance-driven business cycles.     

Monetary and fiscal policy interactions in a post Keynesian open-economy model

Using a post Keynesian model, this study aims to analyze the stabilizing role of fiscal and monetary policies in an open economy with a managed exchange rate regime. The real exchange rate is modeled as an endogenous variable and inflation explained using the conflicting claims approach. The dynamic properties of macroeconomic equilibrium are evaluated in different regimes of fiscal and monetary policies. The main result of this study suggests that the preferred policy regime is the one in which economic authorities are complementary and fiscal policy plays an explicitly active role. In this regime, the fiscal policy must commit to the target for the rate of capacity utilization and the monetary authority must commit to the inflation target.     

On the Effectiveness of Monetary Policy and of Fiscal Policy

There has been a major shift within macroeconomic policy over the past two decades or so in terms of the relative importance given to monetary policy and to fiscal policy in both policy and theoretical terms. The former has gained considerably in importance, with the latter being rarely mentioned. Furthermore, the nature of monetary policy has shifted away from any attempt to control some monetary aggregate (prevalent in the first half of the 1980s), and instead monetary policy has focused on the setting of interest rates as the key policy instrument. There has also been a general shift towards the adoption of inflation targets and the use of monetary policy to target inflation. This paper considers the significance of this shift in the nature of monetary policy. This enables us to question the effectiveness of monetary policy, and to explore the role of fiscal policy. We examine these questions from the point of view of the "new consensus" in monetary economics and suggest that it is rather limited in its analysis. When the analysis is broadened out to embrace empirical issues and evidence the clear conclusion emerges that monetary policy is relatively impotent. The role of fiscal policy is also considered, and we argue that fiscal policy (under specified conditions) remains a powerful tool for macroeconomic policy. This is particularly an apt conclusion under current economic conditions.     

Teaching Inflation Targeting: An Analysis for Intermediate Macro

Over the last decade, many central banks have adopted policies known as inflation targeting. If intermediate-level macroeconomics students are to be prepared to think about current policy issues, it is important to provide them with an introduction to the macroeconomic implications of inflation targeting. Unfortunately, the standard aggregate demand-aggregate supply frameworks commonly used to teach intermediate macroeconomics are not well suited for this task because they are expressed in terms of output and the price level and because they fail to make explicit the policy objectives of the central bank. The author provides a simple graphical device involving the output gap and the inflation rate that overcomes these problems and that can be used to teach intermediate macroeconomics students about inflation targeting.     

Monetary policy through the ‘credit-cost channel’: Italy and Germany pre- and post-EMU

We present an empirical analysis of the ‘Credit-Cost Channel’ (CCC) of monetary policy transmission. This channel combines bank credit supply and interest rates on loans as a cost to firms. The thrust of the CCC is that it makes both aggregate demand and aggregate supply dependent on monetary policy. As a consequence (1) credit market conditions (e.g. risk spreads) are important sources and indicators of macroeconomic shocks, (2) the real effects of monetary policy are larger and persistent. We have applied the Cointegrated Vector Autoregression (CVAR) econometric methodology to Italy and Germany in the ‘hard’ EMS period and in the European Monetary Union (EMU) period. The short-run and long-run effects of the CCC are detectable for both countries in both periods. Simulation of the estimated model also confirms that inflation-targeting by way of inter-bank rate control stabilizes inflation through structural shifts of the stochastic equilibrium paths of both inflation and the output.     

中国宏观经济形势与政策:2005-2006年

2005年中国经济向加强宏观经济调控的预期方向稳定发展,继续呈现高经济增长与低通货膨胀的良好配合态势。2006年乃至"十一五"期间,中国宏观经济管理应该保持其中性政策取向的连续性与稳定性,在最高可持续增长率(HSGR)的需求管理最终政策目标指导下,建立价格、工资与汇率动态调整一致的政策目标体系,通过稳健财政政策和货币政策的积极操作,以国内投资需求为轴心,实现国民经济持续快速增长。     

The BMW Model: A New Framework for Teaching Monetary Economics

Abstract: Although the IS/LM-AS/AD model is still the central tool of macroeconomic teaching in most macroeconomic textbooks, it has been criticized by several economists. Colander (1995) demonstrated that the framework is logically inconsistent, Romer (2000) showed that it is unable to deal with a monetary policy that uses the interest rate as its operating target, and Walsh criticized that it is not well suited for an analysis of inflation targeting. The authors present a framework that develops the Romer approach into a very simple but, at the same time, comprehensive macroeconomic model. In spite of its simplicity, it can carry the main insights of the New Keynesian macroeconomics to an intermediate level and deal with issues like inflation targeting, monetary policy rules, and central bank credibility.     

金融状况、通胀不确定性与通胀预测——基于Markov机制转换模型的分析

一国的金融状况一般通过信贷传导机制、利率传导机制、汇率传导机制和资产价格传导机制来影响通胀水平并决定通胀趋势,但高通胀水平伴随着较大的通胀不确定性。FCI能有效预测我国的通胀趋势,高通胀状态下FCI对通胀趋势的预测能力强于低通胀状态;低通胀状态下FCI对通胀趋势的短期预测效果优于中长期。我国应尽快指定相关部门制定并定期公布FCI,充分发挥FCI的通胀预测功能,并以此帮助国家实施宏观经济监测、完善调控政策、提高通胀治理效率。要提高央行政策制定的透明度,应避免频繁的政策方向变动,政策调控应尽量平滑操作,从而维持货币政策的稳定性和连贯性、降低通胀不确定性。要充分利用低通胀环境赋予的有利时机推进价格等各项体制的改革。     

THE PARTISAN MODEL OF MACROECONOMIC CYCLES: MORE THEORY AND EVIDENCE FOR THE UNITED STATES*

The “Partisan Theory” of macroeconomic policy is based on the idea that political parties typically weight nominal and real economic performance differently, with left-party governments being more inclined than right-party ones to pursue expansive policies designed to yield lower unemployment and higher growth, but running the risk of extra inflation. Given suitable assumptions about the structure of the macroeconomy, partisan models imply a political signal in demand management, output and inflation movements originating with shifts in party control of the government. In this paper I develop and test with postwar US data a revised Partisan model that allows for (i) uncertainty among policy authorities about the sustainable output growth rate and therefore about how aggregate demand expansions will be partitioned between extra output and extra inflation, and (ii) ex-post and projective learning and preference adjustment under such uncertainty. Dynamic numerical analysis of a small, stylized political-economic model based on these extensions of Partisan Theory generates within-sample forecasts that correspond remarkably well to the observed pattern of price, output and nominal spending fluctuations under the parties.     

Monetary policy credibility and macrodynamics: evidence from Ghana

We compute a time-varying metric of monetary policy credibility based on Ghana’s experience, using both symmetric and asymmetric approaches. We then follow-up with some empirical evidence to address the linkages between macroeconomic developments and central bank credibility. The empirical results reveal high and low credibility cycles with an average duration of 2 years over the study period. Particularly, higher levels of credibility were associated with stable domestic currency and lower nominal interest rates. This reinforces the notion that efficient monetary policy delivers higher central bank credibility with better outcomes for macroeconomic variables. In contrast, the level of credibility tends to worsen in the wake of weakening macro fundamentals which are not adequately countered by monetary policy decisions. There is therefore the need for efficient monetary policy formulation to achieve a stable macroeconomic environment in Ghana. This will in the long-run build policy credibility towards attaining the central bank’s medium-term inflation target.     

Assessing the role of aggregate demand and supply shocks in China’s macroeconomic fluctuation

The combination of a high growth rate and low information has been observed since the late 1990s in the Chinese economy. Should the fact be considered as a result of greatly improved supply capability or should the fact reflect the improvement in the government’s aggregate demand management? In this paper, we try to assess the role of aggregate demand and supply shocks in China’s macroeconomic fluctuation. We use a bivariate structural VAR model to investigate macroeconomic dynamics for China within the aggregate-demand and aggregate-supply framework, using the quarterly data in the period of 1996Q1–2005Q4. Our principal findings are following: (1) China’s high growth shall be associated more with greatly improved supply capability, especially after its WTO entrance. The expansionary aggregate demand policies may have limited effects to raise the growth rate in the post-1996 in China. This result suggests that we need a more pro-growth policy stance in order to maintain a high and stable growth. (2) The low inflation in that period is driven primarily by weak aggregate demand rather than supply factors.     

What Monetary Policy after the Crisis?

The objective of this paper is to reflect on some of the implications that recent economic experience has for monetary and financial stability policies. We contend that the financial crisis and the upsurge in inflation 2007–08 have shown that the policy model based on the new consensus in macroeconomics, which largely held sway over the past decade or more, is broken. It is argued that inflation targeting cannot deliver low inflation. We argue that fine-tuning through interest rates should not be attempted, but rather a constant real interest rate target based on the output growth rate should be adopted. The key objective of monetary policy should be shifted to financial stability, the independence of central banks should be brought to an end, and their decision making should be coordinated with other macroeconomic policy initiatives.     

中国经济走势与宏观经济政策取向

本文采用历史分析和逻辑研究相结合的方法,认为中国经济的运行规律是决定中国未来宏观经济走势的基础,而世界经济运行规律和中国的宏观经济政策选择也影响着宏观经济的走势。无论从中国经济自身的运动规律还是从世界经济的运行规律来看,未来几年中国经济增长总体上都将呈现向好的趋势。因此,2012年及其未来一段时间,保持经济适度增长,促进结构调整,抑制通货膨胀,将成为中国经济发展的主旋律和政策选择的目标。     

The impact of macroeconomic factors on income inequality: Evidence from the BRICS

In this paper we investigate how the evolution of income growth, real interest rates, and inflation have driven income inequality across a variety of countries with particular focus on the BRICS economies (Brazil, Russia, India, China, and South Africa) during the period 2001 to 2015. Our work suggests that, when central banks of the BRICS economies use monetary policy for macroeconomic stabilization, they need to consider the impact monetary policy changes have on the distribution of income in their nations. Our estimates reveal that the unintended consequence of policies that induce economic growth and higher prices is higher income inequality. We find that the positive relationship between the three macroeconomic variables and income inequality for the BRICS economies is stronger during the post-2008 period.     

Could a higher inflation target enhance macroeconomic stability?

Recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2%. We evaluate whether an increase in the inflation target to 3% or 4% could improve macroeconomic stability in the Canadian economy. We find that the magnitude of the benefits hinges critically on two elements: (i) the availability and effectiveness of unconventional monetary policy (UMP) tools at the effective lower bound and (ii) the level of the real neutral interest rate. In particular, we show that when the real neutral rate is in line with the central tendency of estimates, raising the inflation target yields some improvement in macroeconomic outcomes. There are only modest gains if effective UMP tools are available. In contrast, with a deeply negative real neutral rate, a higher inflation target substantially improves macroeconomic stability regardless of UMP.     

Monetary and Fiscal Policy Rules in the EMU

Abstract. This paper studies the design and effects of monetary and fiscal policy in the euro area. To do so, a stylized two‐region model of monetary and fiscal policy rules in the EMU is built. We analyse how monetary and fiscal rules affect the adjustment dynamics in the model. Both the effects on the individual countries and on the EMU aggregate economy are studied. Three aspects play an important role in the analysis: (i) the consequences of alternative monetary and fiscal policy rules, (ii) the consequences of asymmetries between EMU countries (asymmetries in macroeconomic shocks and macroeconomic structures), and (iii) the role of alternative degrees of backward‐ and forward‐looking behaviour in consumer decisions and inflation expectations.     

Dynamics of Macroeconomic Adjustment with Growth: Some Simulation Results *

This paper examines the impact of several macroeconomic policies, both demand and supply management policies, on economic activity within a small macroeconomic simulation model. The model is based on a standard analytical framework that underlies adjustment policies in developing economies (Des). The standard approach has been to use aggregate government expenditure as an instrument of fiscal policy to shock economic activity in a DE, with a negative dynamic response typically observed. In the context of such a small macroeconomic simulation model we decompose government expenditure into consumption and investment expenditure. Simulation exercises with and without model-consistent expectations throw up some contrasting results in the sense that fiscal policy can influence output positively through the effects of public sector investment on private investment in a DE such as India. [F43, E62]     

中国上市公司商业信用 周期性变化的宏观经济动因研究

本文为了揭示中国上市公司商业信用周期性变化的宏观经济动因,构建了一个宏观经济因素影响上市公司商业信用行为的理论分析框架,从宏观和微观两个层面分析了宏观经济发展状况、货币政策和通货膨胀水平对中国上市公司商业信用周期性变化的影响机理。利用中国上市公司季度面板数据进行了实证检验。结果显示,随着货币政策宽松、宏观经济扩张和通货膨胀水平的增加,中国上市公司提供的商业信用净额都显著降低。这些研究结果折射出,当货币政策收紧或宏观经济收缩时,商业信用资金从上市公司部门流向非上市企业部门;反之,当货币政策过度宽松或宏观经济过度扩张时,上市公司部门通过商业信用渠道从非上市企业部门吸纳商业信用资金。     

Anatomy of canadian inflation: An analysis with CANDIDE model 2.0

The objective of this paper is to analyze the causes of inflation projected for Canada through out the 1980s, using CANDIDE Model 2.0 as reported in the 18th Annual Review base case. Our analysis suggests that, in the medium-run inflation is not only a monetary phenomenon but also caused by a host of other factors: external inflation, foreign interest rates, low productivity growth, labour market tightness, domestic energy pricing and indexation of wages to CPI, a measure of inflation that reflects both domestic and foreign price pressures. Our results indicate that the restrictive aggregate damand policies alone will not make a significant dent in inflation without incurring substantial loss in output and employment. Our analysis suggests that we might better fight inflation using a balanced mix of aggregate demand and supply management policies and incentive based income policies.