Monetary Policy Analysis in a Small Open Credit-Based Economy

This paper describes a simple framework for monetary policy analysis in a small open economy where bank credit is the only source of external finance. At the heart of the model is the link between banks’ lending rates (which incorporate a premium over and above the marginal cost of borrowing) and firms’ net worth. In contrast to models in the Stiglitz-Weiss or Kiyotaki-Moore tradition, the supply of bank loans is perfectly elastic at the prevailing rate. The central bank sets the refinance rate and provides unlimited access to liquidity at that rate. The model is used to study the effects of changes in official interest rates, under both fixed and flexible exchange rates. Various extensions are also discussed, including income effects, the cost channel, the role of land as collateral, and dollarization.

On Optimal Monetary Policy Rules and the Construction of MCIs in the Open Economy

This paper presents a simple open-economy forward-looking model to underscore the important role of the real exchange rate channel in the conduct of optimal monetary policy. As opposed to the closed economy, optimal monetary policy in the open economy depends on both demand-side and supply-side parameters.The paper also highlights the importance of the exchange rate channel for the design and implementation of a Monetary Conditions Index in the conduct of monetary policy. The model gives rise to an alternative MCI where the weight on the real exchange rate depends on all parameters of the model and the policymakers preferences.     

Evaluating South Africa's Open Economy

The competing theories of the macroeconomic trilemma and dilemma are empirically tested for South Africa. The empirical findings show evidence of the trilemma theory being applicable to South Africa, supporting the country's ability to maintain monetary independence (MI). An empirical puzzle, however, emerged as South Africa's MI index decreased during the country's 2000–2014 inflation‐targeting period. A possible explanation, and subject for further research, is that the increasing opening of South Africa to international flows since 1995 may have caused South Africa to be more exposed to international business cycles and shocks, resulting in a reduction in measured MI.     

Monetary Policy and Borrowers’ Loan Defaults: Research Based on Data from Renrendai

This paper uses Renrendai data to study the relationship between monetary policy and the default behavior of borrowers, and analyzes the transmission channels. The research shows that tight monetary policy will lead to a significant increase in a borrower's probability to default, and this effect will continue for several months. There may be two transmission channels: (i) monetary policy changes a debtor's liquidity through credit and balance sheet channels, which directly affects their current repayment behavior; and (ii) monetary policy may affect a borrower's investment, production and profitability, thus changing their long‐term solvency. The paper also finds that the repayment behavior of productive borrowers is more susceptible to monetary policy than consumptive borrowers, and that the default behavior of borrowers in coastal provinces is more susceptible to monetary policy than of borrowers in inland provinces. These findings provide new evidence for understanding how monetary policy affects individual behavior and its transmission mechanisms.     

Monetary Policy Impulses and Retail Interest Rate Pass‐Through in Asian Banking Markets

This paper considers the integration of financial markets and mutual influences of monetary policies in the USA and Asia based on monthly data from 1994 to 2007. We used panel‐type and time‐series and quantile panel‐type error correction models to test the influences of expected and unexpected monetary policy impulses on the interest rate pass‐through mechanism in the financial markets of 9 Asian countries and the USA. The empirics show that if interest rate integration exists in the financial markets, the following effects are observed: (i) positive impulses of unexpected monetary policy will lead to an increase in the long‐run multiplier of the retail interest rate; (ii) the adjustment of retail interest rates with short‐run disequilibrium will lead to an increase in the long‐run markup; and (iii) the empirical results of quantile regression prove that when the interest variation is greater than the 0.5th quantile and unexpected monetary policy impulses are greater than the expected monetary policy impulses, the short‐run interest rate pass‐through mechanism becomes more unstable.     

Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting Versus Flexible Currency Board in Sub‐Saharan Africa

The paper examines the monetary policy actions through which central banks in sub‐Saharan Africa have tried to eliminate the negative impacts of the shocks facing their economies. We compare two different monetary policy regimes: a currency board regime (in the CFA zone) and an inflation targeting policy regime (Ghana and South Africa) when central banks respond to demand, supply, and fiscal shocks. We extend the usual forecasting and policy analysis system models to replicate the economic features of these economies during the period 2002–12 and to evaluate the impact of several policies in response to these shocks. We find that both policies are inappropriate in helping the economies escape from the effects of negative demand shocks, both are essential when negative shocks to primary balance occur, while inflation targeting dominates the currency board regime as a strategy to cope with positive shocks to inflation.     

Monetary Policy in Illiquid Markets: Options for a Small Open Economy

Two impediments to effective monetary policy operation include illiquidity in bond markets and the zero bound of interest rates. Under these conditions alternative means of enacting monetary policy may be required. This paper empirically explores policy options implemented through equity and currency markets that will generate similar inflation responses at different time horizons. In terms of GDP loss the least costly means of achieving a particular long run inflation outcome is via the current monetary policy arrangements. Currency market alternatives are volatile but less expensive than the equity market in terms of output loss for short term inflation horizons.

Monetary Model of Exchange Rate for Thailand: Long-run Relationship and Monetary Restrictions

Abstract

This paper examines the long-run relationship between exchange rate and its determinants based on the flexible-price monetary model. The multivariate cointegration approach is adopted to attain our objective of this study. The empirical results provide evidence favoring the monetary approach to exchange rate for a small and open emerging economy, namely Thailand. In addition, the validity of the underlying assumptions of the monetary approach to the determination of exchange rate is established. The findings suggest that exchange rate players may effectively monitor and forecast the exchange rate movement via the money supplies, incomes, and interest rates variables of both Thailand and Japan. Besides, one has to follow the economic development of Thailand's major trading partner, Japan, to understanding the movement of exchange rate for Thailand. Moreover, our findings add new insights to accompany previous studies that documented the important influence of the US in the emerging Asian economies.     

Exchange Rate Pass-through,Unemployment and Optimal Implementable Monetary Policy Rule for Emerging Economies

Abstract

This paper develops a small open economy model with nominal rigidities and search-matching frictions to study the implications of exchange rate pass-through for monetary policy in emerging countries. I find that, with complete exchange rate pass-through, the optimal policy rule features unemployment targeting as well as inflation targeting. However, the welfare gain from responding to unemployment fluctuations diminishes as the rate of exchange rate pass-through to import prices decreases. With low exchange rate pass-through, the optimal monetary policy is strict inflation targeting.     

THE ROLE OF THE EXCHANGE RATE IN A NEW KEYNESIAN DSGE MODEL FOR THE SOUTH AFRICAN ECONOMY

We build a small open economy New Keynesian dynamic stochastic general equilibrium model for South Africa similar to Steinbach et al. We abandon their assumption of complete risk sharing with the foreign economy, and introduce country risk shocks to allow deviations from uncovered interest rate parity. These changes allow us to include the exchange rate as an observable variable in the estimation of the model. Using forecast error variance decompositions and historical decompositions, we show that country risk shocks have sizable effects on the South African business cycle. We also explore the optimal monetary policy implications of our model within the context of Taylor rules.     

Modelling Monetary Union in Southern Africa: Welfare Evaluation for the CMA and SADC

This paper proposes a quantitative assessment of the welfare effects arising from the Common Monetary Area (CMA) and an array of broader groupings among Southern African Development Community (SADC) countries. Model simulations suggest that (i) participating in the CMA benefits all members; (ii) joining the CMA individually is beneficial for all SADC members except Angola, Mauritius and Tanzania; (iii) creating a symmetric CMA‐wide monetary union with a regional central bank carries some costs in terms of foregone anti‐inflationary credibility; and (iv) SADC‐wide symmetric monetary union continues to be beneficial for all except Mauritius, although the gains for existing CMA members are likely to be limited.     

Delegation and Fiscal Policy in the Open Economy: More Bad News for Rogoff's Delegation Game

This article studies the open-economy Rogoff delegation game, taking into account both intra-country and intercountry interactions between fiscal authorities and central banks. With representative bankers, the Nash equilibrium of fiscal and monetary authorities independently responding to supply-side shocks sees insufficient monetary adjustment and an imbalance towards fiscal stabilization if shocks are sufficiently symmetric; the opposite occurs if shocks are sufficiently asymmetric. Appointing conservative bankers shifts the fiscal–monetary balance away from monetary towards fiscal policy. Unilateral delegation benefits that country; but when all countries independently delegate, the outcome is only favorable if shocks are sufficiently asymmetric.     

数量型还是价格型货币政策比较——基于利率市场化角度的分析

利率市场化进程中,数量型还是价格型货币政策合适?文章考虑金融市场上的金融加速器特征,将其引入DSGE模型,通过校准、模拟,从宏观经济波动幅度、不同货币政策下冲击效应以及福利损失函数三方面综合分析了利率市场化过程中数量型和价格型货币政策有效性问题。研究结果显示,随着存款利率的上升,在熨平经济波动方面,价格型货币政策更有优势;在促进经济增长方面,数量型货币政策更有优势;对央行损失而言,价格型货币政策的损失更小。因此,中央银行应根据需要灵活的运用数量型和货币型搭配使用,做好数量型向价格型转变。     

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.     

Reforms,Exchange Rates and Monetary Commitment: A Panel Analysis for OECD Countries

The paper investigates the link between monetary policy and structural reforms in open economies. We test three hypotheses: (a) the Calmfors hypothesis that the degree of reforms is higher in the case of autonomous policy and lower in the case of commitment, (b) the TINA hypothesis which implies a positive impact of a monetary policy rule on the extent of reforms, and (c) a third factors hypothesis. In our empirical analysis on panel data of 23 OECD countries from 1980–2000 we find little evidence for the Calmfors hypothesis, but evidence in favor of the TINA argument for labor market and regulatory reform.

The Categorization of Small Open Economies and the Response to Foreign Interest Rate Shocks: Based on Financial Integration and Net External Credit

To analyze precisely effects of foreign interest rate hike shocks, this paper categorizes small open economies into four kinds of types based on the net external credit (or debt) level and the financial integration level. The empirical result shows that responses of macroeconomic variables tend to differ substantially depending on the type of a small open economy. These findings imply that we need to consider the net external credit (or debt) level and the financial integration level of a small open economy when we predict the effect of a foreign interest rate hike shock.