Is it really more dispersed?

The ECB’s one size monetary policy is unlikely to fit all euro area members at all times, which raises the question of how much monetary policy stress this causes at the national level. I measure monetary policy stress as the difference between actual ECB interest rates and Taylor-rule implied rates at the member state level. These rates explicitly take into account the natural rate of interest to capture changes in trend growth. I find that monetary policy stress within the euro area has been steadily decreasing prior to the recent financial crisis. Current stress levels are not only lower today than in the late 1990s, they are also in line with what is commonly observed among U.S. states or pre-euro German Länder.     

Spillovers of the Conventional and Unconventional Monetary Policy from the US to South Africa

This paper assesses the effect of US monetary policy on South Africa during the period 1990–2018. We separately analyse and compare the effect of conventional monetary policy, before the Global Financial Crisis, and unconventional monetary policy, after the US monetary policy reached the zero-lower bound. Our impulse response function results indicate that monetary policy in South Africa responds mainly to local inflation, economic activity and financial conditions. While there is strong correlation between the global and South African financial cycle, the financial cycle is not transmitted to the real economy because of the sluggish response of industrial production and domestic credit, especially after the global financial crisis. We see this as an indication of the effects of structural issues to the real economy and constrained households’ balance sheet which has prevented the local economy to take advantage of low local interest rates and the global economic recovery after the crisis.     

Monetary policy in the Euro area – lessons from the first years

This paper investigates in a consistent semi-structural empirical framework three current issues of monetary policy in the euro area. First, regarding policy transmission we offer a three-stage procedure to combine the estimation of economic structure prior to EMU with current ECB monetary policy. Second, we test whether the regime change leads – before or after – EMU to structural instability. Third, we investigate the stance of monetary policy in Europe. We compare a counterfactual ECB reaction function based on average interest rates prior to EMU with actual ECB policy. Furthermore, we analyse actual ECB policy with interest rate projections using Bundesbank reaction functions and euroland data.We thank two anonymous referees, participants of the Royal Economic Society Conference in 2003, the Money, Macro, and Finance Annual Conference in 2002, research seminars at the Universities of Augsburg, Bochum, Bonn, Frankfurt and Bloomington/Indiana for helpful comments. Obviously, we are responsible for all remaining shortcomings.     

Central Bank Balance Sheet Policies and Inflation Expectations

We analyse the empirical effects of credit easing and quantitative easing on inflation expectations and exchange rates. Both monetary policy strategies are summarised in measures for composition and size of the central bank balance sheet and are included in a VAR model. The results show that changes in balance sheet size had positive, albeit weak effects on inflation expectations in Japan, while the effects were negligible in the euro area. By contrast, an increasing balance sheet size is associated with reduced short-term inflation expectations in the US and UK, pointing at negative signalling effects. Shocks to balance sheet size or composition have no substantial effects on long-term inflation expectations in the euro area, US and UK. An expanding balance sheet size is associated with a depreciation of the euro, pound sterling and Japanese yen.     

What Prompts the People＇s Bank of China to Change Its Monetary Policy Stance？ Evidence from a Discrete Choice Model

In the present paper, we model the policy stance of the People＇s Bank of China （PBC） as a latent variable, and the discrete changes in the reserve requirement ratio, policy interest rates, and the scale of open market operations are taken as signals of movement of this latent variable. We run a discrete choice regression that relates these observed indicators of policy stance to major trends of macroeconomic and financial developments, which are represented by common factors extracted from a large number of variables. The predicted value of the estimated model can then be interpreted as the implicit policy stance of the PBC. In a second step, we estimate how much of the variation in the PBC＇ s implicit stance can be explained by measures of its policy objectives on inflation, growth and financial stability. We find that deviations of CPI inflation from an implicit target and deviations of broad money growth from the announced targets, but not output gaps, figure significantly in the PBC＇s policy changes.     

Was ECB's monetary policy optimal?

Overall, the ECB managed monetary policy quite satisfactorily in the first phase of EMU. Nevertheless, this paper asks whether monetary policy could not have been improved. In the last three years, Euroland was confronted with the first external shock. Oil prices increased considerably, leading to an increase of headline inflation of over one percentage point in 2000–01. With a specific Taylor rule one can very well understand, how the ECB sets interest rates, but it turns out that monetary policy based on the estimated Taylor reaction function was rather backward than forward looking. While it reacted with a lag to the actions of the U.S. Fed, it was overly cautious by targeting total HICP inflation. Here it is strongly argued and also demonstrated with model simulations that a monetary policy oriented towards core inflation would have resulted in a much better economic performance. The business cycle downturn could have been mitigated with no additional inflation risks.     

The transmission mechanism of monetary policy in Japan: Evidence from banks' balance sheets

We examine how banks' responses to monetary policy vary according to their balance sheet using Japanese bank data from 1975 to 1999. We find that the effect of monetary policy on lending is stronger for banks that are smaller, less liquid, and more abundant with capital. The effects of bank balance sheet on monetary transmission are different by bank types, policy stances and borrowers' industries. Our results imply that a lending channel of monetary transmission exists, that the effect of expansionary monetary policy is attenuated if banks' capital is scarce, and that the effect of monetary policy on the allocation of funds depends on banks' balance sheets. J. Japanese Int. Economies 20 (3) (2006) 380–405.     

One Money and Sixteen Needs: Has the ECB’s Monetary Policy Become More Balanced Towards the Needs of the Member States?

In this paper we analyze whether the ECB’s monetary policy has become more balanced towards the needs of the individual member states with the passage of time. We assume that the ECB’s monetary policy stance is in line with a Taylor rule and based on the overall situation in the Euro area, more specifically on the Euro area inflation rate and the overall business cycle position in the area. The question therefore boils down to investigating whether inflation and business cycles have converged since the start of the monetary union. We show that the ECB, if in existence in the 1990s, would have had an impossible task. This is because inflation and business cycles still strongly differed in that time, although convergence substantially increased in the run up to the monetary union. In this respect, the decade under EMU drastically differs from the preceding one. This being said, the evidence for a further improvement in the course of the first decade of the new millennium is mixed. This is because although inflation has further converged, business cycles have shown a tendency for increased divergence. If, however, we are willing to put weights on inflation and output gap divergence (as implied by the Taylor rule), we conclude that also in the course of the period under EMU in general the ECB’s monetary policy has become more in line with the needs of the individual members. Looking at individual countries, we show that during the first decade of its existence the ECB’s interest rate was most fitted to the needs of France and Italy, and least to the needs of Ireland and Greece (both too low) and Germany (too high). To a lesser extent there were also mismatches for Spain and Portugal (both too low). In the more recent period since 2005, the mismatch between the desired domestic interest rate and the desired ECB rate has come down for most countries (most noticeable Germany). For Belgium (for which a higher interest rate was more appropriate), on the other hand, the mismatch increased. These overall positive findings, however, offer no guarantee that the task of the ECB will become easier in the future.     

Monetary policy in the euro area: Was it too tight in the 1990s?

This paper studies the monetary policy in the euro area. An important question concerning the euro area is whether the monetary policy has been too tight in the 1990s and in turn, caused the high unemployment rates, in contrast to the economic prosperity and low unemployment rate of the U.S. Therefore, the authors explore what would have happened to the euro economy if the Central Banks had followed either the fixed or time-varying monetary policy rule of the U.S. The paper does find that the European central banks and then later the ECB overreacted to past inflation pressures.     

Measuring the monetary policy stance of the People's bank of china: An ordered probit analysis

The People's Bank of China (PBC) has employed a range of different instruments in the implementation of its monetary policy over the past decades, so perhaps no single instrument would constitute an adequate representation of the monetary policy stance. We thus develop a new policy stance index, and examine it in an ordered probit model, which follows the studies by Gerlach (2004) and He and Pauwels (2008). The empirical results show that in a backward-looking model, monetary policy reacts to actual output growth; one the other hand, when deviations from trend levels are considered, the PBC concerns inflation most seriously. In a forward-looking model, when we examine the PBC's statements in its quarterly Monetary Policy Executive Report from 2001Q1 to 2010Q3, it seems that the PBC's assessment of the prospects for inflation plays a key role determining the PBC's monetary policy stance. Our conclusions suggest that the PBC is informally targeting inflation, although no explicit target has ever been announced to the public by the PBC.     

欧元区统一货币政策绩效及其对中国的启示

欧元产生以来,欧洲中央银行在统一货币政策的框架下较好的实现了物价稳定的首要任务,却未能有效促进欧元区的经济增长、充分就业和国际收支平衡,主要原因在于:成员国经济基本面的差异使统一货币政策产生了巴拉萨-萨缪尔森效应。由此给当前正致力于货币合作的东亚地区带来了一个重要启示:应不断加强各国间的政策协调,确保主要经济指标高度趋同,为将来单一货币的实行奠定重要基础。     

Financial Deregulation and the Bank Lending Channel in Developing Countries: The Case of Indonesia

The dominant role of commercial banks as a source of finance and the considerable asymmetry of information in financial markets in developing countries have raised an argument that the bank lending channel of monetary transmission mechanism would be very important in such countries. This study addresses the issue by investigating empirically whether there are differential effects of monetary policy on banks' balance sheets, and its implications to the existence of the bank lending channel of monetary policy in Indonesia, especially since the early 1980s when the government adopted a policy of financial deveculation. We find significant differences of balance sheet behaviour across bank classes in response to a change in monetary policy, consistent with the predictions of the bank lending view. We also found that because of access to foreign funds and the existence of bank loan commitment, the monetary policy was unable to constrain loan supply by the large (state) banks, indicating that the bank lending channel operates through smaller (non-state) banks.     

Transmission mechanisms of conventional and unconventional monetary policies in open economies

This paper provides an empirical examination on the transmission mechanisms of conventional and unconventional monetary policies for two non-EMU countries, Switzerland and the United Kingdom, over the period 1990–2017. We investigate the role of stock prices and consumer expectations in the transmission of monetary policy. We propose two distinct structural VAR models. The model for the case of conventional monetary policy covers the pre-2009 period, while the model for the case of unconventional monetary policy covers the post-2009 period. The official bank policy rate and central bank’s reserve assets are used as instruments for conventional and unconventional monetary policy. The analysis reveals that the inclusion of a forward-looking informational variable of near-term development in economic activity and a financial variable such as the stock prices is of key importance for the monetary policy assessment. We provide evidence for the existence of a consumer confidence channel in the transmission of conventional monetary policy. Moreover, the long-term government bond yields, the exchange rate and stock prices have an important role in the transmission of unconventional monetary policy. Our findings indicate that conventional and unconventional monetary policies have short-run expansionary effects in both countries by increasing output, consumption, investment, stock prices and wages, while reducing unemployment.

     

Can We Still Lean Against the Wind?

In an overlapping generations model without financial frictions, Gali (Am Econ Rev 104(3):721–752, 2014) observed that a ‘leaning against the wind’ monetary policy is likely to aggravate the fluctuations in the bubble. He found that optimal monetary policy in such an economy must strike a balance between stabilization of the bubble and stabilization of aggregate demand. This paper extends Gali (Am Econ Rev 104(3):721–752, 2014)’s model by introducing various financial frictions in the bubbly economy with a Samuelson 2-period overlapping agents and examine how ‘leaning against the wind’ macro-prudential policies like capital adequacy affect the size and volatility of bubble, inflation and aggregate demand. While the results of the model with financial frictions vindicate Gali (Am Econ Rev 104(3):721–752, 2014) that a leaning against the wind monetary policy generates a larger volatility in the bubble than a policy of benign neglect, the paper finds that minimisation of bubble volatility requires an active macro-prudential policy. It is also observed that stronger interest rate response of monetary policy to the bubble necessitates a stronger macroprudential response possibly to absorb the excess volatility generated by the monetary policy. However, the paper also finds that tightening macroprudential policy parameter beyond a threshold value may encourage banks to take more risks and increase credit supply, aggravating the bubble in the process. With respect to macroprudential policy, there is no conflict between stabilization of current aggregate demand and stabilization of future aggregate demand and both call for a strong macroprudential response, at least until the macroprudential parameter attains the threshold value, although the conflict between the two objectives persists with respect to monetary policy as in Gali (Am Econ Rev 104(3):721–752, 2014). Empirical verification of the provisioning cost channel through structural vector autoregression confirm that a positive provisions shock can contract asset bubbles by restricting credit, output and a delayed marginal response of interest rate spreads.     

European monetary unification: a tour d'horizon

This article takes stock of the literature and debate over Europeanmonetary unification. In contrast to other papers, where itis argued that the issues and prospects remain shrouded in uncertainty,I argue that in a number of important areas, a reasonable degreeof consensus now exists, as the result of a decade of scholarship.The subsequent stock-taking concentrates on areas where significantquestions remain, starting with the implications of surrenderingthe exchange rate and an independent national monetary policyas instruments of adjustment; the conduct of fiscal policy underthe Excessive Deficit Procedure and the Stability Pact; andhow quickly the European union is likely to develop an EU-widesystem of fiscal federalism to accompany its monetary union.Turning from fiscal to monetary issues, I ask whether the EuropeanCentral Bank (ECB) will be as inflation averse as the Bundesbank,what exchange-rate policy the ECB will pursue, and whether theeuro will be a leading reserve currency. I conclude with whatmay be the most contentious issue of all, namely whether Europe'smonetary union could collapse after it begins.     

Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma

Using the “trilemma indexes” developed by Aizenman et al. (2010) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—we examine how policy configurations affect macroeconomic performances, with focus on the Asian economies. We find that the three policy choices matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation rate. We find that trilemma policy configurations affect output volatility through the investment or trade channel depending on the openness of the economies. Our results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears to enhance the stabilizing effect of the trilemma policy choices, and this may help explain the recent phenomenal buildup of IR in the region.     

Multiple wage-bargaining systems in the single European currency area

Little attention in the EMU literature has been paid to theinteraction between central bank monetary rules and systemsof collective wage bargaining. Analytically and empirically,coordinated wage-bargaining systems respond with real wage restraintto non-accommodating monetary policy. Since wage determinationis dominated by collective bargaining in all the EMU memberstates and wage coordination within the member states has grownsince 1980, this is a topic of potential importance. In particular,the replacement of the Bundesbank, directly targeting Germaninflation, by a European Central Bank (ECB) targeting Europeaninflation will remove a major institutional support of wagerestraint in Germany. The consequences of this for EMU are workedout under two scenarios, that inflation expectations will begenerated by ECB monetary policy and that they will reflectGerman inflation outcomes. Possible institutional developmentsare discussed including government union bargains. The Bundesbankalso played a major role in maintaining fiscal rectitude: forunderlying structural reasons, therefore, it is possible thatGermany will move to a period of fiscal activism with wage restraintand low inflation purchased through social contract negotiations.     

The European Monetary Policy Responses During the Pandemic Crisis

This paper uses an event-based analysis to describe how the European Central Bank’s (ECB’s) policy responses to the pandemic crisis have affected the European financial and economic system. The result of our exercise, which is based on the examination of the main measures taken by the ECB during 2020, is that these responses have positively affected the European economic system by improving banks’ lending activity and by indirectly creating room for expansionary fiscal policies in the euro area’s high-debt countries that do not have fiscal capacity.

     

The Relationship Between Price Stability and Financial Stability: Evidence From Major Emerging Economies

We examine the relationship between price stability and financial stability for major emerging economies using a Markov regime-switching model. Empirical results suggest that monetary policy is consistent with the Taylor rule in all countries except for India and all countries followed both low and high inflation targeting monetary policy regimes. Low inflation targeting regime seems to be more persistent and has higher duration than high inflation targeting regimes except for Indonesia and South Africa. All countries seem to have had financial stability concerns when they formulated their monetary policy as the coefficient of the financial stress index is statistically significant at least in one regime. Overall the results suggest that Taylor rule-based monetary policies have been implemented to various degrees in major emerging economies to achieve economic stability, price stability, and financial stability.     

Central Bank Communication in a Low Interest Rate Environment

When interest rates are low, or negative, central banks must increasingly rely on effective communication to ease the stance of monetary policy. Empirical evidence suggests that the ECB’s forward guidance, consisting of a carefully expounded series of expectations involving both key policy rates and asset purchases, has been successful in (i) reducing the sensitivity of forward rates to macroeconomic news, (ii) insulating euro area financial conditions from external shocks and (iii) providing additional monetary policy accommodation at a time when the room for cuts in key policy rates has been very limited. At the same time, a central bank cannot always be sure how its forward guidance works and much of the challenge arises from the interaction between central banks and financial markets. In this environment, and for forward guidance to be credible and effective, policymakers need to be clear about their reaction function, regularly align their policy expectations with the evolving assessment of the state of the economy and its likely evolution, and act accordingly.