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.     

Variations Across Canadian Regions in the Sensitivity to U.S. Monetary Policy

This paper contributes to the research on regional economic responses to monetary policy shocks in two ways. First, rather than just model the Canadian economy at the national level, we examine the impact of monetary policy shocks across five separate Canadian regions. The second extension of the literature is our focus upon estimating the impact from both Canadian and U.S. monetary policy shocks upon regional Canadian economic activity. The findings are broadly consistent with results from previous research modeling the national Canadian economy, but noteworthy regional differences are observed. Eastern Canadian regions, defined as Ontario (ON), Quebec (QU), and Atlantic (AT), exhibit greater sensitivity to Canadian monetary policy shocks than do Western Canadian regions. We also find that U.S. monetary policy shocks have a discernable impact on Canadian regional economic activity, but the impact varies across regions. For the three Eastern Canadian regions ON, QU, and AT, there is a significant impact upon regional economic activity from a U.S. monetary policy shock, but not for the two Western Canadian regions Prairie (PR) and West (WE). Moreover, the impact on ON, QU, and AT from a fed funds shock is quite similar to the impact from a shock to the Canadian Bank Rate.     

资本开放、外汇储备累积与货币政策独立性——中国数据的实证研究

在开放和发展条件下,基于凯恩斯动态货币需求调节方程和Cavoli模型,本文构建了一个包含外汇储备增加的国内市场利率决定模型。对中国2001~2008年月度数据的OLS和TSLS回归结果表明,国际市场利率和外汇储备增加对国内利率影响并不显著,而物价水平、产出和滞后一期的货币供给等变量系数符号不仅与理论预期一致,且检验显著。论文进一步采用了递归的SVAR模型来分析国际利率和外汇储备增加对国内利率的动态冲击效应,脉冲响应函数表明这种动态冲击效应同样十分微弱,说明了中央银行的货币冲销有效性和国内货币政策的独立性。     

中国货币政策数量效果的实证研究

文章主要运用了单位根检验、协整检验、格兰杰因果关系检验、脉冲响应函数和方差分解等计量经济学方法,利用1994年到2004年的季度数据,对货币供应量、利率这两个重要货币政策变量与GDP之间的关系进行了计量分析,利率对实体经济的影响不显著;不同层次的货币供应量都能对经济产生影响,但它们对GDP的作用效果是有差异的.为提高我国货币政策的效果,实现我国货币政策的目标提出了相关的政策建议.     

Workers' Remittances,Capital Inflows,and Economic Growth in Developing Asia and the Pacific

This paper examines the impact of remittances on economic growth, using developing countries in Asia and the Pacific as a case study. Using data for the period 1993–2013, our results show that remittances only generate negative and significant impacts on economic growth if they reach 10 percent of GDP or higher. A remittances‐to‐GDP ratio of below 10 percent could still impact growth negatively, but the effect is statistically insignificant. The present study finds some degree of substitutability between remittances and financial development. Foreign direct investment (FDI), but not other types of capital inflow, contributes significantly to economic growth. Other traditional growth engines, including education, trade openness, and domestic investment, are crucial in promoting growth in developing Asian and Pacific nations.     

The Exchange Rate and the Monetary Transmission Mechanism in Germany

For the conduct of monetary policy under floating exchange rates it is important to understand the role of the exchange rate in the monetary transmission mechanism (MTM). The timing and the magnitude of the effects of a change in the exchange rate on output and inflation may be quite different from traditional interest rate channels, thereby affecting optimal policy. In this paper we examine the exchange rate channel in the MTM in Germany by estimating an identified VAR model. Two features of the results are highlighted. The effect of a policy shock on the exchange rate accelerates the pass-through of policy into prices and leads to a different response of the various components of GDP. We then show that these qualitative effects can be duplicated in a general equilibrium model for a semi-small open economy with sticky prices and wages that is calibrated to capture the main features of the German economy.     

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.     

Trans-Tasman Transmission of Monetary Shocks: Evidence From a VAR Approach

This paper investigates the cross-country transmission mechanisms of monetary shocks between Australia and New Zealand within a VAR framework for the period 1985:1–2003:4. The empirical results indicate that a monetary shock in either Australia or New Zealand has real effects in the short-run in both countries however, an Australian shock generates more significant responses of most variables. Australian output is found to be significantly more sensitive than New Zealand output to monetary innovations in either country. The results also suggest that monetary innovations in a small open economy can also influence its larger trading partner.The authors would like to thank Faik Koray and an anonymous referee for their valuable comments. The usual disclaimer applies.     

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.     

Navigating the trilemma: Capital flows and monetary policy in China

In recent years China has faced an increasing trilemma—how to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China's monetary policy as the country liberalizes its good and financial markets and integrates with the world economy. It shows how China has sought to insulate its reserve money from the effects of balance of payments inflows by sterilizing through the issuance of central bank liabilities. However, we report empirical results indicating that sterilization dropped precipitously in 2006 in the face of the ongoing massive buildup of international reserves, leading to a surge in reserve money growth.We also estimate a vector error correction model linking the surge in China's reserve money to broad money, real GDP, and the price level. We use this model to explore the inflationary implications of different policy scenarios. Under a scenario of continued rapid reserve money growth (consistent with limited sterilization of foreign exchange reserve accumulation) and strong economic growth, the model predicts a rapid increase in inflation. A model simulation using an extension of the framework that incorporates recent increases in bank reserve requirements also implies a rapid rise in inflation. By contrast, model simulations incorporating a sharp slowdown in economic growth such as that seen in late 2008 and 2009 lead to less inflation pressure even with a substantial buildup in international reserves.     

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.     

贸易摩擦背景下关税与货币政策反制策略研究

通过将贸易品美元定价约束、外汇噪声交易和关税反制等特征融入两国DSGE模型,文章对贸易摩擦背景下美国进口关税冲击的传导渠道以及中国的关税反制策略与货币应对政策有效性等问题进行了数值分析。研究发现,关税反制措施能够有效地对冲美国加征进口关税对中国实际产出、消费和净出口的消极影响,并有助于抑制人民币实际汇率贬值。若进一步搭配将出口品关税纳入利率调控框架的积极货币政策,对于经济扩张与保持汇率稳定都更加有效。但从长期社会福利角度看,积极货币政策对美国经济也具有明显的正向溢出作用,关税反制则会产生显著的福利转移效应,不采取任何关税与货币应对政策将使中国遭受最大的福利损失。因此,基于"打击最大化、自损最小化"原则,中国应对美国采取坚决有力的关税反击,同时保持货币政策相对中性、克制,以期实现"以战促和"的战略目标。     

Do International Remittances Affect Poverty in Africa?*

Abstract: International remittances flowing into developing countries are attracting increasing attention because of their rising volume and their impact on recipient countries. This paper uses a panel data set on poverty and international remittances for African countries to examine the impact of international remittances on poverty reduction in 33 African countries over the period 1990–2005. We find that international remittances—defined as the share of remittances in country GDP—reduce the level, depth, and severity of poverty in Africa. But the size of the poverty reduction depends on how poverty is being measured. After instrumenting for the possible endogeneity of international remittances, we find that a 10 percent increase in official international remittances as a share of GDP leads to a 2.9 percent decline in the poverty headcount or the share of people living in poverty. Also, the more sensitive poverty measures—the poverty gap (poverty depth) and squared poverty gap (poverty severity)—suggest that international remittances will have a similar impact on poverty reduction. The point estimates for the poverty gap and squared poverty gap suggest that a 10 percent increase in the share of international remittances will lead to a 2.9 percent and 2.8 percent decline, respectively, in the depth and severity of poverty in African countries. Regardless of the measure of poverty used as the dependent variable, income inequality (Gini index) has a positive and significant coefficient, indicating that greater inequality is associated with higher poverty in African countries, much in conformity with the literature. Similar results were obtained for trade openness. In the same vein, per capita income has a negative and significant effect on each measure of poverty used in the study. Our results also show that inflation rates positively and significantly affect poverty incidence, depth and severity in Africa. In all three poverty measures, the dummy variable for sub‐Saharan Africa is strongly positive, and strongly negative for North Africa. The policy implications of these results are discussed.     

Do households care about cash? Exploring the heterogeneous effects of India's demonetization

The recent demonetization exercise in India is a unique monetary experiment that made 86 percent of the total currency in circulation invalid. In a country where the currency in circulation constitutes 12 percent of GDP, the policy turned out to be a purely exogenous macroeconomic shock that affected all agents of the economy. This paper documents the impact of this macroeconomic shock on households. By construction, the policy helped households with bank accounts in disposing of the demonetized cash. We use a new household-level data set to tease out the effects of this policy on households with no bank accounts relative to households with bank accounts. Our results show that the impact of demonetization on household income and expenditure has been transient. We find that households with no bank accounts experienced a significant decrease in expenditure in November and December-2016. We find a slight decline in income in November-2016 but the effect dissipates thereafter. There is significant heterogeneity in the impact across households in different asset quartiles. We also show evidence of recovery of household finances whereby households were able to smooth out consumption during the post-demonetization period. However, this recovery phase is associated with an increase in household borrowing from different sources. In particular, informal borrowing (e.g. money lenders and shops) increased during this period.     

Measuring Monetary Policy in a Small Open Economy with Managed Exchange Rates: The Case of Taiwan

We use sign restrictions to identify monetary policy for a small open economy with heavily managed exchange rates. We apply the proposed sign restrictions to the Taiwanese case, where existing studies tend to find no clear effect of monetary policy shocks on the output and price level. Our principal findings are that a contractionary monetary policy shock causes a permanent and significant decline in real gross domestic product, broad money, and price level. Our identification scheme is able to avoid the puzzling impulse responses from which other identification schemes more or less suffer. The fact that monetary policy has not been correctly identified may have led existing studies to conclude that monetary policy is ineffective.     

A Note on the Labor Market Effects of Remittances in Latin American and Caribbean Countries: Do Thresholds Exist?

The labor market effects of remittances have long been examined in the empirical literature. To date, the results have been mixed: some authors observe a negative association between remittances and unemployment while others report that remittances increase unemployment. This study empirically examines the impact of remittances on unemployment using macroeconomic data for a sample of 18 Latin American and Caribbean countries. Specifically, the study tests whether there is a nonlinear relationship between the variables. Results suggest that when the remittance‐to‐GDP ratio is low, remittances have a positive and significant impact on unemployment. However, as they increase, remittances are negatively associated with unemployment. This suggests the possibility that estimations based on the assumption of a linear relationship between remittances and labor may mask the true relationship between the variables.     

On the hump-shaped output effect of monetary policy in an open economy

Results of empirical research have revealed a characteristic hump-shaped effect of a monetary policy shock on output: The effect of the shock builds to a peak after several months and then gradually dies out. We analyze, in the context of a ‘new open economy macroeconomics’ model, factors that imply a hump-shaped response of output to a monetary policy shock. We find that a hump-shaped effect of a monetary policy shock on output is likely to result if the model features a “catching-up with the Joneses” effect, pricing-to-market behavior of firms, and imperfect international financial market integration. We thank two anonymous referees for very helpful comments. The usual disclaimer applies.     

Will the Sarb always Succeed in Fighting Inflation with Contractionary Policy?

The conventional view is that a monetary policy shock has both supply‐side and demand‐side effects, at least in the short run. Barth and Ramey show that the supply‐side effect of a monetary policy shock may be greater than the demand‐side effect. We argue that it is crucial for monetary authorities to understand whether an increase in expected future inflation is due to supply shocks or demand shocks before applying contractionary policy to forestall inflation. We estimate a standard New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy for the South African economy to show that whether the South African Reserve Bank should apply contractionary policy to fight inflation depends critically on the nature of the disturbance. If an increase in expected future inflation is mainly due to supply shocks, the South African Reserve Bank should not apply contractionary policy to fight inflation, as this would lead to a persistent increase in inflation and a greater loss in output. Our estimation results also show that with a moderate level of cost‐channel effect and nominal rigidities, a New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy is able to mimic the price puzzle produced by an estimated vector autoregressive model.     

Estimating the costs and benefits of EMU: The impact of external shocks on labour markets

Estimating the Costs and Benefits of EMU: The Impact of External Shocks on Labour Markets. — Discussions of costs and benefits of EMU usually rely on the optimum currency area approach: when external shocks hit the economy, it is easier to adjust the exchange rate than domestic prices or wages. We find that external shocks have little impact on unemployment, but are more important to manufacturing employment. Taking into account potential shock absorbers (exchange rates, fiscal and monetary policy) leaves results unchanged. By contrast, internal shocks, strongly influence (un)employment. The loss of the exchange rate instrument will not lead to massive unemployment after external shocks.     

Remittance,Institutions and Investment Volatility Interactions: An Intercontinental Analysis

Generating massive investment for growth and development has been one of the main policy goals of most economies around the globe. Countries, most especially developing ones, are highly susceptible to investment volatility owing largely to the fragile nature of their economies as well as weaknesses in terms of dysfunctional institutions. Therefore, sound economic management suggests the need to better understand possible sources for mitigating the adverse effects of investment volatility. Remittances have been identified as important capital flows which do a good job of dousing macroeconomic volatilities. It is on this basis that the study sought to uncover the causal relationship between remittances and investment volatility via the intermediating role of institutions. Using a panel of 70 countries and the system Generalized Method of Moments (GMM) estimator, three insightful outcomes come to the fore. First, remittances played countercyclical roles across the estimated regressions. Second, institutional quality had no significant role in mitigating investment volatility and lastly, the interactive terms of both remittances and institutions significantly mitigated the negative impacts of investment volatility with the exception of the political component of the institutional architecture. Policy suggestions are drawn based on our results.