Does the Reserve Bank of Australia follow a forward-looking nonlinear monetary policy rule?

ABSTRACT

The conventional monetary policy rule describes a simple linear relationship between the domestic interest rate, inflation rate and output gap. An important extension to this rule is to incorporate the forward-looking behaviour of central banks, where it is assumed that they target an expected level of inflation instead of its current realised value. Using quarterly observations for the period 1993:1-2018:2, this paper investigates whether the conduct of monetary policy in Australia can be described by a forward-looking linear monetary policy rule, or by a nonlinear forward-looking monetary policy rule. In particular, the nonlinear forward-looking monetary policy rule is analysed in a regime-switching framework using a smooth logistic transition regression model. While the results show that the conventional forward-looking linear monetary policy rule describes the application of monetary policy in Australia reasonably well, the interest rate setting behaviour of the RBA is best described by a nonlinear forward-looking monetary policy rule.     

The transmission mechanism of monetary policy: Microeconomic aspects of macroeconomic issues

The article analyzes the transmission mechanism of monetary policy in light of microeconomic theory. We address the influence of microeconomic factors on the transmission of monetary policy while taking into account the contributions of conventional price formation and competition theory and heterodox microeconomic theories, including work inspired by the post Keynesians. We found a multiplicity of results regarding changes in price levels and inflation derived from shifts in demand and costs. These results challenge the conventional view, which postulates a single behavior in the circuit from changes in interest rates to demand, prices, and inflation. We conclude that microeconomic and macroeconomic aspects should be integrated to properly explain monetary policy and analyze its effects and transmission mechanism.     

The effects of monetary policy changes on market interest rates in Greece: An event study approach

The operational procedures of the Bank of Greece underwent major changes during the 1990s. These shifts in operational strategy made interest rates the main tool of monetary policy for the first time in Greece. This paper examines the effects of changes in the bank's operational interest rates on market interest rates at eight maturities and for different operational regimes. A major feature of our study is the application of the event study methodology used in finance, which has not been employed in any previous study on this subject. We find that changes in official interest rates had a significant influence on short-term and intermediate-term rates and that this relationship was affected by the changes in the bank's operational procedure.     

The impact of monetary policy on unemployment hysteresis

This article investigates the hypothesis that the extent to which hysteresis occurs in the aftermath of recessions depends on monetary policy reactions. The degree of hysteresis is explained econometrically by the extent of monetary easing during a recession and by standard variables for labour market institutions in a pooled cross country analysis using quarterly data. The sample includes 40 recessions in 19 Organization for Economic Co-operation and Development (OECD) countries for which the required data is available. The time period lasts for the period from 1980 to 2007. This article builds on Ball (1999) and extends the sample of countries, the time period under investigation and the set of control variables.     

The dynamic effectiveness of monetary policy in China: evidence from a TVP-SV-FAVAR model

We use a broad set of China’s macroeconomic indicators and a dynamic factor model to estimate latent factors of economic output and inflation, which are used to measure the ultimate objectives of monetary policy. The above factors and policy variables are incorporated into a TVP-SV-FAVAR model to investigate the dynamic effectiveness of Chinese monetary policy. Our results confirm that the effects of Chinese monetary policy are time-varying. By comparing the quantity rule with the price rule, we find that the price rule is more effective in managing China’s macro-economy, especially after the financial crisis. Moreover, the results can be regarded as a division of policy rules in a way that different rules are directed at different objectives.     

Interest rate gaps and monetary policy in the work of Henry Thornton: Beyond a retrospective Wicksellian reading *

Abstract

This paper revisits the theory of interest rates propounded by Henry Thornton (1760 – 1815). Particular attention is paid to Thornton's examination of the inflationary effects of the gap between the Bank of England's discount rate and the current rate of profit. The paper shows that Thornton is also concerned, unlike Wicksell, about the consequences of a gap between the Bank of England's discount rate and the effective bank lending rate on the market for loanable funds, which results mainly from the usury laws. Thornton's analyses offer then a framework for regulating the value of money through adjustments to the bank rate.     

Shadow rates as a measure of the monetary policy stance: Some international evidence

This paper examines the usefulness of shadow rates to measure the monetary policy stance by comparing them to the official policy rates and those implied by three types of Taylor rules in both inflation-targeting countries (the UK, Canada, Australia and New Zealand) and others that have only targeted inflation at times (the United States, Japan, the Euro Area and Switzerland) over the period from the early 1990s to December 2021. Shadow rates estimated from a dynamic factor model are shown to suggest a much looser policy stance than either the official policy rates or those implied by the Taylor rules, and generally to provide a more accurate picture of the monetary policy stance during both ZLB and non-ZLB periods, since they reflect the full range of unconventional policy measures used by central banks. Furthermore, generalised impulse response analysis based on three alternative vector autoregression (VAR) models indicates that monetary shocks based on the shadow rates are more informative than those related to the official policy rates or to two- and three-factor shadow rates, especially during the Global Financial Crisis and the recent COVID-19 pandemic, when unconventional measures have been adopted. Finally, unconventional policy shocks seem to have less persistent effects on the economy in countries, which have adopted an inflation-targeting regime.     

The effect of capital requirement regulation on the transmission of monetary policy: evidence from Austria

This paper analyzes the role of banks’ regulatory capitalization in the transmission of monetary policy. We use a confidential dataset for Austrian banks spanning from the first quarter of 1997 to the fourth quarter of 2003. We find evidence that Austrian banks react in an asymmetric way to monetary policy depending on their regulatory excess capitalization, i.e. low capitalized banks react more restrictively to a monetary tightening than their highly capitalized peers.

The impact of (un)conventional expansionary monetary policy on income inequality – lessons from Japan

ABSTRACT

This paper analyzes the impact of conventional and unconventional monetary policy on income inequality in Japan, using hitherto unexplored data from the Japan Household Panel Survey. Empirical evidence shows that expansionary monetary policy in Japan has contributed to diminishing the gender pay gap through an increase in working time of women relative to men, but also to increasing the education pay gap. These effects may have materialized via the aggregate demand channel and the labour productivity channel. In contrast, expansionary monetary policy has had no significant impact on the development of the age pay gap.     

The effects of monetary policy in a small open economy: the case of Portugal

In this article, I analyse the macroeconomic effects of monetary policy on the Portuguese economy. I show that a positive interest rate shock leads to: (i) a contraction of real GDP and a substantial increase of the unemployment rate; (ii) a quick fall in the commodity price and a gradual decrease of the price level and (iii) a downward correction of the stock price index. It also produces a ‘short-lived liquidity effect’ and helps explain the negative comovement between bonds and stocks. In addition, I find evidence suggesting the existence of a money demand function characterized by small output and interest rate elasticities. By its turn, the central bank’s policy rule follows closely the dynamics of the money markets. Finally, both the real GDP and the price level in Portugal would have been higher during almost the entire sample period if there were no monetary policy surprises.     

Home sweet host: A cross‐country perspective on prudential and monetary policy spillovers through global banks

Prudential regulation of banks is multi‐layered: policy changes by home‐country authorities affect banks’ global operations across many jurisdictions; policy changes by host‐country authorities shape banks’ operations in the host jurisdiction regardless of the nationality of the parent bank. Do these policies create (unintended) cross‐border spillovers? Similarly, monetary policy actions by major central banks may also have effects on the behaviour of banks in other countries. This paper examines the effect that changes in home‐ and host‐country prudential measures have on cross‐border dollar credit provision, and how these interact with US monetary policy. We first run panel regressions with both layers of regulation, to examine which has a greater effect on cross‐border lending. We then use a novel approach to decompose growth in cross‐border bank lending into separate home, host and common components, and then match each with the corresponding home or host policies. Our results suggest that prudential policies can have spillover effects, which depend on the instrument used and on whether a bank's home or host country implemented them. Home policies tend to have larger spillovers on cross‐border US dollar lending than host policies. We also find that a tightening of US monetary policy can compound the spillovers of some prudential measures.     

The asymmetric effects of investor sentiment and monetary policy on stock prices

We examine the impact of investor sentiment and monetary policy on the stock prices under different market states based on the Markov-switching vector autoregression (MS-VAR) model. The results show that the sentiment shocks, more than monetary policy shocks, lead to not only much larger fluctuations of stock prices but also much longer duration in the stock market downturn than in the stock market expansion, which shows obvious asymmetric effect. Moreover, the responses of stock prices to the sentiment shocks present an immediate effect, while the responses of stock prices to the monetary policy shocks show one-period lag effect.     

货币政策对房价的影响：一个文献综述

通过文献资料法和比较分析法,评述有关货币政策对房价影响的研究方法与研究结论。研究成果：（1）房价与利率问题正日益受到各界关注;（2）房价与利率的关系,学者之间研究的结论不相同,有的学者认为利率对房价产生影响,有的学者认为利率对房价没有影响。研究启示：货币政策与房价的关系还需进一步研究,调控政策还需要不断地完善。     

Empirical research on monetary policy,asset prices and inflation: an analysis based on provincial panel data in China

In this article, we investigate the dynamic correlations among monetary policy, asset prices and inflation and assess the regional effects of monetary policy in China for the period October 2007 to July 2013. We focus on the interdependencies among monetary policy and asset price fluctuations by using the Shanghai Interbank Offered Rate as the preferred variable for analysing monetary policy movement. In particular, we apply a vector autoregressive model in a panel setting, which allows researchers to examine variations over time or across individual regions. The empirical results presented herein indicate that monetary policy reacts actively to asset prices, although it is still shown to be ineffective. In addition, we find that asset prices display some regional differences in their response to an unexpected monetary policy shock.     

The expectations hypothesis of the term structure of interest rates and monetary policy: some evidence from Asian countries

This article outlines a panel data approach to modelling the term structure of interest rates in the short and in the long run. We find robust evidence supporting the expectations hypothesis of the term structure (EHTS) for a small sample of Asian emerging markets. Furthermore, we detect some relevant differences in the transmission mechanism of monetary policy, and the existence of a McCallum (2005) rule (no exogeneity of monetary policy to the yield curve) in some countries. Finally, we document the influence of an international global factor (i.e. a time-varying global risk premium) on the yield curve, while local country-specific factors are not statistically significant.     

The effectiveness of exchange-rate-based monetary policy: evidence from survey data

Singapore’s monetary policy is centred on the management of the exchange rate. We examine how macroeconomic forecasters perceive the effectiveness of this unconventional policy. We provide empirical evidence that forecasters’ expectations are consistent with a forward-looking exchange-rate-based Taylor-type policy rule. They expect monetary authorities to actively manage the currency against expected future changes in inflation and output.     

中央银行沟通是否更有助于预测官方利率决定——来自《中国货币政策执行报告》的证据

根据泰勒规则的有序概率模型,利用中央银行沟通指示器变量和宏观经济变量解释官方利率决定,预测2003—2009年官方利率决定。结果表明:(1)在样本期内,沟通指示器变量提高了官方利率决定的解释力;(2)经济增长的沟通指示器变量、预期的宏观经济变量以及当期的通货膨胀率对官方利率决定有显著影响;(3)在官方利率决定上升和不变时,沟通指示器变量模型的预测能力要好于宏观经济变量模型,但在官方利率下降时,却不能胜过宏观经济变量模型。     

The effectiveness of monetary policy and output fluctuations: An asymmetric analysis

Previous studies have investigated asymmetries in the effects of monetary policy on the real economic activity by using either vector autoregressive (VAR)-based regime-switching models with smooth transition technique or Gaussian functions to parameterise the dynamic effects of structural shocks on the economy. These kinds of VAR models assume asymmetry as a short-run relationship between the series since the long-run neutrality hypothesis of money states that monetary policy can only affect productive capacity of the economy in the short run, but not in the long run. The recent theoretical literature shows that this hypothesis is not quite right. Thus, this paper examines the extent to which monetary policy has a long-run asymmetric effect on output in a number of Organisation for Economic Co-operation and Development countries by using a nonlinear hidden cointegration analysis within a likelihood-based panel framework. The findings indicate that there is a long-run relationship between the real interest rate as an indicator of monetary policy and the growth rate of real output in five countries out of nine under review. This gives support for the view that output has responded asymmetrically to the real interest rate changes. The economic implication of our results is that monetary policy affects positive and negative output fluctuations differently.     

The effect of the market-based monetary policy transparency index on inflation and output variability

This paper examines empirically the effectiveness of the Federal Reserve’s policy under different levels of transparency by using a dynamic and continuous market-based index proposed by Kia (2011 Kia, A. 2011. “Developing a Market-based Monetary Policy Transparency Index: Evidence from the United States.” Economic Issues 16 (2): 53–79. [Google Scholar]) on inflation volatility and output volatility. In theory, the more transparent the monetary policy, the less volatile the money market will be with fewer disturbances and thus the more stable will be the economy. First, a bivariate VAR-BEKK-GARCH(1,1) model is estimated for inflation and output variables in the US economy in order to produce conditional variances and covariance over the period October 1982 to December 2011. Second, by incorporating conditional variances and transparency in a VAR model, impulse response functions reveal that after a positive shock in the Federal Reserve’s transparency (i.e. market participants consider the Federal Reserve’s actions to be more transparent), there is a statistically significant decrease in both inflation volatility and output volatility. Our results reveal the dynamic and crucial role that a central bank’s transparency plays in retaining economic stability and assuring the forecasts concerning inflation and economic growth made by the economic units.