The case for price level or inflation targeting—What happened to monetary policy effectiveness during the Japanese disinflation?

This paper examines whether price level or inflation targeting would have been appropriate policy choices for Japan during its disinflation and deflation period. We employ Markov switching and structural vector autoregressions, together with structural IS equations, to investigate monetary policy effectiveness during the Japanese disinflation. We find evidence of regime switching in the mid-1990s in a model including the nominal policy interest rate. When monetary policy shocks are identified by using the McCallum rule for monetary base, a monetary expansion is found to have a statistically significant impact on prices. Moreover, a lower real ex ante interest rate can still stimulate the economy despite the zero lower bound on nominal interest rates.     

融资成本能评价新型货币政策工具的有效性吗

提升货币政策效果是近年来我国宏观经济调控改革中的重要任务,而如何正确评价货币政策有效性则是这一任务的前提条件。基于此,结合我国经济新变化,文章在经典的CC-LM模型中纳入了新型货币政策工具,从理论上分析了新型货币政策工具对信贷利率与实际产出的传导机制,并应用具有时变参数的TVP-SV-VAR模型进一步检验了理论分析的结论。理论研究与实证检验一致得出：第一,从对实际产出的影响来看,中期借贷便利为代表的新型货币投放方式是有效的;第二,中期借贷便利仅能降低短期信贷利率,而长期将提升信贷利率;第三,中期借贷便利与LPR报价市场的市场化程度提升可强化货币政策有效性。此外,实证研究还表明,依靠中期借贷便利方式投放基础货币会造成吉布逊谜团的现象,因此能否降低融资成本并不能作为评价货币政策有效性的指标。籍此,文章对如何优化新型货币政策有效性提出了富有建设性的政策建议。     

DSGE模型框架下我国货币政策规则的比较分析

货币政策规则是中央银行为了保持通货膨胀和产出稳定并使经济更快发展所使用的货币政策的指导原则。目前,通行于各个国家的货币政策规则主要有利率规则和货币供应量规则。过去一段时间以来,西方发达国家都已逐渐从货币供应量规则过渡到利率规则,而在我国不管是应用方面还是理论研究方面,对于哪一个货币政策规则更适合我国始终都还没有定论。因此,本文试图在DSGE模型的框架下,对我国的货币政策规则进行比较分析。结果得出,相比于货币供应量规则,利率规则下:(1)货币政策更有效;(2)技术冲击所引起的通货膨胀和产出波动更小;(3)技术冲击对通货膨胀和产出的影响更短暂。因此,研究得出,我国更适合使用利率的货币政策规则。     

Expectations formation and the effectiveness of strategies for limiting the consequences of the zero bound

We use simulations of the Federal Reserve's FRB/US model to examine the efficacy of a number of proposals for reducing the consequences of the zero bound on nominal interest rates. Among the proposals are: a more aggressive monetary policy; promises to make up any shortfall in monetary ease during the zero-bound period by keeping interest rates lower in the future; and the adoption of a price-level target. We consider two assumptions about expectations formation. One assumption is fully model-consistent expectations (MCE)—a reasonable assumption when a policy has been in place for some time, but perhaps less so for a newly announced policy. We therefore also consider the possibility that only financial markets have MCE, and that other agents form their expectations using a small-scale VAR model estimated using historical data. All of the policies noted above are highly effective at reducing the adverse effects of the zero bound under MCE, but their efficacy drops considerably when households and firms base their expectations on the historical average behavior of the economy, and only investors fully recognize the economic implications of the various proposals. J. Japanese Int. Economies 20 (3) (2006) 314–337.     

Monetary Policy and Sectoral Bank Lending in Malaysia

Abstract

Unlike most studies on the effect of monetary policy on bank lending, this article intends to answer the question whether the tightening of monetary policy in Malaysia before and after the financial crisis in 1997 affected differently the commercial bank lending to various sectors of the economy. To achieve the objective, Vector Autoregressive Regression (VAR) method was used to generate impulse response function and variance decomposition to trace the impact of a shock in monetary policy on bank lending in Malaysia. The results show that a monetary policy tightening in Malaysia gives a negative impact on all the sectors. Analyzing sectoral responses to monetary shocks, evidence is found that some sectors are more affected than the others. The manufacturing, agricultural, and mining sector seems to decline more than the aggregate bank lending in response to interest rate shock.     

Chinese monetary policy and the banking system

Chinese monetary policy differs from that of many other countries in its use of multiple policy instruments. This paper assesses the effectiveness of some of the instruments employed, using a model of the banking sector and elasticities estimated from Chinese data. We find that direct interest rate changes are a poorer instrument of monetary control in China than changes in reserve requirement ratios and loan-to-deposit ratios. This finding is based on the ambiguous estimated response of deposit demand to such changes, and may help to explain why changes to administered interest rates have been used sparingly as an instrument of Chinese monetary policy. We also find that the ambiguous deposit demand response could pose challenges for the effectiveness of open market operations under interest rate liberalisation, while exchange rate liberalisation is likely to make monetary instruments more powerful.     

The Transmission of Monetary Policy in South Africa Before and After the Global Financial Crisis

This paper examines whether the transmission mechanism of monetary policy in South Africa has changed after the global financial crisis (GFC). We use a Bayesian vector autoregressive (BVAR) model with Minnesota priors and 15 monthly variables, extending the system of Christiano, Eichenbaum, with Evans (1999). The benefit of the BVAR approach is that it can accommodate a large cross section of variables without running out of degrees of freedom. To identify the change in the transmission process, we divide the sample size into two subsamples, namely the pre‐GFC period (March 2001 to August 2008) and the post‐GFC period (September 2008 to February 2016). The results indicate that a change in the transmission of monetary policy occurred after the GFC. The magnitude of the effect of a monetary policy shock on output is considerably greater in the pre‐GFC period compared to the post‐GFC period. Moreover, the impact of a policy shock on inflation is not statistically significant in the post‐GFC period. The variance decomposition shows that the interest‐rate channel has possibly weakened in the post‐GFC period.     

The interest rate–inflation relationship under an inflation targeting regime: The case of Turkey

This paper examines the relationship between nominal interest rates and the expected inflation rate for the Turkish economy between 2002 and 2009, a period when the inflation-targeting regime was implemented as monetary policy. We use the test of cointegrating rank with a trend-break (a method introduced by Inoue, 1999) and we also apply exogeneity tests. Empirical findings indicate that monetary policy rates depend on inflationary expectations; long-term interest rates are affected by monetary policy; and the weak form of the Fisher effect is valid. This evidence implies that monetary policy has actually influenced the real long-term interest rates; the inflation targeting regime pursued by the Central Bank of Turkey is reliable; and hence realized inflation has remained close to its targeted level.     

Interest Rates, Leverage, and Money

The current mainstream approach to monetary policy is based on the New Keynesian model and is expressed in terms of a short-term nominal interest, such as the federal funds rate in the United States. It ignores the role of leverage and also downplays the role of money in basic monetary theory and monetary policy analysis. But as the federal funds rate has reached the zero lower bound and the Federal Reserve is in a liquidity trap, the issue is whether there is a useful role of leverage and monetary aggregates in monetary policy and business cycle analysis. We address these issues and argue that there is a need for financial stability policies to manage the leverage cycle and reduce the procyclicality of the financial system. We also argue that in the aftermath of the global financial crisis and Great Contraction there is a need to get away from the New Keynesian thinking and back toward a quantity theory approach to monetary policy, based on properly measured monetary aggregates, such as the new Center for Financial Stability Divisia monetary aggregates.     

Monetary Policy,Market Structure and the Income Shares in the U.S

A general equilibrium model of heterogeneous capital is employed to investigate whether, how and to what extent monetary policy and market structure may have contributed to the decline of the labor share in the U.S. in recent decades. By construction the model allows monetary policy to affect the labor share through two channels, i.e. one linking the policy rate to the real interest rate and another linking the latter to the useful life of producers’ goods, whereas regarding market structure, the more competitive the economy, the higher the labor share. From its solution using U.S. data over the period 2000–2014 it emerges that the persistent reduction in the policy rate on the one hand slowed down the decline in the labor share and on the other accelerated it, because the reduction in the policy rate was accompanied by a robust upward trend in the equilibrium real rate of interest, which increased the useful life of producers’ goods. In turn, to gauge the relative strength of these two opposite effects, the equation of the labor share is estimated by means of the autoregressive distributed lag method. The results show that the adverse effect of monetary policy through the useful life of producers’ goods was more than 12 times as strong as the favorable effect of the policy rate and on this ground I conclude that the monetary policy contributed to the decline of the labor share significantly, at least since 2000. As for the market structure, it is found that even if firms had and attempted to exercise monopoly power, it would be exceedingly difficult to exploit it because the demand of consumers’ goods is significantly price elastic.     

Optimal exchange-rate policy in a low interest rate environment

This paper examines optimal monetary policy with an explicit zero lower bound in a small open-economy model. The paper finds that the gains from commitment are increasing in the openness of the economy while the optimal rate of inflation is decreasing in the openness of the economy. These results imply that the main findings of Adam and Billi (2007) for a closed-economy model are also true for an open-economy model. Finally, the paper finds that the effectiveness of the exchange-rate channel as a stabilization tool in the low interest rate environment depends on whether the central bank can make a credible commitment. If the central bank cannot commit and makes monetary-policy decisions on a discretionary basis, the optimal path of the nominal exchange rate will exhibit an appreciation, rather than depreciation as suggested in the literature.     

Direct Inflation Targeting and Nominal Convergence: The Czech Case

This study analyses the impact of direct inflation targeting (DIT) on monetary policy credibility in the Czech Republic, as evidenced by asset prices. It examines the effect of changes in the two-week repo rate (the official interest rate) on short and long–term market interest rates. It assumes the asymmetry of information and the existence of a stationary stochastic equilibrium with full knowledge of authorities reaction function. We find that at short maturities, the coefficients for changes in the official repo rate are lower in the DIT period than in the pre-crisis period. This implies that the hypothesis of no increase in the transparency of monetary policy with the introduction of DIT can be rejected. We find that bond yields and interest rate swap rates with maturities of 5 years and longer did not react significantly to official interest rate decisions in the DIT period. This is consistent with the hypothesis that monetary policy was credible both before and after introduction of DIT.     

The Monetary Transmission Mechanism, Non-residential Fixed Investment and Housing

We specify a vector autoregression (VAR) model for the U.S. for 1980–2008 to investigate the statistical causal relationships between private non-residential fixed investment, the effective Federal funds rate, personal consumption expenditures, nonfinancial corporate profits, and the nonfinancial corporate credit market debt to test the validity of macroeconomic relationships in a macro model. The VAR utilizes the Toda-Yamamote procedure to test for Granger causality. Our preliminary results show that the transmission mechanism does not work as expected; we find that fixed investment depends on the level of demand in the economy and profits but not on the interest rate. This casts doubt on the usual assumptions about how the monetary transmission mechanism is expected to work. The second part of the paper investigates the effects of the change in the monetary regime towards low and stable interest rates, a policy pursued by the U.S. Fed since the beginning of the 1990s. We find that the new monetary policy regime has the following effects: (1) our VAR model does not support the hypothesis that low interest rates lead to higher fixed nonresidential investment; (2) low interest rates led to a search for higher yields through increasing risk, and (3) they led to an increase in the demand for securitized assets, especially mortgage-backed securities, which eventually resulted in a housing bubble. The overall results therefore raise doubts about the effectiveness of low interest rates as a policy regime designed as a component of a counter-cyclical policy.     

Responding to a Monetary Superpower: Investigating the Behavioral Spillovers of U.S. Monetary Policy

Between 2002 and 2006, the Federal Reserve set interest rates significantly below the rates suggested by well-known monetary policy rules. There is a growing body of research suggesting that this helped fuel an excess of liquidity in the U.S. that contributed to the 2008 worldwide financial crash. It is less well known that a number of other central banks also lowered interest rates during this period. An important question, then, is what role the Federal Reserve played in influencing other central banks to alter their own monetary policies, which could have magnified the Fed’s actions in creating global liquidity. This paper addresses the issue by showing how spillovers in central bank behavior occur in theoretical rational expectations models. It then establishes empirically how U.S. monetary policy actions affect the actions of other major central banks, particularly in terms of interest rates and currency interventions. The models and data suggest that the U.S. lowering its policy rate, either in general or in reference to a monetary policy rule, influences other central banks to lower their own policy rates and intervene in currency markets, even when controlling for worldwide macroeconomic trends. It thus appears that U.S. actions were a factor in the worldwide lowering of interest rates and the increase in currency reserves in the early 2000s that may have contributed to the subsequent global liquidity boom.     

Fiscal policy independence in a European Monetary Union

Do plans for a monetary union in Europe call for limits on the freedom of the country members of the union to use fiscal policy? In order to provide a tentative answer, we simulate the IMF model MULTIMOD, given various shocks, in the case of a European Monetary Union consisting only of France and Germany. The results clearly indicate the possible value of allowing unfettered use of fiscal policy in both countries. The reasons lie partly in differences in the initial position of the two, partly in differences in their preferences. We also examine the change in the policy significance of the current account in the monetary union. Current account imbalances clearly cease to have the same significance in a monetary union; but they do not therefore become irrelevant.     

Hot Money Flows,Commodity Price Cycles and Financial Repression in the USA and China： The Consequences of Near-zero US Interest Rates

Under near-zero US interest rates, the international dollar standard malfunctions. Emerging markets with naturally higher interest rates are swamped with hot money inflows. Emerging market central banks intervene to prevent their currencies from rising precipitately. They lose monetary control and domestic prices begin inflating. Primary commodity prices rise worldwide unless interrupted by an international banking crisis＇. This cyclical inflation on the dollar＇s periphery only registers in the US core eonsumer price index with a long lag. The zero interest rate policy also fails to stimulate the US economy as domestic finaneial intermediation by banks and money market mutual funds is repressed. Because China is forced to keep its interest rates below market-clearing levels, it also suffers from finaneial repression, although in a form differing from that in the USA.     

基于金融稳定目标的规则型货币政策研究

随着货币政策与金融稳定之间联系的不断深化，中央银行理应在防范金融市场系统性风险中发挥重要的作用。文章首先构建我国金融稳定指数，并将其加入线性货币政策规则，研究结果表明，中央银行在调整名义利率时的确对金融稳定状况有所关注，相比于传统泰勒规则，纳入金融稳定指数的泰勒规则中通胀系数与产出缺口系数均有显著改善，其能够更好地拟合中央银行的实际政策操作。随后，为了进一步考察货币当局对名义利率调整的动态变化特征，文章通过TVP-SV-VAR模型对拓展的时变参数泰勒规则进行了再估计。研究发现，随着经济周期和金融形势的更迭，中央银行也会不断动态调整其政策目标。其中，货币政策对通货膨胀的调控不存在明显的惰性区域，控制通胀始终是中央银行工作的重心。其次，中央银行存在规避经济收缩的偏好，在经济下行时期其对货币政策的调整会向产出缺口倾斜。最后，为了抑制金融机构的过度风险承担，货币当局在本次金融危机之后显著增强了对于金融稳定的关注。     

Endogenous monetary policy shifts and the term structure: Evidence from Japanese government bond yields

I construct a no-arbitrage term structure model with endogenous regime shifts and apply it to Japanese government bond (JGB) yields. This model subjects the short-term interest rate to monetary regime shifts, specifically a zero interest rate policy (ZIRP) and normal regimes, which depend on macroeconomic variables. The estimates show that under the ZIRP regime, the effect of deflation (inflation) on lowering (raising) bond yields amplifies on the long end of yield curves, compared with a case with positive interest rates under the normal regime. On the other hand, output gaps’ ability to raise bond yields weakens for all maturities.     

Is U.S. money causing China's output?

This paper tries to answer the long-standing question of whether money causes output. Instead of focusing on domestic monetary policy and output, we analyze U.S. monetary policy and its possible effects on real output in China. Our results indicate that the main monetary instrument in the U.S., the Federal Fund Rate, Granger causes China's output. A second monetary variable, U.S. money supply, does not seem to have a significant effect on China's output. The results are supported by variance decompositions, which indicate that Federal Fund Rate shocks have an effect on China's real output. The findings have important implications for policy makers in China that focus on maintaining a high and stable economic growth.     

Evaluating monetary policy when nominal interest rates are almost zero

The non-negativity constraint on nominal interest rates may have been a major factor behind a putative structural break in the effectiveness of monetary policy. To check for the existence of such a break without making prior assumptions about timing, and to enable comparison between pre- and post-break monetary policy, we employ an identified Markov switching VAR framework. Estimation results support the existence of a structural break around the time when the de facto zero nominal interest rate policy was resumed and the effectiveness of monetary policy is seen to weaken since then although slightly positive effects from monetary easing still exist. J. Japanese Int. Economies 20 (3) (2006) 434–453.