Welfare costs of monetary policy uncertainty in the economy with shifting trend inflation

We study welfare costs of the uncertainty about monetary policy in the economy featuring shifting trend inflation. We follow Ruge-Murcia (J Econ Dyn Control 36: 914–-938, 2012) to employ the SMM approach to fit the model to the US data (1979Q1-2015Q1). We find that the monetary policy uncertainty affects economic welfare through different dimensions. On the one hand, the policy uncertainty itself distorts the economic welfare negligibly, not only by increasing volatilities of consumption and leisure, but also by decreasing their average levels. A higher level of trend inflation then signifies these changes to produce greater welfare costs. Furthermore, the adverse impacts of policy uncertainty on the economy, documented by the impulse response functions of macroeconomic variables to policy uncertainty shock, become larger when central banks raise their inflation targets. On the other hand, the costs of exogenous variations in trend inflation are larger if there is policy uncertainty.     

Money growth,uncertainty and macroeconomic activity: a multivariate GARCH analysis

The impact uncertainty has on money growth has received much attention in recent years and is an issue of critical importance to central banks, particularly for those, such as the European Central Bank (ECB), which place a strong emphasis on monetary analysis in monetary policy formulation. Some recent papers examining this issue use ad hoc estimates and measure variability rather than uncertainty. We employ a multivariate GARCH model, which measures uncertainty by the conditional variance of the data series, to investigate whether macroeconomic uncertainty and monetary uncertainty Granger-cause changes in real money. The estimated model also allows us to investigate how monetary uncertainty impacts economic activity. We find that macroeconomic uncertainty impacts positively on US real M2 growth over a two-year horizon but that monetary uncertainty does not cause changes in real M2. Instead, our results indicate that real money growth causes monetary uncertainty. Monetary uncertainty is found to have a negative effect on real economic activity and on macroeconomic uncertainty. We conclude by discussing the implications of these results and the methodological approach used for institutions such as the ECB that give monetary analysis a prominent role in their monetary policy strategy.     

Exchange rate uncertainty and firm investment plans evidence from Swiss survey data

A sudden change in monetary policy happened in Switzerland on January 15th, 2015. The Swiss National Bank removed the lower exchange rate bound vis-à-vis the Euro. We believe that uncertainty concerning a vital economic indicator as the exchange rate should influence economic activities. We argue that the unexpected removal of the lower bound induced a temporary uncertainty about future prices in foreign markets and believe that this influenced firm investment in the short term. We exploit the unexpected change in monetary policy as a natural experiment and use the continuous nature of business tendency surveys to determine the role of uncertainty in the immediate aftermath of the event. Changes in firm-level expectations are measured by specially designed survey questions. We use this information to disentangle first and second moment effects. We find that uncertainty negatively affects investment in equipment and machinery through real-option effects and believe that uncertainty positively influences expenditures in research and development through growth-option effects. Finally, we argue that focusing on aggregate gross fixed capital formation masks important insights and suggest the use of disaggregated investment data in future research on the relationship between uncertainty and investment.     

中国货币政策的区域经济稳定效应分析——基于2000-2008年省份月度数据的实证研究

文章基于TVP-GARCH模型构建货币政策反应函数,利用时变参数模型构建包含货币政策变量的省份宏观经济波动模型,发现货币政策对各省份经济的稳定性作用并不明显,可预期的货币政策的省份稳定效应高于不可预期的货币政策,而经济冲击和货币政策制定层面引发的货币增长的不确定性,加大了省份经济波动;货币政策的经济稳定能力存在明显的省份差异,和经济周期同步性以及货币、信用和汇率三个传导渠道的省份特征密切相关。     

货币政策能否促进银行对小微企业信贷投放——基于宏观经济不确定视角的研究

本文研究在宏观经济不确定条件下,不同货币政策工具能否促进银行对小微企业信贷投放。首先,将货币政策引入考虑了宏观经济不确定性的银行资产组合模型中,论证货币政策、宏观经济不确定性与银行信贷资产配置的理论关系。然后利用我国181家银行2004—2018年的数据,检验在宏观经济不确定条件下,不同货币政策工具对银行小微企业信贷行为调控的作用效果。研究结果表明：宏观经济不确定性会抑制银行信贷行为。其中小微企业信贷占比较大的银行受到的影响更为显著。与数量型货币政策相比,价格型货币政策能够更显著地减轻不确定性对银行小微信贷的消极影响。其中银行同业拆借利率的调控效果最强。研究结论对于选择适宜的货币政策工具促进银行向小微企业信贷投放,化解经济不确定性对银行信贷行为的影响并助力小微企业发展等具有政策借鉴意义。     

A dynamic Nelson-Siegel yield curve model with Markov switching

This paper proposes a model to better capture persistent regime changes in the interest rates of the US term structure. While the previous literature on this matter proposes that regime changes in the term structure are due to persistent changes in the conditional mean and volatility of interest rates we find that changes in a single parameter that determines the factor loadings of the model better captures regime changes. We show that this model gives superior in-sample forecasting performance as compared to a baseline model and a volatility-switching model. In general, we find compelling evidence that the extracted factors from our term structure models are closely related with various economic variables. Furthermore, we investigate and find evidence that the effects of macroeconomic phenomena such as monetary policy, inflation expectations, and real economic activity differ according to the particular regime realized for the term structure. In particular, we identify the periods where monetary policy appears to have a greater effect on the yield curve, and the periods where inflation expectations seem to have a greater effect in yield determination. We also find convincing evidence of a relationship between the regimes estimated by the various switching models with economic activity and monetary policy.     

What is on the ECB’s mind? Monetary policy before and after the global financial crisis

This paper analyzes the monetary policy of the European Central Bank (ECB) both before and after the outbreak of the global financial crisis in 2008. In the literature, researchers typically select one Taylor rule-based model to analyze monetary policy of central banks and to derive determinants for the interest rate setting. However, uncertainty about the choice of this respective model is typically neglected. In contrast, we apply a Bayesian model averaging (BMA) approach to extend the Taylor rule to account for model uncertainty driven by heterogeneity in the ECB’s decision-making body, the Governing Council. Our results suggest the following: First, the ECB focuses on the inflation rate when setting interest rates. Second, economic activity indicators were in the focus of the ECB before the financial crisis. Third, over the last decade, the role of economic activity decreased, indicating that inflation is the main driver of monetary policy decisions in the post-crisis period. Fourth, when setting interest rates, central bankers appear to consider more than one model.     

Economic policy uncertainty and real output: evidence from the G7 countries

We use economic policy uncertainty index, and impulse response based test to assess the impact of economic policy-related uncertainty on real economic activity. We use monthly data, over the period from 1985:1 to 2015:3, and impulse response functions to investigate how the economies of the G7 countries respond to positive and negative economic policy uncertainty shocks of different magnitudes. We find that economic policy uncertainty is countercyclical, that the effects of uncertainty shocks increase with size and that the responses of real output to positive and negative economic policy uncertainty shocks are country specific. Our research is important for policymaking and in favour of policies that remove economic uncertainty and its negative effects on the economy. We argue that some control over yellow journalism, a transparent tax system and a set of predictable fiscal and monetary policies can minimize the social costs of economic policy uncertainty.     

Better Monetary Control May Decrease the Distortion of Stabilisation Policy: A Comment

Higher uncertainty about the effects of policy instruments reduces a policymaker's inclination to actively engage in shaping economic policy. If a credibility problem exists, then this is beneficial. However, in the case where the policymaker has private information about an economic shock, higher uncertainty is costly. Hence, the policymaker faces a trade-off when he decides on the degree of control of monetary instruments. It is shown that the optimal degree of uncertainty about the effects of policy depends on the economic preferences of the policymaker and the magnitude of the variance of the shock which is private information.     

Monetary Policy in Australia: The Conflict between Short-Term and Medium-Term Objectives

This article argues that the recent implementation of monetary policy in Australia has been dominated by the response to a large range of unanticipated shocks. In the process of trying to minimise the adverse effects of such shocks, considerable uncertainty has been created about likely outcomes in the medium term. This makes medium-term objectives harder to achieve. Taking the reduction of inflation as an example of an appropriate medium-term objective, simulations are presented using the Murphy model of the Australian economy. The simulations demonstrate that a tightening of monetary policy will reduce inflation more slowly if private agents believe that the tightening is unlikely to be sustained for long. Under uncertainty, monetary policy will have to be tighter and real GDP significantly lower to achieve a given reduction in inflation. A confingency rule of medium complexity is suggested as one way in which appropriate medium-term objectives might be achieved while allowing some flexibility to react to unexpected outcomes in the short run.     

Monetary policy design and transmission asymmetry in EMU: Does uncertainty matter?

In this paper, we consider how uncertainty affects the choice between federal monetary policy based on national and union-wide aggregate data under conditions of asymmetry in the transmission of monetary policy. We find that the uncertainty about the transmission process sustains (and, in some cases, even reinforces) the need to take into account information about national economies in the formulation of monetary policy. Also the forecasting process matters when uncertainty is additive: in particular, when union-wide forecasting is more accurate than national-based forecasting, this advantage can compensate for the welfare loss from using union-wide aggregation. There is, however, a strong case for using national information in the optimal design of common monetary policy.     

Transparent US monetary policy: theory and tests

In 1994, the Federal Reserve System moved to a more transparent reporting of monetary policy. This article assesses the impact of monetary policy transparency on uncertainty about future monetary policy using T-bill rate forecast dispersions and ex post forecast errors from the Survey of Professional Forecasters as a proxy for monetary policy uncertainty. The empirical findings confirm that Federal Reserve transparency has reduced the uncertainty about future monetary policy.     

The impact of economic and monetary uncertainty on the demand for money in emerging economies

By introducing uncertainty, monetary volatility and economic volatility are said to make the public cautious, hence increase their cash holdings or their demand for money. On the other hand, because of monetary and economic uncertainty if the public seek safer assets than money, they may hold less cash. In the absence of any paper testing for the impact of economic and monetary uncertainty on the demand for money in emerging economies, this article fills the gap by considering the experiences of six Central and Eastern European emerging economies and four other emerging economies. We found that the impact is transitory in most countries. Moreover, money demand is found correctly specified and stable in most countries, suggesting that policy based on monetary targeting could still be effective despite significant output and monetary uncertainty.     

Stepping on a rake: The role of fiscal policy in the inflation of the 1970s

The inflation of the 1970s in the US is often discussed as if the only type of policy action that could have prevented the inflation were monetary policy actions and the only type of policy errors that might have induced the inflation were monetary policy errors. Yet fiscal policy underwent dramatic shifts in the 1970s and economic theory makes clear that in an environment of uncertainty about future fiscal policy, monetary policy instruments may lose potency or have perverse effects. This paper documents the vagaries of fiscal policy in this period and argues that people at the time must have been uncertain about fiscal policy's future course. It also lays out a theoretical framework for understanding the effects of fiscal uncertainties on monetary policy and shows that fiscal variables have predictive value in dynamic models, even if traditional monetary policy indicators are included in the system.     

Exchange rate expectations and economic policy uncertainty

This study provides a new angle on the relationship between political decisions and exchange rates. We link a conventional exchange rate modeling approach to the literature on the political economy of exchange rates and studies dealing with the role of policy announcements for financial market expectations by addressing the impact of policy uncertainty on exchange rate expectations and forecast errors of professionals. Our results show that expectations are not only affected by announcements but also by the degree of uncertainty regarding the future stance of economic policy. We find that forecast errors are strongly affected by policy uncertainty compared to expectations, suggesting that the effect of uncertainty is not efficiently accounted for in market expectations. Our main findings hold for economic policy uncertainty, fiscal policy uncertainty and monetary policy uncertainty. In addition, the estimates for the Japanese yen suggest a safe haven role of the yen since higher policy uncertainty in the US results in an expected appreciation of the yen.     

The response of term rates to monetary policy uncertainty

This paper shows that greater uncertainty about monetary policy can lead to a decline in nominal interest rates. In the context of a limited participation model, monetary policy uncertainty is modeled as a mean preserving spread in the distribution for the money growth process. This increase in uncertainty lowers the yield on short-term maturity bonds because the household sector responds by increasing liquidity in the banking sector. Long-term maturity bonds also have lower yields but this decrease is a result of the effect that greater uncertainty has on the nominal intertemporal rate of substitution—which is a convex function of money growth. We examine the nature of these relations empirically by introducing the GARCH-SVAR model—a multivariate generalization of the GARCH-M model. The predictions of the model are broadly supported by the data: higher uncertainty in the federal funds rate can lower the yields of the three- and six-month treasury bill rates.     

Financial distress and fiscal inflation

Is inflation ‘always and everywhere a monetary phenomenon’ or is it fundamentally a fiscal phenomenon? The answer hinges crucially on the underlying monetary–fiscal policy regime. Scant attention has been directed to the role of credit market frictions in discerning the policy regime, despite its growing importance in empirical macroeconomics. We augment a standard monetary model to incorporate fiscal details and credit market imperfections. These ingredients allow for both interpretations of the inflation process in a financially constrained environment. We find that introducing financial frictions to the model and adding financial variables to the dataset generate important identifying restrictions on the observed pattern between inflation and measures of financial and fiscal stress, to the extent that it overturns existing findings about which monetary–fiscal policy regime produced the U.S. data. To confront policy regime uncertainty, we propose the use of dynamic prediction pools and find strong cyclical patterns in the estimated historical regime weights.     

Parameter uncertainty and inflation dynamics in a model with asymmetric central bank preferences

This paper builds on the Lucas' (1973) signal extraction model to study the time-varying effect of uncertainty in the output-inflation trade-off on inflation, using a monetary model with asymmetric central bank preferences whereby deviations of output (relative to target) from above are weighted differently from deviations from below. The model is investigated empirically using data from the South African Reserve Bank (SARB). We show that the implication of the uncertainty element is to cause the authority to change its indirect control, output by less (and hence change it direct control, interest rate by less) whenever inflation is below or above the target, in line with Brainard's attenuation principle. We also find that SARB's asymmetric output stabilization explains inflation movements significantly, and that the monetary authority seems to be more averse to business cycle recessions than expansions, hence more keen to avoid recessions than expansions. Overall, a more transparent and committed monetary policy practice that would reduce uncertainty over the output-inflation trade-off would be helpful for economic stability.     

China's regime-switching monetary policy

To understand Chinese monetary policy, we estimate a forward-looking Taylor-type monetary policy reaction function. The novelty of our paper lies in two aspects. The first is to use a composite overall indicator (the Sun-MP index) to tackle the measurement uncertainty and hence the model selection problem (i.e., a Taylor versus McCallum rule). The second is to capture nonlinearities in the PBC's policy responses with the multiple-regime threshold regression model. We find strong evidence that the PBC's policy reaction function is asymmetric during the post-2000 period and switches across three different regimes. When expecting high inflation, the PBC tightens by adjusting various policy tools; while facing an expected economic slowdown, it eases. However, it is tolerant to low inflation and economic overheating; it barely reacts to them. These findings highlight the importance of allowing for regime switches in modelling the policy response function of a “young” and fast evolving central bank in emerging countries like China.