Asymmetric effects of monetary policy shocks on economic performance: empirical evidence from Turkey

This study investigates the asymmetric effects of monetary policy shocks on the macroeconomic variables of exchange rate, output and inflation for an emerging economy ? Turkey ? by using monthly data between 1990 and 2014. We employ the innovative nonlinear vector autoregressive model of Kilian and Vigfusson (2011), which allows us to observe the effect of different stances (tight or loose) and different sizes (small or large) of monetary policy actions. Our empirical evidence reveals that tight monetary policy, which, in this case, is captured with a positive shock to interest rate, decreases exchange rate, output and prices, as economic theory suggests. Loose monetary policy, which is captured with a negative shock to interest rate, has the opposite effect on these variables. However, the effects of loose monetary policy are weaker than the effects of tight monetary policy because loose monetary policy shocks are less effective than tight monetary policy shocks. Moreover, as the magnitude of a shock increases, the difference between the effects of tight and loose monetary policy policies also increases.     

Assessing the price and output effects of monetary policy in Vietnam: evidence from a VAR analysis

Using monthly data, we perform a vector-autoregressive analysis to measure the effects of monetary policy on the Vietnamese economy. We concentrate our attention on the period following the introduction of the Law on Central Bank in January 1998 (which brought the national monetary policy and its objectives in line with international practices). Contrary to previous studies on Vietnam, we find evidence suggesting that monetary policy (through the manipulation of interest rates) is an effective policy tool in stabilizing prices. However, credit growth tends to induce inflationary pressures. In addition, we find that an expansion of broad money supply leads to an increase in industrial production.     

The effects of economic policy uncertainty on China’s economy: evidence from time-varying parameter FAVAR

ABSTRACT

This article explores the effects of China’s economic policy uncertainty (EPU) on its fiscal policy, monetary policy and a wide range of macro-economic variables using a time-varying parameter FAVAR model. Based on monthly data from 07/2003 to 08/2017, the time-varying structure of the model allows us to capture the time-varying characteristics of the macro-economic variables and which channel is relevant. Empirical results reveal that the reaction of monetary and fiscal policies to EPU is highly asymmetric across macro-economic circumstances. Loose monetary and fiscal policies are adopted in response to EPU shocks during the financial crisis, while policies are moderately tightened after the crisis. The China Interbank Offered Rate (Chibor) responds more sensitively and severely than M2 to EPU shocks. Additionally, EPU shocks have a significant and negative impact on economic growth, consumption, exchange rates, bonds and the stock market, but showing a positive impact on credit, real estate and fixed asset investment (which might be due to China’s special economic market environment and the high investment return). The results indicate that EPU shocks significantly affect macroeconomic fundamentals through precautionary savings and financial market channels but lose their effectiveness through a ‘real options’ effect.     

Macroeconomic effects of government spending shocks: New narrative evidence from Canada

This paper examines the macroeconomic effects of government spending shocks in Canada for the period of 1949–2012. We construct a novel measure of news about exogenous government spending changes identified through the narrative approach. We use government documents, mostly the budget speech, to identify the size, timing, and principal motivation for all planned major federal government spending changes. To achieve identification, we consider those changes that are unrelated to the contemporaneous movements in the economy. The implied government spending multiplier estimates using our exogenous government spending news series are between 1.08 and 1.69.     

Macroeconomic effects of monetary policy in Korea: A time-varying coefficient VAR approach

Using a time-varying coefficient vector autoregressive (TVC-VAR) model, we assess how the efficacy of monetary policy innovations in stimulating real activity has evolved over time in Korea, as an example of emerging market countries, since 2000. We show that the responsiveness of output toward monetary policy innovations has decreased gradually since the early to mid-2000s, but monetary policy remains effective in boosting output even for the most recent sample. In addition, we find that the volatility of exogenous disturbances has decreased dramatically in the post-2000 period, and that this is the main driver of the recent volatility reductions of both output and inflation.     

Trend productivity growth and the government spending multiplier

The paper analyzes the effects of government spending shocks under alternative rates of trend growth in a New-Keynesian model characterized by price and wage rigidity. We show that the presence of trend growth makes the impact on output and consumption of government spending shocks smaller but more persistent with a hump shaped impulse response. Our results imply that the impact government spending multiplier decreases while the cumulative multiplier increases with trend growth.     

Does too much government spending depress the economic development of transition economies? Evidences from dynamic panel threshold analysis

This paper investigates the relationship between government size and economic growth and determines the optimal level of government spending to maximize economic growth. The paper applies a dynamic panel data analysis based upon a threshold model to test the threshold effect of government spending in 26 transition economies over the period spanning 1993–2016. According to the analysis results, government expenditures have a threshold effect on economic growth, and there is a non-linear relationship depicted as an Armey curve in these transition economies. The findings indicate that a government size above the threshold government spending level adversely affects economic growth, while a government size below the threshold level has a positive effect. Furthermore, there is a statistically significant relationship between the two variables above and below that optimal level, even if we divide the sample into developed and developing countries. Our findings suggest that governments in transition economies should consider optimal government size at around the estimated threshold level to support sustainable economic growth.     

Optimal information acquisition and monetary policy

I study optimal monetary policy with an expectational AS curve and private agents who optimally choose their amount of information pertinent to predicting policy. Shocks with time-varying variance (ARCH) induce interesting information acquisition (IA) dynamics; optimal IA affects optimal policy and vice versa. Under discretion, IA dynamics cause time-varying effectiveness of policy because of the expectational AS curve; policy may be rendered completely ineffective. In policy game equilibrium, a fall in the shock’s variance typically induces less IA and raises welfare. In one exceptional case the opposite occurs, a result which does not require implausible unstable equilibria. An agent becoming informed increases the endogenous component of economic volatility; IA therefore has a negative externality. Under commitment policy’s effectiveness is again time-varying, but policy is never completely ineffective: commitment enables the central bank to credibly limit policy’s volatility; this limits private agents’ incentive to become informed, so limits expectation-induced policy neutrality.     

Tax multipliers and monetary policy: Evidence from a threshold model

Romer and Romer (2010) use the narrative record to generate a time series of exogenous shocks to fiscal policy. They report a tax multiplier of 3.0. We extend their analysis and allow for nonlinearities between their shocks and the effects on output by estimating a threshold regression model. Using Hansen’s (1997) procedure, we find the best fitting threshold is changes in the federal fund rate with a delay of two quarters. Moreover, we find that the tax multiplier is approximately 4.3 if accompanied by an accommodative monetary policy and approximately 1.2 under tight monetary policy.     

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.     

The policy (in)effectiveness of government spending in a dependent economy

This paper analyses the policy effectiveness of government spending in a two-sector open economy whose output and expenditure is comprised of tradables and non-tradables. This framework reveals that government spending on either tradables or, more normally, on non-tradables widens the external deficit, yet how the real exchange rate behaves depends, in the first instance, on in which sector the public spending occurs. It also shows that, irrespective of where government spending falls, there appears to be no significant short run boost to overall output and hence employment a priori, although empirically actual impact would depend on the elasticities of tradable and non-tradable output with respect to the real exchange rate. Furthermore, fiscal stimulus is shown to be unambiguously ineffective if deemed unsustainable by foreign lenders, or implemented under a fixed exchange rate regime with limited capital mobility.     

Research on spending policy for university endowment funds

University endowment funds are important capitals in many universities in China today. A lot of universities target their endowment spending at a fixed spending ratio. Because of volatile inflation, it is not optimal. In this paper, the author analyzes the importance of spending policy of university endowment funds, and suggests two models in accordance with inflation-adjusted value.     

Public spending and growth: The role of government accountability

This paper examines the role of institutions in the nexus between public spending and economic growth. Empirical results based on a newly assembled dataset of 80 countries over the 1970–2010 period suggest that particularly when institutions prompt governments to be accountable to the general citizen does public capital spending promote growth. Taking account of the type of financing for this spending, we show that the growth-promoting effect under an accountable government appears to prevail for various financing sources, including a reallocation from current spending, an increase in revenue, and a rise in the budget deficit. However, government accountability does not seem to play a key role in the growth effects of current spending.     

Effects of government spending shocks in China,Japan, and Korea

ABSTRACT

This study investigates the effects of government spending shocks on various key macro variables in China, Korea, and Japan using structural VAR models. The main empirical findings are as follows. Government spending multipliers of all three countries are far larger than 1 in recent years. The effectiveness of fiscal expansion has not changed markedly in China but substantially increased in Korea (after the Asian financial crisis) and Japan (during zero lower bound period). Increases in the effectiveness of fiscal expansion are associated with changes in the monetary and exchange rate policy regimes and institutions of these countries. Among the three countries, the government spending multiplier is relatively large in China but relatively small in Japan in recent years. Although the effects on exchange rate and trade balance vary across countries and sample periods, real exchange rate tends to depreciate, whereas trade balance tends to improve under flexible exchange rate regimes. Some empirical findings are consistent with standard theory, but others are not.

Abbreviations: NK: New Keynesian VAR: Vector Autoregressive ZLB: Zero Lower Bound     

On the welfare costs of misspecified monetary policy objectives

This paper quantifies the effects on welfare of misspecified monetary policy objectives in a stylized DSGE model. We show that using inappropriate objectives generates relatively large welfare costs. When expressed in terms of ‘consumption equivalent’ units, these costs correspond to permanent decreases in steady-state consumption of up to two percent. The latter are generated by both the inappropriate choice of weights and the omission of variables. In particular, it is costly to assume an interest-rate smoothing incentive for central bankers when it is not socially optimal to do so. Finally, a parameter uncertainty decomposition indicates that uncertainty about the properties of markup shocks gives rise to the largest welfare costs.     

The evolution of the monetary transmission channels in Turkey: evidence from a TVP-VAR model

This article investigates the evolution of the monetary transmission mechanisms in Turkey for the period from January 1986 to December 2016. To this aim, the impacts of monetary variables on the prices and economic activity are investigated with a time-varying vector autoregressive model based on. The evidences from the time-varying responses indicate that the adoption of inflation targeting policy has markedly affected the functioning of transmission channels. The results also suggest that local and global financial crises may magnify the impact of monetary policy shocks on the overall economy.     

Financial frictions and optimal stabilization policy in a monetary union

Financial frictions differ across countries and thus cause international differences in the transmission of shocks. This paper shows how the optimal mix of monetary and fiscal policy depends on these country-specific financial frictions. To this end, we build a two-country DSGE-model of a monetary union. Financial frictions are captured by the cost channel approach. We show that the traditional solution to the assignment problem – the common central bank stabilizes the inflation rate at the union level and the national fiscal authorities stabilize the national economies – does not hold in a world with financial frictions. The cost channel decreases the efficiency of monetary policy and increases the need for fiscal stabilization even at the union level. Moreover, the more heterogeneous the union, the more important is fiscal policy in stabilizing shocks. Finally, we evaluate the scenarios in terms of welfare of the representative household.     

China’s monetary policy: Quantity versus price rules

Two monetary policy rules, the money supply (quantity) rule and interest rate (price) rule, are explored for China in a dynamic stochastic general equilibrium model. The empirical results seem to indicate that the price rule is likely to be more effective in managing the macroeconomy than the quantity rule, favoring the government’s intention of liberalizing interest rates and making a more active use of the price instrument. Moreover, the economy would have experienced less fluctuations had interest rate responded more aggressively to inflation.     

Welfare-improving government behavior and inequality in a heterogeneous agents model

Government’s behavior is expected to be non-neutral in terms of impacts on both welfare and inequality. It is acknowledged in most literature that fiscal policy often involves trade-offs between economic growth and inequality.By applying an equilibrium model with heterogeneous agents, capable of exploring the relationship between fiscal policy variables and the endogenous cross-section distribution of income, wealth, consumption and leisure, this paper aims at assessing (i) the optimal menu of government expenditures as well as of (ii) their inter-temporal financing. These are key issues in times of fiscal imbalances and their correction is dominating the current (European) policy agenda.     

Even more on monetary policy in a small open economy

It is well known that in a small open economy with full capital mobility and a fixed exchange rate, monetary policy is ineffective in influencing real output (e.g. the works of Fleming [Int. Monetary Fund Staff Pap. 9 (1962) 369.] and Mundell [Can. J. Econ. Polit. Sci. 29 (1963) 475.]). However, Wu [Int. Rev. Econ. Finance 8 (1999) 223.] finds that when the credit channel is added to this model, monetary policy can have real effects under a fixed exchange rate system. This conclusion hinges on the assumption that open market operations have no effect on foreign exchange reserves of the central bank when evaluating how a change in monetary policy affects the loan market. This assumption is incorrect because under a fixed exchange rate regime, the quantity of foreign reserves becomes endogenous in the model. It is shown that when this assumption is relaxed, monetary policy is still ineffective in influencing output under a fixed exchange regime, even with an operative credit channel.