Optimal interest rate rule in a DSGE model with housing market spillovers

This paper studies the optimal interest rate rule in a DSGE model with housing market spillovers (Iacoviello and Neri, 2010). We find that the optimal rule responds to house price inflation even when the stabilization of house price is not among the objectives of the policymaker, and that the strength of the response depends crucially on a few structural parameters.     

Monetary transmission mechanisms in a small open economy: a Bayesian structural VAR approach

Abstract This paper develops a Bayesian structural VAR model for Canada in order to estimate the effects of monetary policy shocks, using the overnight rate target as the policy instrument. I allow the policy variable and other home and foreign variables to interact with each other contemporaneously. The key finding is that monetary policy affects the real economy through both the market interest rate and the exchange rate. I also find that the Bank of Canada responds to any home and foreign variables that embodies information about future inflation and that external shocks are an important source of output fluctuations.     

ENDOGENOUS TIME PREFERENCE,INTEREST‐RATE RULES,AND INDETERMINACY*

This paper extends the Benhabib et al. flexible‐price, money‐in‐the‐utility‐function model by considering endogenous time preference and re‐examines equilibrium indeterminacy in response to alternative interest‐rate rules. We show that either an active or a passive interest‐rate feedback rule can generate local indeterminacy even if consumption and real money balances are Edgeworth independent. This result is in sharp contrast to that in the related literature. We also find that in the presence of endogenous time preference, local indeterminacy may occur regardless of whether the monetary policy is based on the interest‐rate feedback rule or money growth‐rate targeting.     

Unemployment dynamics in emerging countries: Monetary policy and external shocks

This paper quantifies the impact of three key external shocks – external demand, interest rate, and uncertainty shocks – on emerging market economies (EMEs). We find that external shocks have a sizeable impact on macroeconomic fluctuations in EMEs and that a considerable fraction of this impact is through the domestic stock market. A decrease in external demand and an increase in external interest rate and uncertainty lead to a higher unemployment rate, lower stock market return, and a depreciation of the domestic currency. The EMEs' monetary policy actively responds to external shocks and dampens their impact on domestic activity.     

Investment and interest rate policy: a discrete time analysis

This paper analyzes the restrictions necessary to ensure that the interest rate policy rule used by the central bank does not introduce local real indeterminacy into the economy. It conducts the analysis in a Calvo-style sticky price model. A key innovation is to add investment spending to the analysis. In this environment, local real indeterminacy is much more likely. In particular, all forward-looking interest rate rules are subject to real indeterminacy.     

Term structure and forward guidance as instruments of monetary policy

This paper studies a simple monetary model with a Ricardian fiscal policy in which equilibria are indeterminate if monetary policy consists solely of a rule for fixing the short-term interest rate. We introduce explicitly into the model the agents’ expectations of inflation which create the indeterminacy and show that there are two types of policies—a term structure rule or a forward guidance rule for the short rate—which lead to determinacy. The first consists in fixing the interest rates on a family of bonds of different maturities as function of realized inflation; the second consists in fixing the short-term interest rate and the expected values of the short-term interest rate for a sequence of periods into the future as a function of realized inflation. If the monetary authority chooses an inflation process that satisfies conditions derived in the paper and applies one of these rules, it anchors agents’ expectations to this process, in the sense that it is the unique inflation process compatible with equilibrium when the interest rates or expected future values of the short rate are those specified by the term structure or forward guidance rule.     

Central bank inability and Taylor rule in developing countries

This paper seeks to adjust Taylor rule to mimic an environment that has central bank inability (losses). Moreover, the current paper is aiming at investigating the effect of the new features of Taylor rule within a context of a New-Keynesian model on a developing economy. The current paper concludes that we can utilize Taylor rule within a New-Keynesian model to introduce the influence of the central bank inability on the economy. Central bank inability decreases both expected future real interest rate and expected future real output. On the contrary, it increases expected future nominal interest rate and expected future inflation rate. Moreover, we prove that the effect of central bank inability has larger effect on the expected inflation rate more than the influence of targeted inflation rate.     

Does it matter (for equilibrium determinacy) what price index the central bank targets?

What inflation rate should the central bank target? We address determinacy issues related to this question in a two-sector model in which prices can differ in equilibrium. We assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile. The contribution of this paper is to demonstrate that a modified Taylor Principle holds in this environment. If the central bank elects to target sector one, and if it responds with a coefficient greater than unity to price movements in this sector, then this policy rule will ensure determinacy across all sectors. The results of this paper have at least two implications. First, the equilibrium-determinacy criterion does not imply a preference to any particular measure of inflation. Second, since the Taylor Principle applies at the sectoral level, there is no need for a Taylor Principle at the aggregate level.     

The time-varying policy neutral rate in real-time: A predictor for future inflation?

This paper examines the time-varying policy neutral interest rate in real-time for the Czech Republic in 2001:1–2006:09, estimating various specifications of simple Taylor-type monetary policy rules. For this reason, we apply a structural time-varying parameter model with endogenous regressors. The results indicate that the policy neutral rate gradually decreased over the sample period to levels comparable to those in the euro area. Next, we propose a measure of the monetary policy stance based on the difference between the actual interest rate and the estimated policy neutral rate and find it a useful predictor of the level as well as the change of the future inflation rate.     

What Do Data Say About Monetary Policy,Bank Liquidity and Bank Risk Taking?

This paper tests empirically the linkage between banks' investment and interbank lending decisions in response to interest rate changes. We draw conclusions for the monetary policy, which uses the interest rate as its main tool. Across European countries we find that the risk-free (i.e. monetary policy) interest rate negatively affects the liquidity retained by banks and the decision of a bank to be a lender in the interbank market. Instead, the interbank interest rate has a positive impact on these decisions. We also find that banks who lend show less risk-taking behaviour and tend to be smaller than those who are borrowers. Most importantly, the risk-free interest rate is positively correlated with loans investment and bank risk-taking behaviour.     

Wage setting actors and sticky wages: Implications for the business cycle and optimal monetary policy

Two sticky-wage models are introduced in this paper to examine the implications of having either households or firms as wage setting actors. The rate of wage inflation depends positively on the output gap if households set wages whereas such a relationship is of negative sign when firms set wages. Moreover, impulse–response functions and the statistical comparison with US data show different business cycle properties depending upon wage setting actors. Finally, optimal monetary policy is derived for each case, and compared with a Taylor-type monetary policy rule.     

Forecasting the Direction of Policy Rate Changes: The Importance of ECB Words

This paper evaluates the predictive power of different information sets for the European Central Bank (ECB) interest-rate-setting behaviour. We employ an ordered probit model, i.e. a limited dependent variable framework, to take into account the discreteness displayed by policy rate changes. The results show that the forecasting ability of standard Taylor-type variables, such as inflation and output gap, is fairly low both in-sample and out-of-sample, and is comparable to the performance of the random walk model. Instead by using broader information sets that include measures of core inflation, exchange rates, monetary aggregates and financial conditions, the accuracy of the forecasts about ECB future actions substantially improves. Moreover, ECB rhetoric considerably contributes to a better understanding of its policy reaction function. Finally, we find that that the ECB has been fairly successful in educating the public to anticipate the overall future direction of its monetary policy, but has been less successful in signalling the exact timing of rate changes.     

Changing transmission of monetary policy on disaggregate inflation in India

This paper investigates the time-varying effects of monetary policy on aggregate, sectoral, and disaggregate inflation in India from 1997 to 2017 using a large dataset of 439 variables. We find that the effectiveness of a contractionary monetary policy in controlling aggregate inflation has improved over time. This improvement in the policy's effectiveness can be attributed to better transmission through credit and asset price channels. In investigating disaggregate inflation, we find that a contractionary monetary policy is more effective in reducing inflation in the manufacturing sector than in the agricultural sector. Further, the sacrifice ratios in all manufacturing sectors have improved over time. However, the commodities prices of some sectors respond positively after a monetary contraction, which demonstrates the presence of a cost channel in the Indian economy. Our findings suggest that the monetary authority in India should have an interest rate rule that incorporates sectoral inflation and reacts to each with different intensity.     

Expected Future Budget Deficits,the Real Exchange Rate and Current Account Dynamics in a Finite Horizon Model

This paper uses an optimizing open economy general-equilibrium model to investigate the macroeconomic effects of current and expected future budget deficits. It is shown that current and expected future budget deficits are positively correlated with the current account deficit, the capital stock and the real exchange rate, but negatively correlated with the domestic real interest rate and consumption, along the stable path approaching the steady state. The paper also demonstrates that the world real interest rate is positively correlated with consumption, foreign assets and the domestic real interest rate, but negatively correlated with the capital stock and the real exchange rate. Received April 11, 2001; revised version received October 25, 2001     

Are heterogeneous FOMC forecasts consistent with the Fed’s monetary policy?

Yes, they are! We find that although there is a surprisingly high dispersion of individual forecasts and some dissent on the Federal Funds target, the FOMC’s individual behavior is well described by a Taylor-type rule.     

Disinflation costs in China and monetary policy regimes

This paper investigates the real effects of a disinflationary policy in China, in which we conduct a disinflation experiment in a medium-scale New Keynesian model. We highlight two key features of China's economy: the relevance of money to monetary policy rules and household inequality. For the former, we consider two monetary policy regimes: an expanded Taylor rule with money and a money supply rule. For the latter, we take into account a share of the population that is limited in its ability to participate in assets markets. Our analysis suggests that a disinflation policy is more costly when the central bank controls the money supply than the case in which the nominal interest rate is the policy instrument. Our results are driven by the different impacts of disinflation on nominal and real interest rates under the two regimes.     

“Ex-ante” Taylor rules and expectation forming in emerging markets

The success of monetary policy in stabilizing inflation depends substantially on its influence on expectation formation of private agents. This paper provides a novel perspective on the expectation forming process of financial markets. Using forecasts for the short-term interest rate, the inflation rate, and output growth for 10 emerging markets in Latin-America, central and eastern Europe, we estimate expected (“ex-ante”) Taylor-type rules. We find evidence for significant differences in the expectation formation process in the sense that the well-known Taylor principle fairly holds for only some countries, while for the other countries it does not. The adaption of an explicit inflation targeting regime seems to explain this cross-country differences.     

商品期货有助于预测通货膨胀率吗

本文通过对我国22种商品期货提取隐含的便利收益率时间序列,发现商品期货在样本内和样本外可以显著预测未来通货膨胀率,在控制了利率、货币增速影响后,这一结果仍然成立。进一步,采用南华商品期货综合指数、商品期货各品种指数、商品期货大类指数,以及美国商品研究局商品期货指数对通货膨胀率进行了样本外预测,结果表明这些指数对于预测我国通货膨胀率效果仍然显著。基于商品期货价格的预测模型都优于本文的基准模型和朗润预测指数,这表明商品期货市场包含了与通货膨胀率相关的重要信息,可以作为未来一般物价走势的重要参考。     

The accuracy of interest rate forecasts in the Asia-Pacific region: opportunities for portfolio management

We analysed interest rate forecasts from Australia, China, Hong Kong, India, Indonesia, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand. We assessed 532 forecast time series with a total of 85,264 individual interest rate forecasts. To do so, we carried out a comparison to naïve forecasts and investigated the forecast time series for topically orientated trend adjustments. In addition, we deployed the sign accuracy test and the unbiasedness test. The results are very sobering in part: 95.9% of all forecast time series are characterized by the phenomenon of topically orientated trend adjustments, and 99.4% of all forecast time series proved to be biased. Only a small proportion of the forecast time series (3.6%) reflected the future interest rate trend significantly more precisely than a naïve forecast. However, at the same time some of the results of the study are surprisingly positive. The sign accuracy test revealed that 48.3% of all forecast time series predict the interest rate trend significantly better than a random walk forecast.     

Re-exploring the nexus between monetary policy and banks' risk-taking

In this paper, we analyse the link between monetary policy and banks' risk-taking behaviour. Some theoretical and empirical studies show that monetary easing increases banks' appetite for risk related to asset valuation and the search for higher yield. However, the low interest rate environment that began in 2010 is casting doubt on these findings. Our study adds to analyses of the monetary risk-taking channel considering non-linearity, especially testing threshold effects in this channel. Using a dataset of US banks, we find that the impact of low interest rates on banks' risk behaviour depends on the previous monetary regime, that is on the deviation of monetary rates from the Taylor rule. We complement the literature on the Taylor rule and provide arguments that extend the use of the Taylor rule by Central Banks to financial stability purposes.