‘Talking down monetary policy’ – a note

There is a recent debate about whether ultra-expansionary monetary policy is no longer effective in stimulating demand, a concern often voiced in the euro area in light of persistently low and even negative inflation. As a response, the European Central Bank (ECB) warns against ‘talking down monetary policy’ (ECB Vice-President Vítor Constâncio, 2016). This note uses a textbook model of optimal monetary policy to study a situation in which the public misperceives the interest rate elasticity of aggregate demand, which reflects policy effectiveness. We show that as a result of underestimating policy effectiveness demand shocks can no longer be stabilized perfectly, thus resulting in inefficient inflation and output dynamics. In the presence of misperceptions, a negative demand shock leads to a prolonged period of negative inflation rates.     

A brief note concerning Hayek’s non-standard conception of knowledge

Whatever F.A. Hayek meant by “knowledge” could not have been the justified true belief conception common in the Western intellectual tradition from at least the time of Plato onward. In this brief note, I aim to uncover and succinctly state Hayek’s unique definition of knowledge.     

Understanding China’s monetary policy: an institutional perspective

Given China’s status as a large transitional economy, analysing the country’s monetary policy requires an understanding of the institutional and policy environment within which monetary policy operates. As China’s monetary policy has multiple objectives and the central bank is subordinate to the State Council in monetary policy decisions, addressing deep-rooted structural issues and improving governance and institutions are essential so that monetary policy can be more focused and effective. Confronted with the Impossible Trinity dilemma, China faces daunting challenges in tackling the inevitable policy choice between monetary autonomy and exchange rate control as its capital account increasingly liberalises. This article analyses China’s unique and evolving monetary policy framework from an institutional perspective and evaluates the challenges to monetary management and reforms. Relevant policy implications for monetary policy implementation are also discussed.     

International spillovers of ECB’s unconventional monetary policy: the effect on Central Europe

We examine how unconventional monetary policy of the European Central Bank (ECB) influences macroeconomic stability in three Central European economies. We estimate various panel vector autoregressions (PVARs) using monthly data from 2008 to 2014. Using the shadow policy rate and central bank assets as measures of unconventional policies, we find that output growth and inflation in Central Europe temporarily increase following an expansionary unconventional monetary policy shock by the ECB. Using both impulse responses and variance decompositions, we find that the effect of unconventional policies on output growth is much stronger than the effect on inflation.     

A symposium on Theodore Burczak’s, Socialism after Hayek

What does socialism after Hayek look like? Ted Burczak provides one highly intriguing answer.     

Time-varying transmission efficiency of China’s monetary policy

This paper tries to investigate the time-varying characteristics of China’s monetary policy transmission from the impulse response evidence of both open-economy DSGE model and TVP-VAR model. We find that the transmission efficiency of price-based monetary policy has significantly improved over the sample period, while quantity-based monetary policy is weakening. The resume of exchange reform in 2010 also strengthens the exchange rate channel especially in terms of price-based monetary policy. Combining with the evidence from DSGE model underlines the importance of further interest rate liberalization and price-based monetary policy Taylor rule should also consider the exchange rate stability.     

Did Hayek have a monetary theory of business cycles?

Joseph Schumpeter, a careful reader of Hayek, categorized Hayek??s theory of economic cycles as non-monetary. Almost every other source, including Hayek himself, categorized the theory as monetary. The issue turns on the concept of causality being used. The question of what causality concept to apply to complex phenomena has substantive implications for economic theory. A simple concept of causality, appropriate to the study of some physical phenomena, will mislead when applied to complex phenomena. We provide examples of errors in analysis that follow from the wrong choice of a causal paradigm.     

F. A. Hayek’s influence on Nobel Prize winners

F.A. Hayek’s broad research program has led some to conclude that his impact on economics has been minimal. This citation study examines the frequency of Nobel laureates cited by other laureates in the official Prize Lectures to understand how elite economists influence other elite economists. It finds that Hayek is the second most frequently mentioned laureate in the Prize Lectures, and he has the second most publication citations of the laureates. Hayek’s influence on the top tier of economists is substantial.

Choosing one’s own informal institutions: on Hayek’s critique of Keynes’s immoralism

In the main, Hayek favored rules that apply equally to all and located such rules in tradition, beyond conscious construction. This led Hayek to attack Keynes’s immoralism, i.e., the position that one should be free to choose how to lead one’s life irrespective of the informal institutions in place. However, it is argued here that immoralism may be compatible with Hayek’s enterprise since Hayek misinterpreted Keynes, who did not advocate the dissolving of all informal rules for everybody. By avoiding this misinterpretation, immoralism can be seen as institutional experimentation at the margin, which Hayek himself favored.

After Hayek: On Theodore Burczak’s socialism after Hayek

Burczak reformulates socialism to escape Hayek’s strictures against central planning. While Hayek supports a social safety net as well as other liberal reforms, Burczak points out that these reforms fall outside Hayek’s theoretical framework. We explain that this is because Hayek narrowed the classical economists’ conception of sympathetic agency to imitation and rule following. By contrast, liberal reform proposals follow from the theoretical framework of Adam Smith and John Stuart Mill. For Smith and Mill, sympathy is a richer concept in which people change places imaginatively with others. Sympathetic agency allows a wide range of other regarding actions and political reforms.

Political incentives and the effectiveness of monetary policy: evidence from China’s city commercial banks

From the perspective of official-and-director (OAD), this article takes studies of the effect of monetary policy on bank loans to the heterogeneity of bank. We explore how political incentives affect the lending channel of monetary policy transmission, using a sample of China’s city commercial banks during 2006–2014. And we further analyse the role of OAD’s characteristics, including administrative rank and age. The results indicate that although tight monetary policy can reduce bank loans, the OAD can weaken this relationship, and the higher is the administrative rank of OAD, the larger is the effect. And the older is OAD, the larger is the effect. More importantly, the relationship between monetary policy and bank loan is insignificant in banks with OAD, implying that the lending channel of monetary policy is absent when considering the role of OAD.     

Has monetary policy really become less effective in the euro area? A note

This paper applies a time-varying VAR model with stochastic volatility to the euro area. In contrast to the literature, we find that (i) monetary policy has not become less effective and that (ii) the expansionary policy that is currently pursued would not have resulted in a less severe recession in 2009.     

South Africa’s monetary policy independence: evidence from a Global New-Keynesian DSGE model

We study the response of South African monetary policy decisions to foreign monetary policy shocks. We estimate the extent of foreign monetary policy pass through by augmenting standard Taylor rules and comparing the results within the context of a Global New-Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. The general equilibrium model captures important spill-over effects that would otherwise have been ignored in a single equation set-up. The results show that the relationship between foreign monetary policy shocks and South African interest rates is complicated – South Africa does not import foreign monetary policy directly, but is still affected. Except for the US, an increase in foreign interest rates leads to a decrease in South African interest rates – highlighting the complex channels that the monetary policy authority has to monitor outside of its economy.     

Darwinian paradigm,cultural evolution and human purposes: on F.A. Hayek’s evolutionary view of the market

The claim that the Darwinian paradigm of blind-variation-and-selective-retention can be generalized from the biological to the socio-cultural realm has often been questioned because of the critical role played by human purposeful design in the process of cultural evolution. In light of the issue of how human purposes and evolutionary forces interact in socio-economic processes the paper examines F.A. Hayek’s arguments on the “extended order” of the market (capitalism), in particular with regard to their policy implications. Its focus is on the tension that exists in Hayek’s work between a rational liberal and an agnostic evolutionary perspective. A re-construction of his arguments is suggested that allows for a reconciliation of these seemingly contradictory views.     

On fallibility and perfection: Boettke’s Hayek vs. mainline economics

The Review of Austrian Economics - Peter Boettke’s F.A. Hayek Economics, Political Economy, and Social Philosophy (Palgrave 2019) is a nuanced treatment that examines the historical context...     

Impact of asset price fluctuation on China’s monetary policy: An empirical analysis based on quarterly data, 1994–2006

The strenuous fluctuation in global asset price in recent years has had a profound impact on the economic and social development of every country. An empirical analysis indicates that asset prices (the stock price index and real estate prices) are important endogenous variables affecting the interest rate reaction function of central bank monetary policy. With expected inflation as a given, each one percentage point rise in output gap will cause a 0.79 percentage point reduction in interest rates by the central bank and each one percentage point rise in real estate price will result in a 2.2 percentage point rise in interest rates. The stock price index does have an influence on the trends in monetary policy, but it is less salient than the impact of housing prices. We also show that monetary policy that employs asset price as an endogenous variable increases the central bank’s control in seeking to attain its objectives. Therefore we suggest that the central bank should make asset price fluctuation an endogenous variable and incorporate it into its forward-looking interest rate rule, in order to facilitate the healthy development of China’s markets for real estate, stocks and derivatives, energy and bulk commodities and maintain rapid, smooth, sustainable and harmonious economic development.     

The economic analysis of social norms: A reappraisal of Hayek’s legacy

This paper is organized as follows: first, we show that the reference to the notion of group selection is coherent with the other parts of Hayek’s thought. Second, we develop the idea that recent works in terms of the emergence and evolution of social norms corroborate in part Hayek’s theses in this domain. Finally, we put to the fore some drawbacks in Hayek’s approach and propose means to solve them.

A note on ‘Corporate Social Responsibility and Marketing Channel Coordination’

Goering (2012) works on a bilateral monopoly with perfect marketing channel coordination to analyze the effects of corporate social responsibility. He starts the analysis of a bilateral monopoly with socially concerned firms where either the manufacturer or the retailer is additionally to its profit interested in a share of consumer surplus. In this short note, we extend this analysis and study the case where both firms are socially concerned. As a result, we enlarge the analysis started by Goering (2012) and get further interesting insights into a bilateral monopoly with corporate social responsibility. First, we are able to summarize ‘Proposition 1’ and ‘Proposition 4’ into a common one and figure out the circumstances when the wholesale price fixed by the manufacturer is below marginal costs. Second, we explain analytically the findings from ‘Proposition 3’ and ‘Proposition 6’. We point out the model's key assumption – the perfectly coordinated marketing channel – as the driver of the results and the reason for the equilibrium results' independence from retailer's social concern.