Fed's monetary policy mistake and the US post-COVID economic recovery

This paper argues that the persistent inflation in the U.S. during the post-COVID economic recovery was mainly the result of the Fed’s policy mistake caused by an overestimation of the negative output gap. The paper shows that after a two-quarter contraction, the U.S. economy quickly rebounded and outpaced its potential output, thus remaining in overheating territory. However, policymakers prolonged the monetary expansion beyond the necessary, which contributed to fuel inflation for a more prolonged time. The policy mistake was the result of an inaccurate estimation of potential output. Based on an alternative estimation that uses full employment as a condition, this paper shows that the U.S. economy has been running with a positive output gap since mid-2021. The results illustrate that the Federal Reserve was well-behind the curve in an economy in overexpansion and with a galloping inflation escalating well-above the target.     

The impact of the term spread in US monetary policy from 1870 to 2013

In this paper, we apply a novel econometric approach joint with an exhaustive revision of the main events in the history of US monetary policy in order to check the effectiveness of monetary policy focused on interest rates. Unlike the traditional cointegration approach, this new methodology allows us to break with the rigidity of traditional approaches in favour of letting the series be cointegrated, and the spread is able to follow a long-memory process; i.e., it does not necessarily need to be I(0) and also rejects the assumption that interest rates could follow the dichotomy I(0)/I(1). To the best of our knowledge, this is one of the first applications of the Fractionally Cointegrated Vector Autoregressive (FCVAR) model (Johansen and Nielsen (2012) and Nielsen and Popiel (2016)). Aiming to achieve this goal, we use two databases, i.e., the Jordà-Schularick-Taylor Macrohistory Database and Shiller’s database. Our results cannot reject the Expectations Hypothesis of Term Structure in this time period, and more importantly, we also find that the long-term rate drives the long-run relationship, contributing to the total proportion to the common trend; the persistence of the spread shows us effective control power over interest rates by the Fed.     

Channels of monetary policy transmission in Vietnam

Since the economic reforms launched in 1986, the Vietnamese economy has registered impressive economic growth. While foreign investment is providing much needed capital, through the conduct of monetary policy, the State Bank of Vietnam (SBV), which is an integral part of the government of Vietnam, is also playing an important role in nurturing the economic growth. The aim of this paper is to evaluate the success of the SBV policies. Monetary policy actions affect all sectors of real economies with a significant lag. Without a good understanding of the transmission mechanism, monetary policy actions may not achieve the desired outcomes. Using quarterly data from 1995 to 2010, this paper focuses on monetary policy transmission mechanisms in Vietnam. Specifically, we consider the dynamic response of the Vietnamese economy to interest rate, exchange rate and foreign shocks. The estimated results based on structural vector autoregressive (SVAR) methodology suggest that monetary shocks tend to have a strong influence on Vietnam’s output. We find that Vietnam’s monetary policy is relatively more susceptible to foreign shocks.     

Central bank credibility and monetary policy in Indonesia

This paper examines the role of central bank credibility in achieving an inflation target and proposes monetary policy rules for Indonesia. Towards that end, we construct and estimate a forward-looking small scale macroeconomic model (SSMM) of the Indonesian economy by adapting the theoretical underpinnings of the well-known Batini–Haldane model, along with the Taylor policy rule. Our results indicate that it is crucial for the Indonesian central bank to bolster its credibility in order to achieve a lower inflation rate. The inflation–output volatility trade-off frontier we derived from the SSMM shows that a monetary policy rule that targets both inflation and output gaps will result in less macroeconomic volatility. We also found that the inclusion of the exchange rate into the rule as an additional feedback variable warrants consideration in the future course of monetary policy management.     

Economic performance under different monetary policy frameworks

We examine the economic performance (inflation and growth) associated with different monetary policy frameworks, presenting unconditional and conditional analyses, and using predictions of countries’ monetary policy framework choices to address the issue of endogeneity. We find some differences in performance associated with the different monetary policy frameworks, together with a general improvement over time which is explained in part by the trends towards inflation targeting and more precise monetary control, that is from changes in the choice of framework, but in part, and perhaps more strongly, reflects a more general trend towards better economic performance related to changes in decision-making within the frameworks. Our results suggest that the choice of MPF is an important, but by no means the only, determinant of economic performance, and therefore not the only consideration for policymakers looking to improve economic performance.     

Effect of monetary policy credibility on the fear of floating: Evidence from Brazil

Based on the argument that monetary policy credibility can reduce the fear of floating (FF), we analyze this hypothesis for Brazil. Since expectations play a key role under Inflation Targeting, we also analyze whether credibility can affect the expectations of financial markets about the FF of the Central Bank. The results show credibility can reduce the FF, and financial markets expect less intervention by the Central Bank when credibility is higher. Thus, policymakers must pay attention to the credibility of their policies, otherwise they may be misinterpreted regarding both the goals they pursue and how they conduct monetary policy.     

Sovereign bond holdings and monetary policy operations in the euro area

This paper investigates the relationship between sovereign bond holdings of banks and refinancing operations by the ECB for countries in the euro area. We use data collected by Bruegel as well as a new dataset compiled from the annual statements of national central banks to estimate panel regression models. Our findings support the hypothesis that the ECB’s refinancing operations have increased resident banks’ exposure to domestic sovereign bonds. This is in line with the moral suasion theory advanced in the literature. These results strengthen the case for regulatory changes aimed at reducing the sensitivity of banks to sovereign risk.     

How does policy advice of the international monetary fund differ along the income of advised countries?

ABSTRACT

The policy advice literature has paid little attention to the role of international organizations in policy advisory systems. This article offers a systematic analysis of policy advice provided by the International Monetary Fund (IMF) in the framework of the IMF’s regular Article IV consultations. The article argues that the content of IMF advice differs according to the income of the advised countries. Content analyses of the Article IV consultation reports of 18 countries show correlations between the gross national income (GNI) of the advised countries and the function of advice in the policy cycle, the specificity of advice, the recommended policy instruments and the targeted policy issues. Results show that the IMF rather points to policy problems, advices on policy goals and focuses on improving implementation when advising lower income countries. When advising higher income countries, the IMF’s advice focuses on means and specific policy tools.     

Inflation projections for monetary policy decision making

Many central banks set inflation targets over the medium term and inflation projections are a key input for monetary policy decision making. In this paper, we present the procedures used by the Spanish Central Bank staff to project consumer price inflation. We also provide some illustrations of their policy uses, such as fan charts, deflation probabilities and the monitoring of inflation targets.     

Monetary policy in the New-Keynesian model: An application to the Euro Area

This paper analyzes monetary policy in a stylized New-Keynesian model. A number of issues are focused upon: (i) optimal monetary policy under commitment or discretion versus ad-hoc monetary policy based on simple rules, (ii) the effects of fiscal policies and foreign variables on monetary policy, (iii) the effects of fiscal deficit and interest rate smoothing objectives and the role of forward-backward linkages in the model. The model is estimated for the Euro Area. Using simulations of the estimated model, it is analyzed how these aspects might affect monetary policy of the ECB and macroeconomic fluctuations in the Euro Area.     

Regional asymmetries in monetary transmission: The case of South Africa

PPP is unlikely to hold instantaneously for all commodities across the different regions of a monetary area. It is therefore possible that monetary expansions or contractions will have different effects in different regions, if there are regional asymmetries in the monetary transmission mechanism. We estimate the size of such asymmetries across the nine provinces of South Africa over the period 1997–2005. There are large and statistically significant differences in the response of prices to monetary expansions and contractions. The problems arising from transmission mechanism asymmetries are not restricted to international monetary unions.     

The inflation–output volatility trade-off: a case where anti-inflation monetary policy turns out to be successful, a historical assessment

Over the period 1988–2000, the Greek monetary authorities seemed to have implemented a successful disinflation policy. The question, however, is whether this disinflation was optimal or not. This paper, through a theoretical model and the GMM approach, constructs an optimal policy frontier in terms of a trade-off between output and inflation variabilities. The frontier yields increases in the output variance when policymakers attempt to decrease inflation variances, and vice versa. The location of the actual monetary policy performance suggests a policy close to the frontier, implying a successful monetary policy.     

The Euro, income disparity and monetary union

This paper looks at the impact of the UK joining the Euro on compatibility between the UK and the Euro zone. We construct a theoretical model to capture such effects, and then estimate the model using data from the period 1980–1999 (the period covering the existence of the ECU and the Euro). Particular attention is paid to the actual dynamics of the system and the important roles of monetary and fiscal policy. We find that the dynamic path of the UK and Euro members is stable and that UK monetary policy is in line with that of its Euro zone neighbours in a way that would be close to that expected if the UK were already a member of the Euro zone.     

Commodities and monetary policy: Implications for inflation and price level targeting

We examine the relative ability of inflation targeting and price level targeting monetary policy rules to minimize inflation variability and business cycle fluctuations in a commodity-exporting country for supply and demand shocks to global commodity markets. The macroeconomic consequences of oil and non-oil primary commodities differ and affect the relative merits of the alternative monetary policy frameworks. Particularly, the consumption of refined oil products and demand-driven commodity price movements induce highly persistent inflation pressures resulting in a significant deterioration of the inflation-output gap trade-off available to central banks. When such terms-of-trade shocks are prevalent, price level targeting is inferior to inflation targeting.     

Zero Lower Bound and negative interest rates: Choices for monetary policy in the UK

There have been relatively few analyses of the policy context and consequences of a Zero Lower Bound (ZLB) for nominal interest rates. This paper sets out monetary policy alternatives, including negative interest rates, a revision of the inflation target, and rendering unconventional policy instruments such as QE conventional (permanent). Following extensive discussion of policy options, we set out a model that explores the impacts of the real policy rate on economic growth, employment and inflation, with particular attention to the British economy. We use a Time-Varying Structural Vector Auto-regressive (TVSVAR) Model where the sources of time variation are both the coefficients and variance–covariance matrix of the innovations. It was found that real rates have significant implications for real growth, the labour market and price stability even when monetary policy was constrained at the ZLB in nominal terms. The study additionally applies a discrete break in the data to focus on the Post-Global Financial Crisis and ZLB period. This indicates that the effectiveness of real rates did not diminish and this has important implications in terms of a policy approach which seeks to exploit real negative rates.     

Modeling U.S. monetary policy during the global financial crisis and lessons for Covid-19

The paper formulates the modeling of unconventional monetary policy and critically evaluates its effectiveness to address the Global Financial Crisis. We begin with certain principles guiding general scientific modeling and focus on Milton Friedman's 1968 Presidential Address that delineates the strengths and limitations of monetary policy to pursue certain goals. The modeling of monetary policy with its novelty of quantitative easing to target unusually high unemployment is evaluated by a Markov switching econometric model using monthly data for the period 2002–2015. We conclude by relating the lessons learned from unconventional monetary policy during the Global Financial Crisis to the recent bold initiatives of the Fed to mitigate the economic and financial impact of the Covid-19 pandemic on U.S. households and businesses.     

我国货币政策失效的原因分析及对策

1997年以来,我国的货币政策在经济增长中起到了一定的作用,但也存在一些失效,主要表现在利率机制、准备金政策、公开市场业务等方面存在缺陷。因此,必须不断完善我国的货币政策,以便更好地为经济增长提供政策指导。     

Monetary policy,trade-offs and the transmission of UK Monetary Policy

We provide a new method to model changes in monetary policy of the Bank of England (BoE) as well as the impact of these changes on UK economy. This is important as central bankers have widened the range of instruments in their monetary policy toolbox. Specifically, we estimate a proxy for the monetary policy stance and then analyse a time-varying parameter vector autoregressive with stochastic volatility model to explain the BoE’s trade-offs when making policy decisions and as well as to demonstrate dynamic impacts of monetary policy on inflation and economic growth. The empirical results show that our estimated monetary policy proxy is better at capturing the BoE’s policy when the interest rate lower bound becomes binding.