Loose monetary policy and firm uncertainty

ABSTRACTThis 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.

Using the continuous difference-in-difference (DID) model, this paper analyzes the Chinese listed companies’ panel data from 2013 to 2019 by taking the rapid monetary policy easing in mid-2015 as the policy shocks to test the impact of loose monetary policy on enterprise R&D investment. The results show that loose monetary policy significantly weakened the negative impact of high leverage on enterprise R&D investment. After considering the heterogeneity and fixed effects of enterprise and industry characteristics, loose monetary policy still significantly improved highly leveraged enterprises’ R&D investment and showed a greater innovation-driving role in a competitive market environment. Based on this, this paper believes that The People’s Bank of China should continue to guide the decrease of medium- and long-term interest rates and promote benign competition among enterprises to improve the effectiveness of the monetary policy.

This paper examines whether the loose monetary policy was a key factor in the 2006 housing bubble and then led to the financial crisis of 2008. It analyses the situation of the US economy during the early 2000s. It presents how the role of the Federal Reserves Monetary strategies such as the Expansionary Monetary Policy created an easy credit environment and investors' overconfidence in the US. Furthermore, this paper delves into the Taylor rule and explores the principle for adjusting nominal interest rates based on economic fluctuation and inflation. This framework is crucial in understanding the policy decisions of that time. In addition, this paper outlines the different perspectives on the Monetary Policy from the John B. Taylor and Bernanke who was defend for the Federal Reserve that fears of deflation and the restrictions brought about by the liquidity trap during that time. The paper also reveals labour market, including unemployment and output gaps, indicated economic strength but also inflationary pressure. In conclusion, this paper emphasizes the importance of a multifaced approach to monetary policy analysis in understanding the intricate factors that led to this pivotal event in economic history.

This study explores interconnections between risk behaviour in the financial sector, particularly banking sector, with monetary policy stance. Referring Bernanke and Blinder (1988) modified model for analyzing the bank credit behavior, we develop an empirical model to test the role of risk behaviour in monetary policy transmission mechanism. Vector Error Correction Model are applied to test the significance of interaction between risk variables and monetary policy stance in the short run dynamics of credit behavior around its long-run cointegration with real GDP. Some empirical results emerge from this preliminary study. First, there is early indication that risk taking channel in the monetary policy transmission mechanism exists in Indonesia during analysis period. Second, risk variables and credit tend to move procyclicalyl while monetary policy stance tends to a-cyclical. Third, pro-cyclical behavior of credit and risk variables reverses the effect of loose monetary policy stance, and there is an indication of asymmetric effect between tight monetary policy and loose monetary policy in Indonesian economy. These empirical findings bring about policy recommencations for better understanding on the risk behavior in the banking sector, as well as integration beetween monetary dan financial sector policies.JEL Code : E52, E58,Keyword: Monetary Policy Transmission Mechanism, Monetary Policy Stance, Banking Risk Behavior, Risk Perception

Using the data of China’s A-shares listed companies from 2007 to 2017, this study found that there are significant differences between state-owned enterprises and private enterprises in terms of credit allocation scale, credit term structure, and credit financing cost. Compared with state-owned enterprises, private enterprises have smaller credit allocation scale, shorter credit term, and higher financing cost. Monetary policy has a significant impact on the differences; in which loose monetary policy will aggravate the financing difference between private enterprises and state-owned enterprises, while tight monetary policy will narrow the difference.

In recent years central bankers have devoted increased attention to the question of whether and how to intervene to address the growing environmental and climate crisis. The climate intervention debate gained momentum during a period of low inflation and loose monetary policy in core economies – a time characterised by near zero interest rates and large asset purchase programmes. Since 2021, however, the macroeconomic context has changed. Against this background, the paper analyses the contradictory and problematic nature of the direction monetary policy has taken in reaction to higher inflation. It argues that higher interest rates delay the green transformation by raising the cost of sustainable investments, and that the resulting delay also hampers prospects for achieving price stability. The paper concludes that the present macroeconomic environment demands a ‘greener and cheaper’ monetary policy approach designed to address the environmental and climate crisis and also to simultaneously fight inflation.

Based on the research hotspot and the established status of the real economy financialization, this paper examines the impact of financialization on regional innovation from a macro perspective. In theory, economic financialization has an impact on regional innovation mainly through innovative “water reservoir effect” and “crowding effect”, and the overall impact depends on the net effect of the two. In view of this, based on the 2008-2016 provincial panel data, this paper analyzes the specific effects of regional financialization on technological innovation and analyzes the transmission path of effects based on the spread of financial regions. The study finds that, on the whole, financialization has a negative overall effect on regional innovation, and this conclusion is still stable after using the instrumental variable test. After considering the spatial factors, the financialization has a positive and spatial relationship between the regions, indicating that the financialization has a tendency to spread between regions; at the same time, the impact of financialization on regional technological innovation is still significantly negative. Considering the location heterogeneity, it is found that the negative effects of financialization are more significant in the central and eastern regions. After further examining the monetary policy, it is found that the relatively loose monetary policy actually strengthens the “crowding out effect” and further worsens the suppression of innovation by financialization. The research of this paper supplements the relevant research on the development and impact of China's financialization at the macro level, and provides important empirical evidence for the government's guiding funds to “deviate from reality”.

A number of different solutions have been proposed to deal with the Asian currency crisis. One proposal championed by the International Monetary Fund (IMF) is to allow the currencies to float while seeking to maintain their value through tight monetary policy. A second proposal calls for restrictions on capital flows. A third is establishment of currency boards, which seek to stabilize a currency's value by “pegging” it to the value of another currency. In examining each of these three alternatives, this article concludes that none offers a perfect solution. Capital controls are almost always bad, creating serious distortions throughout the economy and destroying investor confidence. Currency boards, as past experience suggests, can be effective in certain circumstances. Nevertheless, there are concerns that currency boards deprive countries of all policy flexibility (some of which could be helpful in coping with crises), are difficult to set up so as to maintain credibility, and may lack adequate reserves to instill confidence. Such concerns have stood in the way of using of currency boards in the cases of Russia and Indonesia. Having expressed reservations about these two “more radical” solutions, this article closes by noting the main problem with the IMF's prescription of floating currencies: its insistence on high interest rates and tight monetary policy. Because high interest rates tend to be ruinous for the local economy—and their effectiveness in limiting currency depreciation in times of crisis is far from clear—the author argues that interest rates should be raised only to compensate for inflation. Consistent with the recent experience of Brazil, the best solution may be just to allow currencies to float with a relatively loose monetary policy.

This paper analyses the COVID recession and the large fiscal policy response by modelling scenarios using a macro‐econometric model. The COVID recession mainly arose from lower household consumption of certain services under COVID social distancing. The fiscal response to compensate for income losses in those service industries meant that unemployment was around 2 percentage points lower for 3 years than otherwise would have been the case. However, there was over‐compensation: for every $1 of income the private sector lost under COVID, fiscal policy provided $2 of compensation. Following the end of social distancing, the aftereffects of over‐compensation and over‐prolonged loose monetary policy are modelled to have generated excess demand that temporarily added up to 3 percentage points to the annual inflation rate. Also, three forms of over‐compensation in the JobKeeper program that led the fiscal response created disincentive effects and inequities. The primary lesson for future pandemics is that fiscal policy should compensate, but not over‐compensate, for income losses, both in aggregate and at the program level. The secondary lesson is that monetary policy needs to take more account of the stimulus already provided by the fiscal response, so that interest rates do not remain very low for too long.

Why do bad policy ideas persist over time? We trace the development of the euro’s governing ideas over fiscal and monetary policy in the face of mounting evidence that continued adherence to those ideas was economically deleterious. We argue that a specific form of social learning, framed by a retrospective recoding in 2010–2012 of Europe’s experience with fiscal rules in 2003–2005, drove European elites to pursue policies that were economically irrational but politically rational. As a result, the Eurozone’s medium-term resilience has been made possible by the European Central Bank’s unconventional and loose monetary policies, which operate in direct opposition to the tight fiscal policies of its member states’ governments. We maintain that this self-defeating macroeconomic policy mix will continue as long as the lessons learned by policymakers are driven by the need to win what we term an authority contest, rather than provide better macroeconomic outcomes.

The two leading explanations for the poor inflation performance during the 1970s are policy opportunism (Barro and Gordon 1983) and “inadvertently” bad monetary policy (Clarida, Gali, and Gertler 2000, Orphanides 2003). The main models of the latter category are that of Orphanides (loose monetary policy was the outcome of mis‐perceptions about potential output rather than of inflation tolerance) and of Clarida, Gali, and Gertler (weak policy reaction to expected inflation led to indeterminacies). We show that both of these models can account for high and persistent inflation and also have satisfactory overall performance if an exceptionally large decrease in productivity took place at that time.

Since the outbreak of the latest financial crisis central banks in several countries have decided to apply non-conventional monetary policy measures. Other monetary authorities behaved more conventionally but conducted a very loose monetary policy anyway. The goal of the paper is to discuss threats and possible consequences of treating the money instrumentally (monetary easing, government financing by the central bank). The authorities tend to arbitrary reinforce just one function of money, a medium of exchange, in order to artificially increase the sales and production of goods and services while neglecting other major function: a store of value. Fast growing money aggregates, awareness that there is no limit for money creation, and ideas such as “helicopter money” stimulate the attempts to storage the wealth in different form, e.g. cryptocurrency. The remarks were formulated from the conventional and Islamic finance perspective. Statistical data come from the euro area, Poland, and Iran, where banking system is fully Islamic.

We contribute to the debate over the contemporary relevance of the Austrian Business Cycle theory (ABC) by making three theoretical developments. First, we claim that the heterogeneous nature of entrepreneurship is the best means to respond to a Rational Expectations (RE) critique. If entrepreneurs are different then the “cluster of errors” are not made by everyone, just those on the margin. And if the marginal entrepreneurs are systematically different from the population as a whole, we avoid the implication of widespread irrationality, even though credit expansion will affect real variables. Second, we argue that the size of the monetary footprint is a more telling signal than the market rate of interest, and will not necessarily be revealed by measured inflation. Therefore attention to the official interest rate or Consumer Price Index is misleading, and an inappropriate way to assess applicability. And third, the main harm from loose monetary policy is not that it encourages entrepreneurs to behave more recklessly with capital, but that it encourages precisely the people who can’t afford capital at the market rate to borrow, and makes them the marginal trader. This suggests that adverse selection is a more important issue than moral hazard. We acknowledge that empirical work is required to verify these claims, and suggest how this might be undertaken.

Economic Crises and the Breakdown of Authoritarian Regimes: Indonesia and Malaysia in Comparative Perspective. By Thomas B. Pepinsky. New York: Cambridge University Press, 2009. Pp. 326. Thomas Pepinsky' s book is focused on a simple question - why did Indonesia and Malaysia have such different political outcomes in the aftermath of the 1997-98 crisis? In seeking to answer it, he aims to shed light on how regimes respond to changes in their economic fortunes and, in particular, crises. Pepinsky contends that despite some differences, Indonesia and Malaysiamake effective comparators . Up until the crisis, both countries were classified as authoritarian, and their economies were open and export-oriented, with convertible currencies, a managed exchange rate, ample stocks of foreign reserves, and no independent central bank. However, their responses to the 1997-98 crisis differed markedly, with dramatically distinct political outcomes. Indonesia had an inconsistent policy response, ranging from initial acceptance of the International Monetary Fund austerity packages to rejecting them in favour of a range of often contradictory measures - ranging from reducing interest rates, providing emergency support to banks, and reinstating costly infrastructure projects. Virtually the only policy that was pursued consistently was maintaining an open capital account. The resulting turmoil resulted in President Soeharto's resignation, and an authoritarian breakdown. Although it also experienced a deep and traumatic economic crisis, Malaysia had a very different policy response and, ultimately, a distinct political outcome. After an initial period of uncertainty, the government consistently resisted austerity measures such as high interest rates, expenditure cuts, and currency devaluation. Of particular interest, then Prime Minister Mahathir imposed capital controls and pegged the Malaysian ringgit to the U.S. dollar. Despite considerable political unrest and a challenge to his leadership, Mahathir emerged from the crisis relatively unscathed, and the regime remained intact. Pepinsky argues that the key to understanding the differing outcomes in the two countries is to focus on political coalitions and their economic interests. He contends this is more enlightening than studying each country's institutions, as institutions in themselves do not explain policy choices. In contrast, a focus on the coalitions underpinning the regimes provides an explanation of why particular policies were adopted. He holds that political actors always seek to obtain beneficial outcomes for themselves, and even regimes are dependent on support from their constituents. Thus, when confronting economic crisis, regimes come under pressure from their supporters to implement policies in their interests. When the actors in a regime's supporting coalition have compatible interests, the ensuing policy responses will be coherent. When they have diverging interests, policy responses will be contradictory and of little utility - and the corresponding results in the political sphere will put the regime under stress. In this book, Pepinsky identifies three classes of political actor: holders of fixed capital; holders of mobile capital; and labour. Holders of fixed capital are firms whose assets tend to be in land, equipment, and buildings that cannot be moved without converting them into cash. Conversely, mobile capital holders have mostly liquid assets that can be transferred easily. A more intuitive contrast can be made between industrial and financial capital. These two groups will have different economic interests and desired policies during economic crises. For example, mobile capital holders will tend to prefer no capital controls and a tight monetary policy, and holders of fixed capital would prefer capital controls and a looser monetary policy. The third key constituency, labour, will tend to favour policies that avoid inflation and preserve public spending and employment. …

This paper reviews some of the research on the causes of the financial crisis of 2008–09, highlights the key events that triggered a financial panic in September 2008, and summarizes the key policy actions that the United States has taken to ameliorate the crisis. We document the characteristics and growth of the sub-prime mortgage market, and the distorted incentives and flawed regulatory structure surrounding the secondary market for mortgage-backed securities. We also assess the role for macroeconomic determinants of the crisis that serve to explain the bubble in U.S. asset prices, most notably low global interest rates attributed to either loose monetary policy or excess global saving. Although low global interest rates may have contributed to the boom in housing markets and speculative excesses, we believe that the financial innovations and microeconomic distortions played a more fundamental role. Finally, a recovery marked by higher private saving, weak domestic investment, and a large public deficit appears to be unsustainable. Ultimately, the U.S. economy will need to shift about 3 percent of GDP from domestic consumption to the export sector. This will pose some serious challenges to Asian economies that have come to rely on exports to the U.S. market.