MONETARY POLICY RULES AND BUSINESS CYCLE CONDITIONS*

This paper estimates a forward-looking reaction function with time-varying parameters to examine changes in the Brazilian monetary policy under the inflation-targeting regime. As the monetary policy rule has endogenous regressors, the conventional Kalman filter cannot be applied. Thus, the two-step procedure proposed by Kim and Nelson (J Monet Econ 53:1949–1966, 2006) is used for consistent estimation of the hyper-parameters of the model. The results indicate that the reaction function parameters of the Central Bank of Brazil are time-varying and that the regressors of that function are endogenous. Besides, we observed that: (i) the monetary policy interest rate (Selic rate) responses to current inflation and the inflationary expectations present considerable changes and have diminished with the passing of time; (ii) since mid-2010, policy rule has violated the Taylor principle; (iii) the implicit target for the Selic interest rate has shown a decline over time; and (iv) the degree of interest rate smoothing has shown a relative stability. Finally, the policy instrument response to the output gap presents an increasing trend over the 2010–2011 period.

The recession following the sub-prime crisis has rekindled international interest in the field of monetary and fiscal policy interaction. However, very little has been done to appropriately estimate these dynamic policies. This paper estimates regime- switching monetary and fiscal policy rules and lays strong emphasis on mis-specification testing. We apply a Markov regime-switching model to estimate monetary and fiscal policy rules for India to highlight the evolving stance of Indian macro-policy for the period 1951–2008 and investigate the behaviour of select macroeconomic variables under the estimated policy regimes. Our results suggest that, in India, fiscal policy was largely active for the entire period except for a few periods of restraint. Monetary policy, despite achieving greater autonomy post-1990s, has largely been accommodating fiscal policy. Whenever monetary policy became active, fiscal policy undermined monetary policy’s effectiveness by not accommodating accordingly. We argue for an aggressive monetary policy and a constrained fiscal policy in India.

Monetary shocks and asymmetric effects in an emerging stock market: The case of China

Regime Switching Monetary and Fiscal Policy Rules and Interaction there-in: An Indian Case Study

This dissertation consists of four essays, focusing on the relationship between financial risks, financial market uncertainty and macroeconomic conditions. The first essay estimates the effects of anticipated and unanticipated monetary policy changes on jump variation by employing high frequency non-parametric jump detection methods. We use an event study approach and a structural VAR framework in examining stock price jump variation for the aggregate economy, the financial, health, energy and telecommunication-information technology sectors (Tel-Info). We find that anticipated changes in the Fed funds have no significant effect on jumps. In contrast, jump variation in the price of financial market data increases with monetary policy surprises. We document evidence of asymmetries in the response of jumps to monetary policy changes. Monetary policy surprises and positive changes in the Fed target rate induce increment in jumps. Similar results exist in the sector analysis. In addition, this study uncovers no evidence of endogenous response between jumps and monetary policy surprises. The second essay estimates the response of uncertainty/risk aversion to monetary policy actions in both the financial sector and the aggregate economy using a Structural Vector Autoregressive (SVAR) model. When compared with other sectors, our constructs reveal that financial risk aversion/uncertainty has greater correlation with the aggregate risk aversion and uncertainty. Our analysis reveals that financial risk aversion and uncertainty exhibit stronger interdependence with monetary policy actions than aggregate uncertainty and risk aversion. The third essay provides the dynamic characterization of the link between ex-ante financial distress risk and the real economy. Using 219, 990 firm-year observations, an ex-ante measure of financial distress is generated at sector level. By employing simultaneous equation model, we provide a comprehensive set-up for predicting ex-ante financial distress risk and examining its effect on GDP growth. Over the period of 1970-2012, the results from the US firms reveal that ex-ante financial distress strongly relate to GDP growth. Ex-ante distress risk contracts GDP growth by up to 10%. Similar contractions in the growth of GDP are uncovered when a single equation approach is used in establishing the relationship between financial distress and growth in GDP. In addition, the results remain consistent when a confirmatory analysis is generated by using a weighted sector index of financial distress. The fourth essay examines liquidity risk and financial integration using bank level flows for 95 countries. The results suggest that global banking network influences liquidity risk. The more the banks are connected to each other the more they are prone to liquidity risk and the result is the same for intermediaries in the network formation. Borrowers that connect to important lenders are not at an advantage, but banks that have independent access to finance in the financial network are at an advantage. On a regional basis, banks in Europe, Africa and Asia and Pacific that have strong connections are prone to liquidity risk. American banks that function as intermediary in the network are prone to liquidity risk. Banks in the American region that have independent access to financing in the financial network are able to reduce liquidity creation, but their degree of connectivity worsens net stable funding.

This article examines the response of consumer and business confidence to five measures of change in Australian monetary policy. Actual, expected and surprise increases in the official cash rate target and related interest rates are shown to negatively impact consumer sentiment. Business confidence is less affected by increases in the cash rate target, but is negatively affected by an increase in the 90‐day bank accepted bill rate. Tests for model stability and asymmetries in the response of sentiment to increases and decreases in interest rates otherwise find only limited evidence for monetary policy having a perverse signalling effect on sentiment.

We characterize monetary and fiscal policy rules to implement optimal responses to a substantial decline in the natural rate of interest, and compare them with policy decisions made by the Japanese central bank and government in 1999-2004. First, we find that the Bank of Japan's policy commitment to continuing monetary easing until some prespecified conditions are satisfied lacks history dependence, a key feature of the optimal monetary policy rule. Second, the term structure of the interest rate gap (the spread between the actual real interest rate and its natural rate counterpart) was not downward sloping, indicating that the Bank of Japan's commitment failed to have su.cient influence on the market's expectations about the future course of monetary policy. Third, we find that the primary surplus in 1999-2002 was higher than predicted by the historical regularity, implying that the Japanese government deviated from the Ricardian rule toward fiscal tightening.

Bank Capital, Bank Lending, and Monetary Policy in the Euro Area This paper provides arguments and evidence in favour of the hypothesis that bank capital matters for euro area banks’ loan response to a change in monetary policy. Bank-level panel data estimates for 1991-1999 show that the lending behaviour of the least-capitalised banks in France and Italy is more responsive to a change in monetary policy than that of better capitalised banks. The degree of capitalisation also matters for the monetary policy impact on lending of the key players in the German and euro area banking system. These findings suggest that the new Basle capital requirements can affect the monetary transmission channel through bank capital. (JEL C23, E52, G21)

COVID-19 created a situation in which each nation was under pressure to implement strategies in order to stop the spreading of virus and to save human beings life. In the other hand economic activities, financial markets and private sector were collapsing. The lockdown has stopped almost every economic activity, but the nations could not think about healthy economies without healthy people. The end of April and the beginning of May brought the flat curve of COVID-19 infections and the eyes immediately turned up into the monetary policy changes. This study will analyze and will present the monetary policy changes taken from USA and European Union to recover economy from the COVID-19. A focus will be given also to the proposal economic assistance from EU to Western Balkans Countries to combat COVID-19. The study concludes that deflation must be avoided during COVID-19 economic crisis.

The Industrial Impact of Monetary Policy Shocks: Some Stylised Facts

The Bank lending channel and sovereign risk: Effects on significant and less significant banks after the implementation of the Banking Union

How does the expansion of domestic banks in international markets affect the bank lending channel of monetary policy? Using bank-firm loan-level data, we find that loan growth and loan rates from international banks respond less to monetary policy changes than domestic banks and that internationalization partially mitigates the risk-taking channel of monetary policy. Banks with a large international presence tend to tolerate more their credit risk exposition relative to domestic banks. Moreover, international banks tend to rely more on foreign funding when policy rates change, allowing them to insulate better the monetary policy changes from their credit supply than domestic banks. This result is consistent with the predictions of the internal capital markets hypothesis. We also show that macroprudential FX regulation reduces banks with high FX exposition access to foreign funding, ultimately contributing to monetary policy transmission. Overall, our results suggest that the internationalization of banks lowers the potency of the bank lending channel. Furthermore, it diminishes the risk-taking channel of monetary policy within the limit established by macroprudential FX regulations.

This paper examines whether monetary policy has similar effects across regions in the United States. Impulse response functions from an estimated structural vector autoregression reveal a core of regions—New England, Mideast, Plains, Southeast, and the Far West— that respond to monetary policy changes in ways that closely approximate the U.S. average response. Of the three noncore regions, one (Great Lakes) is noticeably more sensitive to monetary policy changes, and two (Southwest and Rocky Mountains) are found to be much less sensitive. A state-level version of the model is estimated and used to provide evidence on the channels for monetary policy.

This chapter describes monetary policy. Monetary policy aims at keeping consumer prices stable and the financial system well-functioning. Monetary policy is conducted by central banks. To achieve their goals, central banks use their monetary policy instruments, the most important of which is the monetary policy rate. By changing the short interest rate, central banks influence financial markets, first via its influence over other interest rates (longer interest rates on government bonds, interest rates on commercial debt, mortgage rates, etc.) and then via spill-overs to other asset prices, such as stock prices, exchange rates, house prices, etc. Changes in monetary policy thereby influence the business cycle and its future path. When monetary policy influences the business cycle, and the business cycle influences the stock market, there are good reasons to believe that monetary policy also influences the stock market.

In an open economic environment, economies generally experienced economic instability emerging out of internal and external factors. Like other central banks ’apparently following discretionary policy rule corresponding to fluctuations in the economy, Reserve Bank of India has also been not less than anyone in responding frequently to different economic situations by changing key interest rates those it has under its privilege. Using Autoregressive Distributed Lag (ARDL) model of co-integration, this paper decisively estimates exchange rate augmented Taylor Type rule for India's monetary policy and examined its short-run and long-run behaviour with respect to the output gap, inflation gap and exchange rate over the period from 2001Q1 to 2012Q4. Estimation results revealed that output gap, inflation gap and exchange rate are the important determinants of monetary policy in India. Amongst these three, inflation and output gap found to be matter more for RBI than exchange rate in short-run, but the situation is vice-versa in long-run. The study also asserts that Exchange Rate Augmented Taylor Type rule sufficiently explains the behaviour of RBI's monetary policy.