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Abstract

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Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

Article
Publication date: 1 February 2007

Subrata Ghatak and Willy Spanjers

The purpose of this paper is to discuss the potential benefits of monetary policy rules for transition economies (TEs).

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Abstract

Purpose

The purpose of this paper is to discuss the potential benefits of monetary policy rules for transition economies (TEs).

Design/methodology/approach

The paper discusses monetary policy rules, inflation targeting, political risk and ambiguity and monetary policy and ambiguity.

Findings

It is argued that the nominal interest rate may fail to be the appropriate instrument in such rules. One reason is the amount of non‐calculable political and economic risk inherent in TEs. These risks lead to a significant and volatile‐ambiguity premium in the interest rate over and above the normal risk premium, which makes the real equilibrium interest rate difficult to measure. Furthermore, ambiguity of the public regarding the monetary policy leads to an ambiguity premium on inflation.

Originality/value

The paper advocates a simple monetary policy rule based on a monetary aggregate like the money base minimizes the impact of ambiguity. It may therefore be the appropriate monetary policy for TEs.

Details

International Journal of Development Issues, vol. 6 no. 1
Type: Research Article
ISSN: 1446-8956

Keywords

Article
Publication date: 16 November 2015

Guobing Wu, Hao Zhang and Ping Chen

In this paper, six forms of non-linear Taylor rule have been applied to compare the fitting and prediction of response function of monetary policy of China, in an attempt…

Abstract

Purpose

In this paper, six forms of non-linear Taylor rule have been applied to compare the fitting and prediction of response function of monetary policy of China, in an attempt to figure out a form of non-linear Taylor rule that accords with Chinese practices. The paper aims to discuss this issue.

Design/methodology/approach

In this paper, the authors will conduct in-sample fitting and out-of-sample prediction on the response function of monetary policy of China by introducing the factor of exchange rate and by applying forward-looking, backward-looking and within-quarters non-linear Taylor rule with data from the first quarter of 1994 to the second quarter of 2011, with a view to provide reference for formulation and implementation of monetary policies of China.

Findings

By analyzing the experimental data, the authors find that first, after introducing the factor of exchange rate, both the implementation effect and prediction ability of the monetary policies improve. Exchange rate has a relatively greater influence on the effect of the monetary policies during low inflation period. Introduction of exchange rate can improve the prediction accuracy of our monetary policies significantly. Second, as the implementation effect of monetary policy under different macro-background varies greatly, the situation should be correctly appraised when formulating and implementing monetary policies. According to the empirical results, the monetary policies have obvious non-linear characteristics, and transit smoothly with the change of inflation rate. On the two sides of inflation rate of 2.174 percent, there is an asymmetry response.

Research limitations/implications

Surely, the conclusions are reached on the basis of quarterly data and one-step prediction method. It is no doubt that use of frequency mixing data including quarterly and monthly data will provide more sample information for studying relevant issues. And the use of multiple-step prediction method may cause a dynamic change of prediction indicators of models, which will help choose more appropriate prediction models. That is what the authors will study next.

Originality/value

First, by introducing exchange rate, this paper will extend non-linear Taylor rules and test its applicability and fitting effect in China. Second, figure out a non-linear Taylor rule that conforms to Chinese practices with data. In this paper, multiple forms of non-linear Taylor rules and actual macro date will be adopted for fitting and finding out a non-linear Taylor rule that fits Chinese practices. Third, empirical basis will be provided for further perfecting monetary policies prediction models. As there are few studies in connection with the prediction accuracy of non-linear Taylor rules so far, this paper will compare and study the prediction accuracy of non-linear Taylor rules by utilizing multiple advanced prediction techniques, so as to offer a beneficial thinking for predicting and formulating monetary policies by the central bank.

Details

China Finance Review International, vol. 5 no. 4
Type: Research Article
ISSN: 2044-1398

Keywords

Book part
Publication date: 1 July 2015

Nikolay Markov

This chapter investigates the predictability of the European monetary policy through the eyes of the professional forecasters from a large investment bank. The analysis is…

Abstract

This chapter investigates the predictability of the European monetary policy through the eyes of the professional forecasters from a large investment bank. The analysis is based on forward-looking Actual and Perceived Taylor Rules for the European Central Bank which are estimated in real-time using a newly constructed database for the period April 2000–November 2009. The former policy rule is based on the actual refi rate set by the Governing Council, while the latter is estimated for the bank’s economists using their main point forecast for the upcoming refi rate decision as a dependent variable. The empirical evidence shows that the pattern of the refi rate is broadly well predicted by the professional forecasters even though the latter have foreseen more accurately the increases rather than the policy rate cuts. Second, the results point to an increasing responsiveness of the ECB to macroeconomic fundamentals along the forecast horizon. Third, the rolling window regressions suggest that the estimated coefficients have changed after the bankruptcy of Lehman Brothers in October 2008; the ECB has responded less strongly to macroeconomic fundamentals and the degree of policy inertia has decreased. A sensitivity analysis shows that the baseline results are robust to applying a recursive window methodology and some of the findings are qualitatively unaltered from using Consensus Economics forecasts in the regressions.

Details

Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons
Type: Book
ISBN: 978-1-78441-779-6

Keywords

Book part
Publication date: 1 July 2015

Nikolay Markov

This chapter estimates a regime switching Taylor Rule for the European Central Bank (ECB) in order to investigate some potential nonlinearities in the forward-looking…

Abstract

This chapter estimates a regime switching Taylor Rule for the European Central Bank (ECB) in order to investigate some potential nonlinearities in the forward-looking policy reaction function within a real-time framework. In order to compare observed and predicted policy behavior, the chapter estimates Actual and Perceived regime switching Taylor Rules for the ECB. The former is based on the refi rate set by the Governing Council while the latter relies on the professional point forecasts of the refi rate performed by a large investment bank before the upcoming policy rate decision. The empirical evidence shows that the Central Bank’s main policy rate has switched between two regimes: in the first one the Taylor Principle is satisfied and the ECB stabilizes the economic outlook, while in the second regime the Central Bank cuts rates more aggressively and puts a higher emphasis on stabilizing real output growth expectations. Second, the results point out that the professional forecasters have broadly well predicted the actual policy regimes. The estimation results are also robust to using consensus forecasts of inflation and real output growth. The empirical evidence from the augmented Taylor Rules shows that the Central Bank has most likely not responded to the growth rates of M3 and the nominal effective exchange rate and the estimated regimes are robust to including these additional variables in the regressions. Finally, after the bankruptcy of Lehman Brothers the policy rate has switched to a crisis regime as the ECB has focused on preventing a further decline in economic activity and on securing the stability of the financial system.

Details

Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons
Type: Book
ISBN: 978-1-78441-779-6

Keywords

Article
Publication date: 6 November 2017

Nicholas Apergis and Chi Keung Marco Lau

This paper aims to provide fresh empirical evidence on how Federal Open Market Committee (FOMC) monetary policy decisions from a benchmark monetary policy rule affect the…

Abstract

Purpose

This paper aims to provide fresh empirical evidence on how Federal Open Market Committee (FOMC) monetary policy decisions from a benchmark monetary policy rule affect the profitability of US banking institutions.

Design/methodology/approach

It thereby provides a link between the literature on central bank monetary policy implementation through monetary rules and banks’ profitability. It uses a novel data set from 11,894 US banks, spanning the period 1990 to 2013.

Findings

The empirical findings show that deviations of FOMC monetary policy decisions from a number of benchmark linear and non-linear monetary (Taylor type) rules exert a negative and statistically significant impact on banks’ profitability.

Originality/value

The results are expected to have substantial implications for the capacity of banking institutions to more readily interpret monetary policy information and accordingly to reshape and hedge their lending behaviour. This would make the monetary policy decision process less noisy and, thus, enhance their capability to attach the correct weight to this information.

Details

Journal of Financial Economic Policy, vol. 9 no. 4
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 1 February 2002

ROGER W. SPENCER and JOHN H. HUSTON

John Taylor devised a simple monetary policy rule that links the Federal Reserve's policy interest rate with inflation and output targets. This paper compares actual policy

Abstract

John Taylor devised a simple monetary policy rule that links the Federal Reserve's policy interest rate with inflation and output targets. This paper compares actual policy rates with the rates that would have been recommended by the basic Taylor Rule for three long periods in U.S. economic history: 1875–1913 (“Pre Fed”), 1914–1951 (“Early Fed”), and 1952–1998 (“Modern Fed”). In addition, the authors develop a more complex version of the Rule to facilitate a comparison of the way in which each monetary authority would have reacted to the economic challenges presented outside its own time period. The empirical evidence suggests that Modern Fed would have reacted more promptly and appropriately to inflation and output problems outside its time period than either Early Fed or Pre Fed, and that the movement of interest rates in the Pre Fed period came closer to the corrective policies of Modern Fed than did those of Early Fed.

We would like to thank C. Y. Chen, Wenchih Lee, two anonymous referees and the seminar participants at the 2000 FMA annual meeting for their helpful comments and encouragement. All of the remaining errors are our responsibility.

Details

Studies in Economics and Finance, vol. 20 no. 2
Type: Research Article
ISSN: 1086-7376

Book part
Publication date: 12 November 2014

Camille Cornand and Frank Heinemann

In this article, we survey experiments that are directly related to monetary policy and central banking. We argue that experiments can also be used as a tool for central…

Abstract

In this article, we survey experiments that are directly related to monetary policy and central banking. We argue that experiments can also be used as a tool for central bankers for bench testing policy measures or rules. We distinguish experiments that analyze the reasons for non-neutrality of monetary policy, experiments in which subjects play the role of central bankers, experiments that analyze the role of central bank communication and its implications, experiments on the optimal implementation of monetary policy, and experiments relevant for monetary policy responses to financial crises. Finally, we mention open issues and raise new avenues for future research.

Details

Experiments in Macroeconomics
Type: Book
ISBN: 978-1-78441-195-4

Keywords

Open Access
Article
Publication date: 19 June 2019

Sherine Al-shawarby and Mai El Mossallamy

This paper aims to estimate a New Keynesian small open economy dynamic stochastic general equilibrium (DSGE) model for Egypt using Bayesian techniques and data for the…

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Abstract

Purpose

This paper aims to estimate a New Keynesian small open economy dynamic stochastic general equilibrium (DSGE) model for Egypt using Bayesian techniques and data for the period FY2004/2005:Q1-FY2015/2016:Q4 to assess monetary and fiscal policy interactions and their impact on economic stabilization. Outcomes of monetary and fiscal authority commitment to policy instruments, interest rate, government spending and taxes, are evaluated using Taylor-type and optimal simple rules.

Design/methodology/approach

The study extends the stylized micro-founded small open economy New Keynesian DSGE model, proposed by Lubik and Schorfheide (2007), by explicitly introducing fiscal policy behavior into the model (Fragetta and Kirsanova, 2010 and Çebi, 2011). The model is calibrated using quarterly data for Egypt on key macroeconomic variables during FY2004/2005:Q1-FY2015/2016:Q4; and Bayesian methods are used in estimation.

Findings

The results show that monetary and fiscal policy instruments in Egypt contribute to economic stability through their effects on inflation, output and debt stock. The monetary policy Taylor rule estimates reveal that the Central Bank of Egypt (CBE) attaches significant importance to anti-inflationary policy and (to a lesser extent) to output targeting but responds weakly to nominal exchange rate variations. CBE decisions are significantly influenced by interest rate smoothing. Egyptian fiscal policy has an important role in output and government debt stabilization. Additionally, the fiscal authority chooses pro-cyclical government spending and counter-cyclical tax policies for output stabilization. Again, past values of the fiscal instruments are influential in the evolution of the future fiscal policy-making process.

Originality/value

A few studies have examined the interaction between monetary and fiscal policy in Egypt within a unified framework. The presented paper integrates the monetary and fiscal policy analysis within a unified dynamic general equilibrium open economy rational expectations framework. Without such a framework, it would not be easy to jointly analyze monetary and fiscal transmission mechanisms for output, inflation and debt. Also, it would be neither possible to contrast the outcome of monetary and fiscal authorities commitment to a simple Taylor instrument rule vis-à-vis optimal policy outcomes nor to assess the behavior of monetary and fiscal agents in macroeconomic stability in context of an active/passive policy decisions framework.

Details

Review of Economics and Political Science, vol. 4 no. 2
Type: Research Article
ISSN: 2631-3561

Keywords

Article
Publication date: 27 February 2020

Diego Pitta de Jesus, Cássio da Nóbrega Besarria and Sinézio Fernandes Maia

This paper aims to analyze the macroeconomic effects of a monetary policy shock considering that fiscal policy is under fiscal constraints. For that, a dynamic stochastic…

Abstract

Purpose

This paper aims to analyze the macroeconomic effects of a monetary policy shock considering that fiscal policy is under fiscal constraints. For that, a dynamic stochastic general equilibrium (DSGE) model was developed for Brazil, which was estimated through Bayesian econometrics.

Design/methodology/approach

In the basic model, the government does not have any type of fiscal restriction. The other two estimated models, however, consider that the fiscal authority implements some kind of fiscal rule. One of these rules is the Constitutional Amendment 95/2016 (EA 95/2016), which includes a limitation for government spending. The other Alternative Rule seeks to represent the characteristics of a more austere fiscal rule, as proposed by Wesselbaum (2017).

Findings

It was possible to verify in this paper that the implementation of EA 95/2016 by the Brazilian government does not produce statistically different results and that it reduces the welfare of the households in relation to the scenario without fiscal rule. Thus, the proportionate benefit of EA 95/2016 is less than the cost associated with this fiscal rule (less welfare). If the government adopts a fiscal constraint similar to the Alternative Rule, it is possible to considerably reduce the interaction between fiscal and monetary policy, thereby reducing the fiscal dominance policy over monetary policy. However, the cost in terms of welfare is much higher than the baseline scenario. Thus, the fiscal authority is subject to a trade-off among public debt stabilization and household welfare.

Originality/value

The study intends to contribute to the literature on three specific points. First, the monetary–fiscal policy interaction within a representative model of the Brazilian economy is discussed. In addition, the study considers that the government can adopt EA 95/2016 and the Alternative Rule, used in the US economy. Second, the impacts of EA 95/2016 and the Alternative Rule on household welfare will be quantified. Finally, two types of individuals (Ricardian and non-Ricardian agents) and two sectors of production (wholesalers and retailers) are considered. In this paper, the DSGE model is estimated, since the previously mentioned authors performed simulations

Details

Journal of Economic Studies, vol. 47 no. 4
Type: Research Article
ISSN: 0144-3585

Keywords

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