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1 – 10 of over 14000Pragati Priya and Chandan Sharma
The study examines how the liquid assets holdings among non-financial Indian firms vary due to tightening monetary policy and increasing macroeconomic uncertainty.
Abstract
Purpose
The study examines how the liquid assets holdings among non-financial Indian firms vary due to tightening monetary policy and increasing macroeconomic uncertainty.
Design/methodology/approach
The authors analyze 5,640 firms for the period 2011–2021. The authors first estimate India’s monetary policy shocks by decomposing the exogenous shocks from the systematic component of monetary policy changes. The authors then examine the effects of the estimated monetary policy shocks and a range of macroeconomic and policy uncertainty indicators on companies’ cash and bank balances to asset ratios using two-step system generalized method of moments (GMM) estimators.
Findings
The authors find that monetary policy shocks cause the cross-sectional variances for the firms’ liquidity holdings to increase. In anticipation of macroeconomic volatility, companies respond to these shocks after taking into account all the firm-level information to minimize the opportunity costs of holding extra cash or too few cash balances that can hamper firms’ operations. Furthermore, compared to other shocks, the contribution of inflation-induced shocks is predicted to be the largest in the cross-sectional deviation of the firm’s cash holdings. The authors also find that low-growth, older and financially constrained firms observe lesser heterogeneity in their cash holdings as they tend to hold cash as a precautionary buffer.
Originality/value
The authors’ approach to the analysis is unique in many ways. To address potential transmission bias, the authors use nowcasts and forecasts of real gross domestic product (GDP) growth and inflation to generate a series of exogenous monetary policy shocks for identifying unanticipated changes in short-term interest rates. Subsequently, the authors estimate how these shocks affect the cross-sectional deviation of liquid assets. For estimating the effects of macroeconomic uncertainty on corporate cash demand, the authors utilize a range of proxies for uncertainty. Unlike previous attempts, the authors offer evidence for a developing and fast-emerging economy.
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This chapter examines changes in US monetary policy uncertainty (ΔMPU) and fiscal policy uncertainty (ΔFPU) on stock returns while controlling for downside risk, lagged dividend…
Abstract
This chapter examines changes in US monetary policy uncertainty (ΔMPU) and fiscal policy uncertainty (ΔFPU) on stock returns while controlling for downside risk, lagged dividend yield, and time series patterns. Testing G7 markets consistently shows that both ΔMPU and ΔFPU have significant negative impacts on stock returns. Evidence shows that any downside risk, ΔMPU or ΔFPU in US market will soon be transmitted to G6 industrial markets and the impacts are extended to two months. These risk and uncertainty premiums should be priced in the stocks of the major industrial markets.
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Mehmet Balcilar, Rangan Gupta and Charl Jooste
The purpose of this paper is to study the evolution of monetary policy uncertainty and its impact on the South African economy.
Abstract
Purpose
The purpose of this paper is to study the evolution of monetary policy uncertainty and its impact on the South African economy.
Design/methodology/approach
The authors use a sign restricted SVAR with an endogenous feedback of stochastic volatility to evaluate the sign and size of uncertainty shocks. The authors use a nonlinear DSGE model to gain deeper insights about the transmission mechanism of monetary policy uncertainty.
Findings
The authors show that monetary policy volatility is high and constant. Both inflation and interest rates decline in response to uncertainty. Output rebounds quickly after a contemporaneous decrease. The DSGE model shows that the size of the uncertainty shock matters – high uncertainty can lead to a severe contraction in output, inflation and interest rates.
Research limitations/implications
The authors model only a few variables in the SVAR – thus missing perhaps other possible channels of shock transmission.
Practical implications
There is a lesson for monetary policy: monetary policy uncertainty, in isolation from general macroeconomic uncertainty, often creates unintended adverse consequences and can perpetuate a weak economic environment. The tasks of central bankers are incredibly difficult. Their models project output and inflation with relatively large uncertainty based on many shocks emanating from various sources. It matters how central bankers react to these expectations and how they communicate the underlying risks associated with setting interest rates.
Originality/value
This is the first study that looks into monetary policy uncertainty into South Africa using a stochastic volatility model and a nonlinear DSGE model. The results should be very useful for the Central Bank as it highlights how uncertainty, that they create, can have adverse economic consequences.
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Haobo Zou, Mansoora Ahmed, Syed Ali Raza and Rija Anwar
Monetary policy has major impacts on macroeconomic indicators of the country. Accordingly, uncertainty regarding monetary policy shifts can cause challenges and risks for…
Abstract
Purpose
Monetary policy has major impacts on macroeconomic indicators of the country. Accordingly, uncertainty regarding monetary policy shifts can cause challenges and risks for businesses, financial markets and investors. Thus, the purpose of this study is to investigate how real estate market volatility responds to monetary policy uncertainty.
Design/methodology/approach
The GARCH-MIDAS model is applied in this study to investigate the nexus between monetary policy uncertainty and real estate market volatility. This model was fundamentally instituted to accommodate low-frequency variables.
Findings
The results of this study reveal that increased monetary policy uncertainty highly affects the volatility in real estate market during the peak period of COVID-19 as compared to full sample period and COVID-19 recovery period; hence, a significant decline is evident in real estate market volatility during crisis.
Originality/value
This study is particularly focused on peak and recovery period of COVID-19 considering the geographical region of Greece, Japan and the USA. This study provides a complete perspective on the nexus between monetary policy uncertainty and real estate markets volatility in three distinct economic views.
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Emna Trabelsi and Asma Ben Khaled
The implementation of monetary policy by the central bank is an ongoing topic of discussion. This paper aims to explore monetary policy transmission shocks in times of uncertainty…
Abstract
Purpose
The implementation of monetary policy by the central bank is an ongoing topic of discussion. This paper aims to explore monetary policy transmission shocks in times of uncertainty using the new World uncertainty index (WUI). The authors investigate the impact of crises, wars and pandemic shocks on selected macroeconomic variables.
Design/methodology/approach
The authors use unit root tests, structural vector autoregressive model and the Granger causality test according to Toda–Yamamoto with quarterly data over 1999–2022.
Findings
The results of this study show that in the short run, there is a unidirectional relationship between the money market rate and WUI, while the relationship between the latter and the money supply (M2) is bidirectional. The short-term effect runs from WUI to inflation. In the long run, the variance decomposition shows that global uncertainty explains around 12% of inflation pressures. The uncertainty caused by special events in the world creates positive shocks on inflation in Tunisia, which decreases the ability of the central bank to control inflation.
Research limitations/implications
The results have implications over necessary and urgent actions to be implemented for a progressive economic recovery but point to a necessary transition to an inflation-targeting regime.
Originality/value
Examining monetary policy under uncertainty is a recent phenomenon. The authors purposely use a novel WUI by Ahir et al. (2022) that is unexploited in literature.
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Recent empirical studies by Antonakakis, Chatziantoniou and Filis (2013), Brogaard and Detzel (2015) and Christou et al. (2017) present evidence, which supports the notion that a…
Abstract
Purpose
Recent empirical studies by Antonakakis, Chatziantoniou and Filis (2013), Brogaard and Detzel (2015) and Christou et al. (2017) present evidence, which supports the notion that a rise in economic policy uncertainty (EPU) will lead to a decline in stock prices. The purpose of this paper is to examine US categorical policy uncertainty on stock returns while controlling for implied volatility and downside risk. In addition to the domestic impacts of policy uncertainty, this paper also presents evidence that changes in US policy uncertainty promptly propagates to the global stock markets.
Design/methodology/approach
This study uses a GED-GARCH (1, 1) model to estimate changes of uncertainties in US monetary, fiscal and trade policies on stock returns for the sample period of January 1990–December 2018. Robustness test is conducted by using different set of data and modeling techniques.
Findings
This paper contributes to the literature in several aspects. First, testing of US aggregate data while controlling for downside risk and implied volatility, consistently, shows that responses of stock prices to US policy uncertainty changes, not only display a negative effect in the current period but also have at least a one-month time-lag. The evidence supports the uncertainty premium hypothesis. Second, extending the test to global data reveals that US policy uncertainty changes have a negative impact on markets in Europe, China and Japan. Third, testing the data in sectoral stock markets mainly displays statistically significant results with a negative sign. Fourth, the evidence consistently shows that changes in policy uncertainty present an inverse relation to the stock returns, regardless of whether uncertainty is moving upward or downward.
Research limitations/implications
The current research is limited to the markets in the USA, eurozone, China and Japan. This study can be extended to additional countries, such as emerging markets.
Practical implications
This paper provides a model that uses categorical policy uncertainty approach to explain stock price changes. The parametric estimates provide insightful information in advising investors for making portfolio decision.
Social implications
The estimated coefficients of changes in monetary policy uncertainty, fiscal policy uncertainty and trade policy uncertainty are informative in assisting policymakers to formulate effective financial policies.
Originality/value
This study extends the existing risk premium model in several directions. First, it separates the financial risk factors from the EPU innovations; second, instead of using EPU, this study investigates the effects from monetary policy, fiscal policy and trade policy uncertainties; third, in additional to an examination of the effects of US categorical policy uncertainties on its own markets, this study also investigates the spillover effects to global major markets; fourth, besides the aggregate stock markets, this study estimates the effects of US policy uncertainty innovations on the sectoral stock returns.
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Mohammad Azeem Khan, Masudul Hasan Adil and Shah Husain
The purpose of the paper is to address money demand instability and investigate the impact of economic uncertainty, stock market uncertainty and monetary uncertainty on money…
Abstract
Purpose
The purpose of the paper is to address money demand instability and investigate the impact of economic uncertainty, stock market uncertainty and monetary uncertainty on money demand in India over the period 2003Q1–2019Q4.
Design/methodology/approach
The study checks the stationarity of the variables through standard unit root tests. Based on the mixed order of variables' integration, the authors adopt the autoregressive distributed lag (ARDL) model to confirm the cointegration and check the stability of the money demand function (MDF).
Findings
The findings confirm the presence of cointegration and reveal a well-specified MDF, which exhibits stable parameters. Besides the conventional variables, all forms of uncertainties emerge as the essential long-term determinants of money demand. Long-run findings show that people demand more money to avoid the future financial crunch amid high economic, monetary and stock market uncertainties.
Practical implications
The paper recommends, based on the findings, incorporating the monetary aggregates in the monetary policy framework as one of the essential information variables to control the fluctuation in the price level under the current flexible inflation targeting (FIT) regime.
Social implications
The findings also add to the knowledge of economic agents in terms of the overall response of individuals to changes in different forms of uncertainties, thereby helping to formulate their portfolios more diligently.
Originality/value
The current work is the first of its kind in the Indian context. The incorporation of uncertainty measures in the MDF adds to the existing knowledge on money demand.
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Muhammad Aftab, Maham Naeem, Muhammad Tahir and Izlin Ismail
Exchange rate volatility is an important factor affecting investors and policymakers. This study aims to examine the impact of uncertainties, in terms of changes in economic policy…
Abstract
Purpose
Exchange rate volatility is an important factor affecting investors and policymakers. This study aims to examine the impact of uncertainties, in terms of changes in economic policy, monetary policy and global financial markets, on exchange rate volatility.
Design/methodology/approach
The study uses the GARCH (1,1) univariate model to calculate exchange rate volatility. Economic and monetary policy uncertainties are measured using news-based indices, while global financial market volatility is measured using the implied volatility index. Panel autoregressive distributed lag modeling is used to analyze the impact of uncertainty on exchange rate volatility in the short and long run. The sample consists of 26 developed and emerging markets from 2005 to 2020.
Findings
The study finds that economic policy uncertainty significantly increases exchange rate volatility. Similarly, global financial market uncertainty leads to increased exchange rate volatility. The effect of US monetary policy uncertainty reduces exchange rate volatility.
Originality/value
This research contributes to the existing literature on exchange rate fluctuations by examining the impact of uncertainties on exchange rate volatility. The study uses novel news-based indices for measuring economic and monetary policy uncertainties and includes a broader sample of emerging and advanced markets. The findings have important implications for investors and policymakers.
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Lassaâd Mbarek, Hardik A. Marfatia and Sonja Juko
This paper aims to examine the Treasury bond yields response to monetary policy shocks in Tunisia under a heterogeneous economic environment.
Abstract
Purpose
This paper aims to examine the Treasury bond yields response to monetary policy shocks in Tunisia under a heterogeneous economic environment.
Design/methodology/approach
Using a traditional fixed coefficient model, the impact of monetary policy changes on the term structure of interest rates for the whole period from January 2006 to December 2016 is estimated first. Then the stability of this relationship by distinguishing two sub-periods around the revolution of January 2011 is studies. To investigate how the relationship between the monetary policy and the Treasury yield curve evolves over time, a time-varying parameter model is estimated.
Findings
The results show that the impact of monetary policy is more pronounced at the short end of the yield curve relative to the longer end. Furthermore, this impact declines significantly across all maturities following the revolution and exhibits wide time variation. This evidence supports the negative influence of high levels of uncertainty on monetary policy effectiveness and highlights the desirability of more active monetary policy, especially in turbulent environment.
Research limitations/implications
The impact of uncertainty on the effectiveness of monetary policy shocks needs to be explored further in future research to understand the structural sources of uncertainty and their dynamic interactions with monetary policy and risk aversion in asset markets.
Practical implications
A more active role of the central bank to influence the yield curve mainly through Treasury bond purchases covering medium and long maturities may be warranted. Communication also needs to be reinforced to ensure predictability of the monetary policy stance.
Originality/value
This paper extends the empirical literature on the pass-through of monetary policy to interest rates for an emerging country in context of transition by estimating a state-space model to test the time-varying behavior and examine the influence of increased economic uncertainty on monetary policy effectiveness.
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This study finds evidence that a stock return is inversely correlated with downside risk, confirming a pattern of risk-aversion behavior. Evidence from testing a stock return's…
Abstract
This study finds evidence that a stock return is inversely correlated with downside risk, confirming a pattern of risk-aversion behavior. Evidence from testing a stock return's response to a change in economic policy uncertainty indicates a significantly negative effect in the Chinese stock market; this conclusion holds true for testing the impacts of changes in fiscal and monetary policy uncertainties. However, the data produce a mixed effect for the change in fiscal policy uncertainty. The evidence produced from examining the geopolitical effect on the stock market strongly supports the presence of an adverse effect on stock market performance.
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