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The purpose of this paper is to evaluate and analyze impacts of the monetary policy (MP) – money aggregate and interest rate – on the exchange rate in Vietnam.
Abstract
Purpose
The purpose of this paper is to evaluate and analyze impacts of the monetary policy (MP) – money aggregate and interest rate – on the exchange rate in Vietnam.
Design/methodology/approach
The study uses data over the period of 2008–2018 and applies the vector autoregression model, namely recursive restriction and sign restriction approaches.
Findings
The main empirical findings are as follows: a contraction of the money aggregate significantly leads to the real effective exchange rate (REER) depreciating and then appreciating; a tightening of the interest rate immediately causes the REER appreciating and then depreciating; and both the money aggregate and the interest rate strongly determine fluctuations of the REER.
Originality/value
The quantitative results imply that the MP affects the REER considerably.
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Zekeriya Yildirim and Mehmet Ivrendi
Recent turbulence in global financial markets implies that emerging economies are likely to soon enter a new era with greater pressure for currency depreciation and capital…
Abstract
Purpose
Recent turbulence in global financial markets implies that emerging economies are likely to soon enter a new era with greater pressure for currency depreciation and capital outflows. This will likely bring challenges, including macroeconomic instability and inflationary pressures due to potential rapid depreciation. In this context, certain key questions about emerging economies have become focal points of discussion in political and academic spheres: what are the effects of exchange rate depreciation on economic activity? Does exchange rate depreciation create inflationary pressure? Finding answers to these questions is critical for policymakers and financial market participants. As such, the purpose of this paper is to shed light on these questions and thus provides guidance on mitigating the negative impacts of shocks in four fast-growing emerging economies.
Design/methodology/approach
The authors use a vector autoregression model with sign restrictions to examine the dynamic effects of exchange rate movements on fundamental macroeconomic indicators for four fast-growing countries, namely, Brazil, Turkey, Russia, and South Africa. Following Berument et al. (2012a), Ncube and Ndou (2013), Bjørnland and Halvorsen (2013), and An et al. (2014), the authors adopt the sign restriction methodology to identify exchange rate shocks alongside other macroeconomic shocks (monetary policy and productivity shocks) leading to exchange rate fluctuations.
Findings
The results show that exchange rate depreciation typically generates a deep recession and high inflation while improving the trade balance in the four emerging economies. This indicates that depreciation has strong “stagflationary” effects, which are transmitted to the macroeconomy primarily via supply-side channels, especially through the cost of import. Furthermore, the authors find that monetary policy reacts immediately to a domestic currency depreciation in all four emerging countries.
Practical implications
The results imply that these countries’ monetary policies are not and cannot be neutral to exchange rate shocks. However, in these import-dependent countries, monetary tightening (i.e. rate hikes in response to an exchange rate shock) plays a limited role in mitigating the negative effects of depreciation on inflation and economic activity due to the presence of a dominant supply-side channel. In this framework, policymakers should pay greater attention to structural reforms that aim to reduce import dependency. These reforms may increase the effectiveness of domestic monetary policy in mitigating the negative effects of external shocks.
Originality/value
This paper provides a useful perspective for policymakers designing economic interventions to mitigate the adverse effects of exchange rate depreciation and to those who borrow or lend in domestic or international financial markets.
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Oil market VAR models have become the standard tool for understanding the evolution of the real price of oil and its impact on the macro economy. As this literature has expanded…
Abstract
Oil market VAR models have become the standard tool for understanding the evolution of the real price of oil and its impact on the macro economy. As this literature has expanded at a rapid pace, it has become increasingly difficult for mainstream economists to understand the differences between alternative oil market models, let alone the basis for the sometimes divergent conclusions reached in the literature. The purpose of this survey is to provide a guide to this literature. Our focus is on the econometric foundations of the analysis of oil market models with special attention to the identifying assumptions and methods of inference.
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Yu Li and Xiaoyang Zhu
The degree of development and the way to identify a fiscal shock matter in evaluating the effects of the fiscal policy. This paper contributes to the debate on the effects of a…
Abstract
Purpose
The degree of development and the way to identify a fiscal shock matter in evaluating the effects of the fiscal policy. This paper contributes to the debate on the effects of a fiscal expansion on private consumption and the real effective exchange rate.
Design/methodology/approach
This paper uses a sign-restriction method to identify a fiscal shock in the panel structural VAR analysis in the context of both developed and developing countries.
Findings
The authors’ find that (1) private consumption increases in response to a positive government spending shock in both groups, yet such consumption effect is greater in developing than industrial countries; (2) the response of real effective exchange rate to the government spending shock varies across groups: it depreciates in developed countries and appreciates in developing countries; (3) trade balance improves in both groups.
Originality/value
This study sheds light on the differential effects of fiscal shock on consumption and real exchange rate in both developed and developing economies.
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The effect of changes in commodity prices on factor rewards is studied in the multi-commodity, multi-factor case. It is shown that the inverse of the distributive share matrix…
Abstract
The effect of changes in commodity prices on factor rewards is studied in the multi-commodity, multi-factor case. It is shown that the inverse of the distributive share matrix must satisfy the following restriction: it cannot be anti-symmetric in its sign pattern. This means that one cannot partition the commodities into two groups (I and II) and factors into two groups (A and B), such that all factors in group A benefit (nominally) from all commodity price increases in group I, and simultaneously all factors in group B suffer from all commodity price increases in group II. It turns out that this is also the only sign-pattern restriction imposed by the general nature of the relationship of commodity prices and factor rewards.
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The paper is to understand how the financial system is influenced by macroeconomic shocks and how the financial stance, in turn, feeds back into the macroeconomic environment is…
Abstract
Purpose
The paper is to understand how the financial system is influenced by macroeconomic shocks and how the financial stance, in turn, feeds back into the macroeconomic environment is key for policy makers. The most recent financial crisis has demonstrated the need for a deeper understanding of these interdependencies. The purpose of this paper is to analyze what macroeconomic shocks affect the soundness of the German banking system.
Design/methodology/approach
The paper draws on a micro‐macro stress‐testing framework for the German banking system in which macroeconomic and bank‐specific data are used to identify the effects of various shocks in a structural vector autoregressive model, which includes main macroeconomic variables and an indicator of stress in the banking system. To this end, the sign‐restriction approach is applied.
Findings
First, it is found that there is a close link between macroeconomic developments and the stance of the banking sector. Second, monetary policy shocks are the most influential shocks for distress in the banking sector. Third, fiscal policy shocks and real estate price shocks have a significant impact on the distress indicator, while evidence is mixed for the exchange rate. Fourth, for the identification of most shocks it is essential to work in the integrated model that combines the micro‐ and the macro‐sphere.
Originality/value
The paper analyzes various shock scenarios in an integrated micro‐macro framework that takes the mutual relationship between the financial stance and the macroeconomic environment into account.
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A state space representation of a linearized DSGE model implies a VAR in terms of observable variables. The model is said be non-invertible if there exists no linear rotation of…
Abstract
A state space representation of a linearized DSGE model implies a VAR in terms of observable variables. The model is said be non-invertible if there exists no linear rotation of the VAR innovations which can recover the economic shocks. Non-invertibility arises when the observed variables fail to perfectly reveal the state variables of the model. The imperfect observation of the state drives a wedge between the VAR innovations and the deep shocks, potentially invalidating conclusions drawn from structural impulse response analysis in the VAR. The principal contribution of this chapter is to show that non-invertibility should not be thought of as an “either/or” proposition – even when a model has a non-invertibility, the wedge between VAR innovations and economic shocks may be small, and structural VARs may nonetheless perform reliably. As an increasingly popular example, so-called “news shocks” generate foresight about changes in future fundamentals – such as productivity, taxes, or government spending – and lead to an unassailable missing state variable problem and hence non-invertible VAR representations. Simulation evidence from a medium scale DSGE model augmented with news shocks about future productivity reveals that structural VAR methods often perform well in practice, in spite of a known non-invertibility. Impulse responses obtained from VARs closely correspond to the theoretical responses from the model, and the estimated VAR responses are successful in discriminating between alternative, nested specifications of the underlying DSGE model. Since the non-invertibility problem is, at its core, one of missing information, conditioning on more information, for example through factor augmented VARs, is shown to either ameliorate or eliminate invertibility problems altogether.
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Ivan Jeliazkov, Jennifer Graves and Mark Kutzbach
In this paper, we consider the analysis of models for univariate and multivariate ordinal outcomes in the context of the latent variable inferential framework of Albert and Chib…
Abstract
In this paper, we consider the analysis of models for univariate and multivariate ordinal outcomes in the context of the latent variable inferential framework of Albert and Chib (1993). We review several alternative modeling and identification schemes and evaluate how each aids or hampers estimation by Markov chain Monte Carlo simulation methods. For each identification scheme we also discuss the question of model comparison by marginal likelihoods and Bayes factors. In addition, we develop a simulation-based framework for analyzing covariate effects that can provide interpretability of the results despite the nonlinearities in the model and the different identification restrictions that can be implemented. The methods are employed to analyze problems in labor economics (educational attainment), political economy (voter opinions), and health economics (consumers’ reliance on alternative sources of medical information).
This paper aims to examine the distributional channel of monetary policy (MP) and evaluate how financial development (FD) affects the transmission mechanism from MP to income…
Abstract
Purpose
This paper aims to examine the distributional channel of monetary policy (MP) and evaluate how financial development (FD) affects the transmission mechanism from MP to income inequality.
Design/methodology/approach
The empirical investigation is implemented for 32 sub-Saharan African countries over the period 2000–2017, with the aid of vector autoregressions and a dynamic panel data model.
Findings
This study shows that MP has a significant impact on income inequality and the financial system plays an important role by dampening the dis-equalising effects of MP shocks. Both MP and FD directly exert redistributive effects. However, the financial system appears to wield the greatest impact and contribute more to the inequality dynamics.
Practical implications
The policy-relevant conclusion is that the financial system is crucial for the monetary transmission mechanism and the effects of MP actions. As the economy develops financially, it may require less movement in the policy position to achieve the desired policy outcome. Also, macroeconomic stabilisation policies may not be distributionally neutral and may have a role to play in averting longer-term increases in inequality.
Originality/value
Contrary to previous studies, this study indicates MP by the structural shocks to purge the MP stance of the issues of endogenous and anticipatory actions. A distinctive finding of this paper is that cross-country differences in monetary regimes and income explain a significant variation in the distributional impacts of monetary policy. Notwithstanding, the evidence shows that the strength of the transmission is more dependent on FD than the nature of the policy regime.
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Charles N. Noussair, Damjan Pfajfar and Janos Zsiros
We design experimental economies based on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. We apply shocks to tastes, productivity, and interest rate policy…
Abstract
We design experimental economies based on a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. We apply shocks to tastes, productivity, and interest rate policy, and measure the persistence of these shocks. We find that, in a setting where goods are perfect substitutes, there is little persistence of output shocks compared to treatments with monopolistic competition, which perform similarly irrespective of whether or not menu costs are present. Discretionary central banking is associated with greater persistence than automated instrumental rules.
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