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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

Abstract

Details

Nonlinear Time Series Analysis of Business Cycles
Type: Book
ISBN: 978-0-44451-838-5

Article
Publication date: 11 May 2012

Ndahiriwe Kasaï and Ruthira Naraidoo

The purpose of this paper is to investigate how the South African Reserve Bank (SARB) sets monetary policy rate.

Abstract

Purpose

The purpose of this paper is to investigate how the South African Reserve Bank (SARB) sets monetary policy rate.

Design/methodology/approach

Given the controversial debate on whether central banks should target asset prices for economic stability, the authors analyse whether the SARB policy‐makers pay close attention to asset and financial markets in its policy decisions in the context of both linear and nonlinear Taylor type rule models of monetary policy.

Findings

The main findings are that the nonlinear Taylor rule provides the best description of in‐sample SARB interest rate setting behaviour as the financial crisis unfolds. The SARB policy‐makers pay close attention to the financial conditions index when setting interest rates. The SARB's response of monetary policy to inflation is greater during business cycle recessions with not much weight on output and seems to place high importance on inflationary pressures of output during boom periods. The 2007‐2009 financial crisis witnesses an overall decreased reaction to inflation, output and financial conditions amidst increased economic uncertainty.

Originality/value

This paper introduces a financial condition index into a Taylor monetary policy rule and examines whether nonlinear models can provide additional information over a linear model.

Details

Journal of Economic Studies, vol. 39 no. 2
Type: Research Article
ISSN: 0144-3585

Keywords

Article
Publication date: 24 September 2020

Diego Ferreira, Andreza Aparecida Palma and Marcos Minoru Hasegawa

This paper analyzes the potential presence of time-varying asymmetries in the preference parameters of the Central Bank of Brazil during the inflation targeting regime.

Abstract

Purpose

This paper analyzes the potential presence of time-varying asymmetries in the preference parameters of the Central Bank of Brazil during the inflation targeting regime.

Design/methodology/approach

Given the econometric issues inherent to classical time-varying parameter (TVP) regressions, a Bayesian estimation procedure is implemented in order to provide more robust parameter estimates. A stochastic volatility specification is also included to take into account the potential presence of conditional heteroskedasticity.

Findings

The obtained results show that the reduced form and structural parameters were not constant during the period considered. Moreover, the subsequent analysis of the preference parameters provided evidences of short periods in which asymmetry was an important feature to the conduction of monetary policy in Brazil. Yet, during most of the sample period, the loss function was considered to be symmetrical.

Originality/value

This paper aims to contribute to the rather scarce monetary debate on time-varying central bank preferences. The study of Lopes and Aragón (2014) is, to the best of the authors’ knowledge, the only study for Brazil considering specifically TVPs. The authors applied Kalman filter estimation to data from 2000:M1 to 2011:M12. Despite the similar structure of TVPs, the present paper extends the latter study by controlling for stochastic volatility. Ignoring conditional heteroskedasticity might lead to spurious movements in time-varying variables and inaccurate inference (Hamilton, 2010). Thus, the stochastic volatility specification is included to take this issue into account. The authors follow the theoretical scheme put forward by Surico (2007) and Aragón and Portugal (2010), in which the economy is modeled from a New Keynesian perspective and the central bank loss function is assumed to be asymmetric regarding the responses to inflation and output deviations from their targets. On the empirical side, the authors propose a TVP univariate regression with stochastic volatility for the Brazilian reduced-form reaction function, following closely the Bayesian econometric procedure developed by Nakajima (2011). Given the nonlinear non-Gaussian nature of the TVP regression with stochastic volatility, the choice of a nonlinear Bayesian approach using the Markov chain Monte Carlo (MCMC) method is justified due to the intractability of the associated likelihood function (Primiceri, 2005). Finally, based on the theoretical model specification, the authors intend to recover the central bank preference parameters as to further evaluate the degree of asymmetry and its potential time-variation under the inflation targeting regime.

Details

Journal of Economic Studies, vol. 48 no. 4
Type: Research Article
ISSN: 0144-3585

Keywords

Abstract

Details

Quantitative and Empirical Analysis of Nonlinear Dynamic Macromodels
Type: Book
ISBN: 978-0-44452-122-4

Article
Publication date: 6 April 2021

Opeoluwa Adeniyi Adeosun, Olumide Steven Ayodele and Olajide Clement Jongbo

This study examines and compares different specifications of the fiscal policy rule in the fiscal sustainability analysis of Nigeria.

Abstract

Purpose

This study examines and compares different specifications of the fiscal policy rule in the fiscal sustainability analysis of Nigeria.

Design/methodology/approach

This is methodologically achieved by estimating the baseline constant-parameter and Markov regime switching fiscal models. The asymmetric autoregressive distributed lag fiscal model is also employed to substantiate the differential responses of fiscal authorities to public debt.

Findings

The baseline constant-parameter fiscal model provides mixed results of sustainable and unsustainable fiscal policy. The inconclusiveness is adduced to instability in primary fiscal balance–public debt dynamics. This makes it necessary to capture regime switches in the fiscal policy rule. The Markov switching estimations show a protracted fiscal unsustainable regime that is inconsistent with the intertemporal budget constraint (IBC). The no-Ponzi game and debt stabilizing results of the Markov switching fiscal model further revealed that the transversality and debt stability conditions were not satisfied. Additional findings from the asymmetric autoregressive model estimation show that fiscal consolidation responses vary with contraction and expansion in output and spending, coupled with downturns and upturns in public debt dynamics in both the long and short run. These findings thus confirm the presence of asymmetries in the fiscal policy authorities' reactions to public debt. Further, additional evidences show the violation of the IBC which is exacerbated by the deleterious effect of the pro-cyclical fiscal policy response in boom on the improvement of the primary fiscal balance.

Originality/value

This study deviates from the extant literature by accommodating time variation, periodic switches and fiscal policy asymmetries in the fiscal sustainability analysis of Nigeria.

Details

African Journal of Economic and Management Studies, vol. 12 no. 2
Type: Research Article
ISSN: 2040-0705

Keywords

Article
Publication date: 14 April 2022

Honoré Sèwanoundé Houngbédji and Nassibou Bassongui

This paper aims to examine the response of monetary policy to financial instability in the West African Economic and Monetary Union.

Abstract

Purpose

This paper aims to examine the response of monetary policy to financial instability in the West African Economic and Monetary Union.

Design/methodology/approach

Through annual aggregated data from 1970 to 2019, the empirical strategy is based on the Markov regime-switching model with fixed probabilities.

Findings

The results revealed that the monetary policy of the central bank of the West African Economic and Monetary Union is characterized by two regimes (calm and distress) with respect to the trend of financial stability. The authors also found that the occurrence of the calm regime was likely greater than that of the distress regime. In addition, the calm regime is longer than the distress regime. The authors finally revealed that the central bank reacts to financial instability risk by increasing its short-term interest rate when financial instability reaches a threshold.

Research limitations/implications

The limitation of this study is the unavailability of monthly or quarterly data that are more suitable for the methodological approach adopted.

Originality/value

This study is the one to estimate the response of the Central Bank of West African Countries to financial stress using a novel approach based on the Markov-Switching regression.

Details

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

Keywords

Article
Publication date: 8 October 2020

Olumide Olusegun Olaoye, Ukafor Ukafor Okorie, Oluwatosin Odunayo Eluwole and Mahmood Butt Fawwad

This study examines the asymmetric effect of government spending on economic growth in Nigeria over the period 1980–2017. Specifically, this study investigates whether the…

Abstract

Purpose

This study examines the asymmetric effect of government spending on economic growth in Nigeria over the period 1980–2017. Specifically, this study investigates whether the response of economic growth to government spending shocks differs according to the nature of shocks on them. In addition, the authors examine whether the stabilizing effects of fiscal policies are dependent on the state of the business cycle.

Design/methodology/approach

The study adopts the linear fiscal reaction function in addition to the nonlinear regression model of Hatemi-J (2011, 2012), Granger and Yoon (2002), which allows us to separate negative shocks from positive shocks to government spending. Similarly, the authors adopt the generalized method of moments (GMM) techniques of Hansen (1982) to account for simultaneity and endogeneity problems inherent in dynamic model.

Findings

The authors’ findings reveal that there is evidence of asymmetry in the government spending–economic growth nexus in Nigeria over the period of study. Specifically, the authors find that the response of economic growth to government spending shocks differs according to the nature of shocks on them. More specifically, the study established that the stabilizing effects of fiscal policies are dependent on the state of the business cycle.

Originality/value

Unlike the traditional method of modeling asymmetry, which adopts the simple inclusion of a squared government spending term or by the inclusion of a cubic government spending term, the model adopted in this study allows us to model shocks and show how the responses of economic growth to government expenditure differ according to the nature of shocks on them.

Details

Journal of Economic and Administrative Sciences, vol. 37 no. 4
Type: Research Article
ISSN: 1026-4116

Keywords

Book part
Publication date: 1 October 2014

Ahdi Noomen Ajmi and Nicholas Apergis

This chapter estimates causality properties between real money demand and a number of determinants, that is, real output, the lending rate and the real exchange rate…

Abstract

This chapter estimates causality properties between real money demand and a number of determinants, that is, real output, the lending rate and the real exchange rate, across 10 Asian economies through linear and nonlinear causality methodologies spanning the period 1990–2012. The results document both bidirectional and unidirectional causality between monetary aggregates (M1 and M2) and their determinants for different country groups. The empirical findings exemplify the role of the demand for money as a policy tool and can provide useful policy recommendations to the Asian monetary authorities in their vision of forming a future monetary union.

Details

Risk Management Post Financial Crisis: A Period of Monetary Easing
Type: Book
ISBN: 978-1-78441-027-8

Keywords

Book part
Publication date: 1 July 2015

Willi Semmler and Christian R. Proaño

The recent financial and sovereign debt crises around the world have sparked a growing literature on models and empirical estimates of defaultable debt. Frequently…

Abstract

The recent financial and sovereign debt crises around the world have sparked a growing literature on models and empirical estimates of defaultable debt. Frequently households and firms come under default threat, local governments can default, and recently sovereign default threats were eminent for Greece and Spain in 2012–2013. Moreover, Argentina experienced an actual default in 2001. What causes sovereign default risk, and what are the escape routes from default risk? Previous studies such as Arellano (2008), Roch and Uhlig (2013), and Arellano et al. (2014) have provided theoretical models to explore the main dynamics of sovereign defaults. These models can be characterized as threshold models in which there is a convergence toward a good no-default equilibrium below the threshold and a default equilibrium above the threshold. However, in these models aggregate output is exogenous, so that important macroeconomic feedback effects are not taken into account. In this chapter, we (1) propose alternative model variants suitable for certain types of countries in the EU where aggregate output is endogenously determined and where financial stress plays a key role, (2) show how these model variants can be solved through the Nonlinear Model Predictive Control numerical technique, and (3) present some empirical evidence on the nonlinear dynamics of output, sovereign debt, and financial stress in some euro areas and other industrialized countries.

Details

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

Keywords

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