Implementation Errors and Incomplete Information

2018 ◽  
Author(s):  
Rafael Portillo ◽  
Filiz Unsal ◽  
Stephen O’Connell ◽  
Catherine Pattillo
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Incomplete Information ◽  
Low Income ◽  
Complete Information ◽  
Structural Features ◽  
New Keynesian ◽  
Low Income Countries ◽  
Keynesian Model ◽  
Policy Frameworks

This chapter shows that limited effects of monetary policy can reflect shortcomings of existing policy frameworks in low-income countries rather than (or in addition to) the structural features often put forward in policy and academic debates. The chapter focuses on two pervasive issues: lack of effective frameworks for implementing policy, so that short-term interest rates display considerable unintended volatility, and poor communication about policy intent. The authors introduce these features into an otherwise standard New Keynesian model with incomplete information. Implementation errors result from insufficient accommodation to money demand shocks, creating a noisy wedge between actual and intended interest rates. The representative private agent must then infer policy intentions from movements in interest rates and money. Under these conditions, even exogenous and persistent changes in the stance of monetary policy can have weak effects, even when the underlying transmission (as might be observed under complete information) is strong.

The Short-Run Macroeconomics of Aid Inflows

2018 ◽  
Author(s):  
Andrew Berg ◽  
Tokhir Mirzoev ◽  
Rafael Portillo ◽  
Luis-Felipe Zanna
Keyword(s):  
Financial Markets ◽  
Interest Rates ◽  
Low Income ◽  
Transfer Problem ◽  
Current Account Deficit ◽  
New Keynesian ◽  
Low Income Countries ◽  
Short Term ◽  
Keynesian Model ◽  
Short Run

The authors develop a tractable two-sector New Keynesian model to analyse the short-term effects of aid-financed fiscal expansions. The analysis distinguishes between spending the aid (increasing expenditures and/or cutting revenues) and absorbing the aid—using the aid to finance a higher current account deficit. The standard treatment of the transfer problem implicitly assumes spending equals absorption. Here, a policy mix that results in spending but not absorbing the aid, a common reaction, generates demand pressures and results in an increase in real interest rates. It can also lead to a temporary real depreciation. Certain features of low-income countries, such as limited domestic financial markets, make a real depreciation more likely. The analysis presented in the chapter can help understand the experience of Uganda in the early 2000s.

scholarly journals Do Monetary Policy Frameworks Matter in Low Income Countries?

2020 ◽  
Vol 2020 (139) ◽  
pp. 1
Author(s):  
Alina Carare ◽  
Carlos de Resende ◽  
Andrew Levin ◽  
Chelsea Zhang
Keyword(s):  
Monetary Policy ◽  
Low Income ◽  
Low Income Countries ◽  
Policy Frameworks

Book Reviews

2017 ◽  
Vol 55 (1) ◽  
pp. 222-225
Keyword(s):  
Monetary Policy ◽  
Low Income ◽  
Central Banks ◽  
Low Income Countries ◽  
Balance Sheets ◽  
Flow Of Funds ◽  
Monetary Analysis ◽  
Policy Frameworks ◽  
Bank Of England

Bilin Neyapti of Bilkent University reviews “Monetary Analysis at Central Banks,” edited by David Cobham. The Econlit abstract of this book begins: “Four papers investigate how analysis of monetary and credit aggregates is used in modern central banks and how that analysis feeds through into policy making. Papers discuss monetary analysis and central banks (David Cobham); the analysis of money and credit during the financial crisis--the approach at the Bank of England (Jon Bridges, James Cloyne, Ryland Thomas, and Alex Tuckett); central banks as balance sheets of last resort--the European Central Bank's monetary policy in a flow-of-funds perspective (Philippine Cour-Thimann and Bernhard Winkler); and evolving monetary policy frameworks in low-income countries--the Tanzanian experience (Christopher Adam, Pantaleo Kessy, and Ben Langford).”

scholarly journals Monetary policy and news shocks: are Taylor rules forward-looking?

2016 ◽  
Vol 16 (2) ◽  
Author(s):  
Gabriela Best ◽  
Pavel Kapinos
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Taylor Rule ◽  
New Keynesian ◽  
Monetary Shocks ◽  
Taylor Rules ◽  
Macroeconomic Conditions ◽  
Econometric Methods ◽  
Keynesian Model ◽  
Forward Looking

AbstractThis paper extends a standard New Keynesian model by introducing anticipated shocks to inflation, output, and interest rates, and by incorporating forward-looking, forecast-targeting Taylor rules. The latter aspect is parsimoniously modeled through the presence of an expected future interest rate term in the Taylor rule that recent literature has found to be economically and statistically important in a variety of settings without anticipated shocks. Using Bayesian econometric methods, we find that the presence of anticipated shocks improves the model’s fit to the US data but substantially decreases the weight on future macroeconomic variables in the forward-looking Taylor rule. Our results suggest that, although communicating its intentions regarding future monetary policy conduct, as modeled by anticipated monetary shocks, plays an important role for the Fed, responding to its expectations of future macroeconomic conditions does not. Furthermore, we conduct extensive robustness checks with respect to modeling the forward-looking specification of the Taylor rule that confirm our baseline results.

On the Role of Money Targets in the Monetary Policy Framework in SSA

2018 ◽  
Author(s):  
Andrew Berg ◽  
Rafael Portillo ◽  
Filiz Unsal
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Low Income ◽  
New Keynesian ◽  
Policy Framework ◽  
Low Income Countries ◽  
Money Growth ◽  
Ex Post ◽  
Monetary Policy Framework

Many low-income countries continue to describe their monetary policy framework in terms of targets on monetary aggregates. This chapter extends the New Keynesian model to provide a role for ‘M’ in the conduct of monetary policy, and examine the conditions under which some adherence to money targets is optimal. In the spirit of Poole (1970), this role is based on the incompleteness of information available to the central bank, a pervasive issue in these countries. Ex ante announcements and forecasts for money growth are consistent with a Taylor rule for the relevant short-term interest rate. Ex post, the policymaker must choose his relative adherence to interest rate and money growth targets. The chapter shows that some adherence to previously set money targets can emerge endogenously from the signal extraction problem faced by the central bank. The chapter also provides an analytical representation of the factors influencing the degree of optimal target adherence.

Informal financial transactions and monetary policy in low-income countries: Interpolated informal credit and interest rates in Malawi

2018 ◽  
Vol 21 (1) ◽  
Author(s):  
Harold Ngalawa
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Low Income ◽  
Economic Activity ◽  
Financial Sector ◽  
Low Income Countries ◽  
Policy Outcomes ◽  
Vector Autoregressive ◽  
Financial Transactions ◽  
The Impact

Background: Official monetary data usually exclude informal financial transactions although the informal financial sector (IFS) forms a large part of the financial sector in low-income countries. Aim and setting: Excluding informal financial transactions in official monetary data, however, underestimates the volume of financial transactions and incorrectly presents the cost of credit, bringing into question the accuracy of expected effects of monetary policy on economic activity. Methods: Using IFS data for Malawi constructed from two survey data sets, indigenous knowledge and elements of Friedman’s data interpolation technique, this study employs innovation accounting in a structural vector autoregressive model to compare monetary policy outcomes when IFS data are taken into account and when they are not. Results: The study finds evidence that in certain instances, the formal and informal financial sectors complement each other. For example, it is observed that the rate of inflation as well as output increase following a rise in either formal financial sector (FFS) or IFS lending. Further investigation reveals that in other cases, the FFS and IFS work in conflict with each other. Demonstrating this point, the study finds that a rise in FFS interest rates is followed by a decline in FFS lending while IFS lending does not respond significantly and the response of FFS and IFS loans combined is insignificant. When IFS interest rates are raised, total loans decline significantly. Conclusion: The study, therefore, concludes that exclusion of IFS transactions from official monetary data has the potential to frustrate monetary policy through wrong inferences on the impact of monetary policy on economic activity.

scholarly journals Government Spending Effects in a Policy Constrained Environment

2020 ◽  
Vol 20 (91) ◽  
Author(s):  
Ruoyun Mao ◽  
Shu-Chun Susan Yang
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Interest Rates ◽  
Government Spending ◽  
New Keynesian ◽  
Policy Uncertainty ◽  
Policy Regimes ◽  
Keynesian Model ◽  
Low Interest Rates ◽  
Rate Environment

The theoretical literature generally finds that government spending multipliers are bigger than unity in a low interest rate environment. Using a fully nonlinear New Keynesian model, we show that such big multipliers can decrease when 1) an initial debt-to-GDP ratio is higher, 2) tax burden is higher, 3) debt maturity is longer, and 4) monetary policy is more responsive to inflation. When monetary and fiscal policy regimes can switch, policy uncertainty also reduces spending multipliers. In particular, when higher inflation induces a rising probability to switch to a regime in which monetary policy actively controls inflation and fiscal policy raises future taxes to stabilize government debt, the multipliers can fall much below unity, especially with an initial high debt ratio. Our findings help reconcile the mixed empirical evidence on government spending effects with low interest rates.

Do Monetary Policy Frameworks Matter in Low Income Countries?

2020 ◽  
Author(s):  
Alina Carare ◽  
Carlos de Resende ◽  
Andrew T. Levin ◽  
Chelsea Zhang
Keyword(s):  
Monetary Policy ◽  
Low Income ◽  
Low Income Countries ◽  
Policy Frameworks

scholarly journals Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates

2019 ◽  
Vol 109 ◽  
pp. 427-432 ◽  
Author(s):  
Thomas M. Mertens ◽  
John C. Williams
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Interest Rates ◽  
Inflation Targeting ◽  
New Keynesian ◽  
Inflation Expectations ◽  
Natural Rate ◽  
Keynesian Model ◽  
Natural Rate Of Interest ◽  
Downward Bias

This paper applies a New Keynesian model to analyze monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under standard inflation-targeting, inflation expectations will be anchored at a level below the inflation target. Two themes emerge from our analysis: first, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework. Second, price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at target and further reduce the effects of the lower bound on the economy.

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