Strategies for Conducting Monetary Policy

2019 ◽  
pp. 192-228
Author(s):  
D. L. Thornton
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Money Supply ◽  
Real World ◽  
Inflation Targeting ◽  
Quantitative Easing ◽  
New Approach ◽  
Forward Guidance ◽  
Nominal Income ◽  
Economic Reality

This chapter appraises strategies for conducting monetary policy with the objective of evaluating how these strategies are likely to work in the real world of policymaking. The chapter examines policies that are tied to a specific channel of monetary policy (money supply targeting, interest-rate targeting, and forward guidance) and strategies that are not directly tied to a specific channel of monetary policy (inflation targeting, nominal income targeting, and quantitative easing). The strategies are evaluated in terms of the strength of theory on which they are based and their practicality. From this perspective, many of these strategies seem much less feasible than when they are evaluated in the context of abstract and highly stylized economic models. The chapter ends with a new approach to conducting monetary policy—economic reality-based monetary policy—that will make policy more effective and more predictable.

Empirical Evidence of Dynamic Interactions Among Price Level, Interest Rate, Money Supply and Real Income: The Case of the Indian Economy

2020 ◽  
pp. 097215092098029
Author(s):  
Haroon Rasool ◽  
Masudul Hasan Adil ◽  
Md. Tarique
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Money Supply ◽  
Inflation Targeting ◽  
Price Level ◽  
Real Income ◽  
Causality Test ◽  
Indicator Approach ◽  
Multiple Indicator ◽  
The Interest Rate

Monetary policy approaches in India have changed from the simple monetary targeting frameworks in the mid-1980s to the multiple-indicator approach in the late 1990s and to the current flexible inflation targeting framework. The study aims to investigate the relationships among the macroeconomic variables money supply, real income, price level and interest rate for the period 1998–2014 in the case of India, a period when India adopted the multiple-indicator approach as its monetary policy strategy. The study uses the vector autoregression (VAR) model to examine the dynamic relationships among the variables. The Granger causality test via the VAR framework suggests that four pairs of causality exist; in particular, bidirectional causality exists between money supply and price level. Interest rate Granger-causes both real income and price level, and money supply Granger-causes the rate of interest. However, the study could not find any causal relationship between real income and money supply in either direction. The findings that money supply causes the interest rate and the interest rate causes real output are in line with the Keynesian theory, which argues that money supply affects output through the nominal interest rate. Finally, the results also support the arguments made in favour of a policy move from the multiple-indicator approach to the inflation targeting framework in India.

The Role of Different Channels in Transmitting Monetary Policy into Output and Price in Vietnam

2015 ◽  
pp. 20-40
Author(s):  
Vinh Nguyen Thi Thuy
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Money Supply ◽  
Monetary Transmission ◽  
Impulse Response Functions ◽  
Short Run ◽  
The Exchange Rate ◽  
The Interest Rate ◽  
Interest Rate Channel

The paper investigates the mechanism of monetary transmission in Vietnam through different channels - namely the interest rate channel, the exchange rate channel, the asset channel and the credit channel for the period January 1995 - October 2009. This study applies VAR analysis to evaluate the monetary transmission mechanisms to output and price level. To compare the relative importance of different channels for transmitting monetary policy, the paper estimates the impulse response functions and variance decompositions of variables. The empirical results show that the changes in money supply have a significant impact on output rather than price in the short run. The impacts of money supply on price and output are stronger through the exchange rate and credit channels, but however, are weaker through the interest rate channel. The impacts of monetary policy on output and inflation may be erroneous through the equity price channel because of the lack of an established and well-functioning stock market.

scholarly journals Monetary Policy in the Post Keynesian Theoretical Framework

2017 ◽  
Vol 37 (1) ◽  
pp. 45-64
Author(s):  
FÁBIO HENRIQUE BITTES TERRA ◽  
PHILIP ARESTIS
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Inflation Targeting ◽  
Debt Management ◽  
Policy Framework ◽  
Original Writings ◽  
Policy Model ◽  
Original Contribution ◽  
The Interest Rate ◽  
Monetary Policy Framework

ABSTRACT The purpose of this contribution is to develop a Post Keynesian monetary policy model, presenting its goals, tools, and channels. The original contribution this paper develops, following (Keynes’s 1936, 1945) proposals, is the use of debt management as an instrument of monetary policy, along with the interest rate and regulation. Moreover, this paper draws its monetary policy model by broadly and strongly relying on Keynes’s original writings. A monetary policy model erected upon this basis relates itself directly to the Post Keynesian efforts to offer a monetary policy framework substantially different from the Inflation Targeting Regime of the New Macroeconomic Consensus.

Central bank transparency, inflation targeting and monetary policy: a panel data approach

2018 ◽  
Vol 45 (6) ◽  
pp. 1159-1174 ◽  
Author(s):  
Gabriel Caldas Montes ◽  
Cristiane Gea
Keyword(s):  
Developing Countries ◽  
Monetary Policy ◽  
Panel Data ◽  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Inflation Targeting ◽  
Content Type ◽  
Central Bank Transparency ◽  
Policy Interest

Purpose The evidence concerning the effects of the inflation targeting (IT) regime as well as greater central bank transparency on monetary policy interest rates is not conclusive, and the following questions remain open. What is the effect of adopting IT on both the level and volatility of monetary policy interest rate? Does central bank transparency affect the level of the monetary policy interest rate and its volatility? Are these effects greater in developing countries? The purpose of this paper is to contribute to the literature by answering these questions. Hence, the paper analyzes the effects of IT and central bank transparency on monetary policy. Design/methodology/approach The analysis uses a sample of 48 countries (31 developing) comprising the period between 1998 and 2014. Based on panel data methodology, estimates are made for the full sample, and then for the sample of developing countries. Findings Countries that adopt the IT regime tend to have lower levels of monetary policy interest rates, as well as lower interest rate volatility. The effect of adopting IT on both the level and volatility of the basic interest rate is smaller in developing countries. Besides, countries with more transparent central banks have lower levels of monetary policy interest rates, as well as lower interest rate volatility. In turn, the effect of central bank transparency on both the level and volatility of the basic interest rate is greater in developing countries. Practical implications The study brings important practical implications regarding the influence of both the IT regime and central bank transparency on monetary policy. Originality/value Studies have sought to analyze whether IT and central bank transparency are effective to control inflation. However, few studies analyze the influence of IT and central bank transparency on interest rates. This study differs from the few existing studies since: the analysis is done not only for the effect of transparency on the level of the monetary policy interest rate, but also on its volatility; the central bank transparency index that is used has never been utilized in this sort of analysis; and the study uses panel data methodology, and compares the results between different samples.

scholarly journals Komparasi Jalur Moneter untuk Stabilitas Harga Dalam Kerangka Inflation Targeting Framework (Studi kasus pada interest rate, exchange rate dan credit channel)

2019 ◽  
Vol 8 (3) ◽  
pp. 181
Author(s):  
Setyo Tri Wahyudi ◽  
Rinny Apriliany Zakaria ◽  
Nurul Badriyah
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Interest Rates ◽  
Error Correction ◽  
Inflation Targeting ◽  
Correction Term ◽  
Secondary Data ◽  
Credit Channel ◽  
The Right

The monetary policy transmission mechanism has many ways in influencing inflation. This method became known as the monetary path. The use of appropriate channels in monetary policy will affect whether or not the objectives of the monetary policy are achieved. This study aims to determine which monetary path is appropriate for Indonesia, which is a developing country with an open economic system. The data used are secondary data taken from Bank Indonesia for the period 2005 to 2016. The research variables include inflation, BI-rate, credit interest rates (SBB), gross domestic product (GDP), exchange rate, bank reserve (BBR), and the amount of credit extended. This study focuses on the path of interest rates, exchange rates and bank credit using the Error Correction Model (ECM). The results of this study indicate that the right monetary path for Indonesia is the credit channel. This is because the value of the Error Correction Term (ECT) coefficient on the ECM model shows that the coefficient of the credit channel is smaller than the interest rate and exchange rate channel, which means that the imbalance that occurs can be resolved more quickly with the credit channel.

scholarly journals Relationship Between Energy Prices, Monetary Policy and Inflation; A Case Study of South Asian Economies

2014 ◽  
Vol 3 (1) ◽  
pp. 43-58
Author(s):  
Keyword(s):  
Monetary Policy ◽  
Side Effects ◽  
Interest Rate ◽  
Money Supply ◽  
Side Effect ◽  
Aggregate Demand ◽  
Oil Prices ◽  
Energy Prices ◽  
Aggregate Supply ◽  
The Cost

Abstract Monetary policy tools, including money supply and interest rate, are the most popular instruments to control inflation around the globe. It is assumed that a tight monetary policy, either in form of reduction in money supply or an increase in interest rate, will reduce inflation by reducing aggregate demand in an economy. However, monetary policy could be counterproductive if cost side effects of monetary tightening prevail. High energy prices may increase the cost of production by reducing aggregate supply in the economy. If tight monetary policy is used to reduce this cost push inflation, the cost side effect of energy prices will add to cost side effects of monetary tightening and will become dominant. In this case, the monetary policy could be counterproductive. Furthermore, simultaneous reduction in aggregate supply and aggregate demand will bring twofold reduction in output. Therefore greater care is needed in the use of monetary policy in the situation of cost push inflation. This article investigates the presence of cost side effect of monetary transmission mechanism, the role of international oil prices in domestic inflation, and implications for monetary policy. The findings suggest that both monetary policy and oil prices have cost side effects on inflation and monetary tightening could be counterproductive if used to reduce energy pushed inflationary trend.

Monetary Policy's Influence on Real Estate Price in China: An Analysis Based on VAR Model

2013 ◽  
Vol 850-851 ◽  
pp. 1003-1007
Author(s):  
Xiong Song He ◽  
Guo Lin Deng
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Real Estate ◽  
Money Supply ◽  
Var Model ◽  
Response Analysis ◽  
Interest Rate Policy ◽  
The Real Estate ◽  
Real Estate Price ◽  
Rate Policy

Monetary policy has a significant effect on real estate price, and monetary policymakers need to have quick response. Based on the assumptions that monetary policy and real estate price influence each other and variables affect one another with a lag, A VAR model is designed and modified. Through impulse-response analysis and variance analysis, the influence of money supply and that of interest rate on real estate price are tested and compared. We found that: both money supply and interest rate could affect the real estate price; interest rate has a bigger influence that money supply does; as time goes on, the influence of money supply changes little, but that of interest rate enhances; interest rate policy is not easy to control and it will lead to a fluctuation of economy and the fluctuation may enhance, money supply is a better method to regulate real estate industry instead.

The Response of Tail Risk Perceptions to Unconventional Monetary Policy

2016 ◽  
Vol 8 (2) ◽  
pp. 111-136 ◽  
Author(s):  
Masazumi Hattori ◽  
Andreas Schrimpf ◽  
Vladyslav Sushko
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Risk Perceptions ◽  
Equity Market ◽  
Unconventional Monetary Policy ◽  
Tail Risk ◽  
Forward Guidance ◽  
The Impact ◽  
Future Path

We examine the impact of unconventional monetary policy (UMP) on stock market tail risk and risks of extreme interest rate movements. We find that UMP announcements substantially reduced option-implied equity market tail risks and interest rate risks. Most of the impact derives from forward guidance rather than asset purchase announcements. Communication about the future path of policy rates reduced volatility expectations of long-term rates and the associated risk premia. The reaction of equity market tail risk, in turn, points to the risk-taking channel of monetary policy, as the commitment to low funding rates may have relaxed financial intermediaries’ risk-bearing constraints. (JEL E52, E58, G12, G13, G14)

scholarly journals Effectiveness of Monetary Policy in Morocco: Stability and Implications

2020 ◽  
Vol 3 (1) ◽  
pp. 14-28
Author(s):  
MERYEM ERRAITEB
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Central Bank ◽  
Narrow Sense ◽  
New Approach ◽  
Monetary Authorities ◽  
Aggregate Growth ◽  
The Exchange Rate ◽  
Effectiveness Of Monetary Policy

The purpose of this study is evaluating the effectiveness of monetary policy in Morocco. The results suggest that the monetary authorities must get out of the narrowness of logic monetarist by adopting a new approach which explicitly privileges the targeting of inflation as the ultimate goal, while referring to a multitude of indicators likely to guide the Central Bank in the conduct of its monetary policy as the exchange rate and interest rate next to the M3 aggregate growth rule. Thus, monetary authorities should out of the narrow sense monetarist by adopting a new approach that focuses explicitly targeting inflation as the ultimate goal, while referring to a multitude of indicators to guide the central bank in the conduct of monetary policy as exchange rate and Interest rate ET and this, alongside the growth rule M3.  

scholarly journals Testing for the Effectiveness of Inflation Targeting in India: A Factor Augmented Vector Autoregression (FAVAR) Approach

2020 ◽  
Vol 9 (3) ◽  
pp. 163-182
Author(s):  
P Jithin ◽  
Babu M Suresh
Keyword(s):  
Principal Component Analysis ◽  
Monetary Policy ◽  
Money Supply ◽  
Inflation Targeting ◽  
Vector Autoregression ◽  
Principal Component ◽  
Var Model ◽  
Price Stability ◽  
Impulse Responses ◽  
Model Benchmark

AbstractEmploying Factor Augmented Vector Autoregression (FAVAR) model where factors are obtained using the principal component analysis (PCA) and the parameters of the model are estimated using Vector Autoregression framework, we analyse how changes in monetary policy variables impact inflation, output, money supply, and the financial sector in India. Our results for the period 2001:04 to 2016:03 show that the benchmark FAVAR model showed more reliable results than baseline VAR model. Benchmark FAVAR model shows the existence of weak ‘liquidity puzzle’ in India. The impulse responses from the FAVAR approach reveal that monetary policy is more efficient in explaining the variations in inflation rather than stimulating output indicating its effectiveness in attaining the objective of price stability.

Sign in / Sign up

Export Citation Format

Share Document