News shocks modeling on monetary policies using dynamic stochastic general equilibrium (DSGE) model

2019 ◽  
Vol 7 (4) ◽  
pp. 209-230
Author(s):  
Shapoor Zarei ◽  
Hussain Marzban ◽  
Ali H. Samadi ◽  
Ahmad Sadraei Javaheri
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Loss Function ◽  
Dsge Model ◽  
News Shocks ◽  
Monetary Policies ◽  
Content Type ◽  
Social Loss ◽  
The Real ◽  
The Social

Purpose The purpose of this paper is to investigate the effects of news shocks on monetary policies using the dynamic stochastic general equilibrium (DSGE) model. To this end, two kinds of news shocks (known as technology and consumer preferences) are defined according to Khan and Tsoukalas’ (2012) approach. Design/methodology/approach In order to construct and simulate the DSGE model to approaching the real conditions in a case study, consumption habits in the utility function were concerned based on the assumption of the zero-value obtained from multiplying the inflation by the real interest rate in the Fisher’s equation, whereas the real interest rates in the long run were appointed as negative remark in simulating the monetary policy models. The estimation and simulation results for the research models indicated that monetary policies using the interest rate instrument identified the news shocks less frequently than monetary policies using the monetary base instrument. Findings The approximate value of the social loss function in the optimal commitment and discretionary monetary policies suggests that the optimal commitment policy is estimated to be lower in both cases. Due to value of the social loss function in optimal monetary policies with nominal interest rate instrument in the presence of news shocks, this could be claimed that monetary policy with interest rate instrument is more appropriate than the monetary policy with a monetary base instrument. Originality/value The approximate value of the social loss function in the optimal commitment and discretionary monetary policies suggests that the optimal commitment policy is estimated to be lower in both cases.

Measurement of the social loss of wrong public budget allocation

2011 ◽  
Vol 38 (3) ◽  
pp. 209-217 ◽  
Author(s):  
Nissim Ben‐David ◽  
Tchai Tavor
Keyword(s):  
Public Good ◽  
Demand Curve ◽  
Consumer Surplus ◽  
Public Budget ◽  
Content Type ◽  
Social Loss ◽  
The Real ◽  
The Social ◽  
The Government ◽  
Public Demand

PurposeThe purpose of this paper is to measure the social loss occurring due to the inability of the government to use the real public demand function.Design/methodology/approachThe authors developed a model that enables maximization of the public utility of a given public budget by maximizing total consumer surplus, and presented a method for calculating the social loss due to the inability to use the real public demand function.FindingsThe social loss occurring due to the inability of the government to use the real public demand curve was shown.Research limitations/implicationsIn reality, it is impossible to get the proper evaluation of social utility function. Instead, the authors assumed a given public demand for each public good.Practical implicationsThe paper presents a way to measure overtime social loss as a function of the sum of overtime government expenses, the coefficient of variation of the public good supply and the elasticity of demand of the average demand curve.Social implicationsImproving the allocation of public budget.Originality/valueGiven the demand curve for each public good, this paper presents a technique for the optimal allocation of a given budget in order to maximize aggregate consumer surplus.

scholarly journals Monetary Policy: Is the Dual Mandate of the Fed Maximizing the Social Welfare?

2019 ◽  
pp. 112-142
Author(s):  
Dr. Ioannis N. Kallianiotis ◽  
J. Kania
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Social Welfare ◽  
Interest Rates ◽  
Policy Regimes ◽  
The Real ◽  
Personal Consumption ◽  
The Social ◽  
Personal Savings

In this work we deal mostly with the recent (2008-present) Federal Reserve operated monetary policies, which are two unprecedented and distinct monetary policy regimes. The Zero Interest Rate Regime (2008:12-2015:11) and the New Regime (2015:12-2018:12). These different monetary policy regimes provided various outcomes for inflation, interest rates, financial markets, personal consumption, personal savings, real economic growth, and social welfare. Some of the important results are that monetary policy appears to be able to affect long-term real interest rates, risk, the prices of the financial assets, and very little the real personal consumption, personal savings, and the real economic growth during the recent period of extreme monetary policy, in which the Fed held short-term interest rates abnormally low for an extended period (2008-2015) and the present time, which keeps the federal funds rate below the inflation rate. The Fed’s interest rate target was set during those seven years at 0% to 0.25%. On December 16, 2015, the Fed started increasing the target rate by 25 basis points approximately in each FOMC meeting, from 0.25% to 0.50% to 0.75%, and presently to 2.50%. We want to explain the low level of long-term interest rates and the real rate of interest (cost of capital) in the economy. The evidence suggests that it is the Fed the main cause of the low (negative) real interest rate following the 2007-2008 financial crisis. This monetary policy was not very effective (the zero interest rate target of the Fed). It has created a new bubble in the financial market, future inflation, and a redistribution of wealth from risk-averse savers to banks and risk-taker speculators. In addition, it has increased the risk (RP) by making the real risk-free rate of interest negative. The effects on growth, prices, and employment were gradual and very small, due to outsourcing and unfair trade policies, which have affected negatively the social welfare. The dual mandate (price stability and maximum employment) of the Fed is not sufficient to maximize the social welfare of the country.

scholarly journals South Africa’s economic response to monetary policy uncertainty

2017 ◽  
Vol 44 (2) ◽  
pp. 282-293 ◽  
Author(s):  
Mehmet Balcilar ◽  
Rangan Gupta ◽  
Charl Jooste
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Stochastic Volatility ◽  
Stochastic Volatility Model ◽  
Economic Consequences ◽  
Policy Uncertainty ◽  
Dsge Model ◽  
Content Type ◽  
Volatility Model ◽  
Central Bankers

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.

Natural disasters and monetary policy: evidence from an augmented Taylor rule

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nicholas Apergis ◽  
James E. Payne
Keyword(s):  
Developing Countries ◽  
Monetary Policy ◽  
Interest Rate ◽  
Natural Disasters ◽  
Natural Disaster ◽  
Taylor Rule ◽  
Nominal Interest Rate ◽  
Policy Response ◽  
Content Type ◽  
Short Run

Purpose The purpose of this paper is to examine the short-run monetary policy response to five different types of natural disasters (geophysical, meteorological, hydrological, climatological and biological) with respect to developed and developing countries, respectively. Design/methodology/approach An augmented Taylor rule monetary policy model is estimated using systems generalized method of moments panel estimation over the period 2000–2018 for a panel of 40 developed and 77 developing countries, respectively. Findings In the case of developed countries, the greatest nominal interest rate response originates from geophysical, meteorological, hydrological and climatological disasters, whereas for developing countries the nominal interest rate response is the greatest for geophysical and meteorological disasters. For both developed and developing countries, the results suggest the monetary authorities will pursue expansionary monetary policies in the short-run to lower nominal interest rates; however, the magnitude of the monetary response varies across the type of natural disaster. Originality/value First, unlike previous studies, which focused on a specific type of natural disaster, this study examines whether the short-run monetary policy response differs across the type of natural disaster. Second, in relation to previous studies, the analysis encompasses a much larger panel data set to include 117 countries differentiated between developed and developing countries.

scholarly journals The impact of Musharakah financing on the monetary policy in the Islamic economy

2018 ◽  
Vol 3 (3/4) ◽  
pp. 139-152
Author(s):  
Hatem Adela
Keyword(s):  
Economic Theory ◽  
Monetary Policy ◽  
Interest Rate ◽  
Economic Activity ◽  
Methodological Framework ◽  
Mathematical Methods ◽  
Content Type ◽  
Return Rates ◽  
The Interest Rate ◽  
The Impact

Purpose This paper aims to contribute to formulating the methodological framework for a paradigm of Islamic economics, using the development of the conventional economics, theoretical and mathematical methods. Design/methodology/approach The study based on the inductive and mathematical methods to contribute to economic theory within the methodological framework for Islamic Economics, by using the return rate of Musharakah rather than the interest rate in influence the economic activity and monetary policy. Findings Via replacement, the concept of the interest rate by the return rates of Musharakah. It concludes that the central bank can control the monetary policy, economic activity and the efficient allocation of resources by using the return rates of Musharakah through the framework of Islamic economy. Practical/implications The study is a contribution to formulate the methodological framework for a paradigm of Islamic economics, where it investigates the impact of return rates of Musharakah on the money market and monetary policy, by the mathematical methods used in the conventional economy. Also, the study illustrates the importance of further studies that examine the methodological framework for Islamic Economics. Originality/value The study aims to contribute to formulating the Islamic economic theory, through the return rate of Musharakah financing instead of the interest rate, and its effectiveness of the monetary policy. As well as reformulating the concepts of the investment function, the present value and the marginal efficiency rate of investment according to the Islamic economy approach.

scholarly journals Asymmetric effects of monetary policy in Brazil

2009 ◽  
Vol 39 (2) ◽  
pp. 277-300 ◽  
Author(s):  
Edilean Kleber da Silva Bejarano Aragón ◽  
Marcelo Savino Portugal
Keyword(s):  
Monetary Policy ◽  
Monetary Shocks ◽  
Monetary Policies ◽  
The Real ◽  
Asymmetric Effects ◽  
Real Effects ◽  
Markov Switching Models ◽  
Switching Models ◽  
The Business Cycle ◽  
Negative Shock

In this paper, we check whether the effects of monetary policy actions on output in Brazil are asymmetric. Therefore, we estimate Markov-switching models that allow positive and negative shocks to affect the growth rate of output in an asymmetric fashion in expansion and recession states. In general, results show that: i) the real effects of negative monetary shocks are larger than those of positive shocks in an expansion; ii) in a recession, the real effects of positive and negative shocks are the same; iii) there is no evidence of asymmetry between the effects of countercyclical monetary policies; and iv) it is not possible to assert that the effects of a positive (or negative) shock are dependent upon the phase of the business cycle.

Stock prices, exchange rate and interest rate: evidence beyond symmetry

2017 ◽  
Vol 9 (1) ◽  
pp. 2-19 ◽  
Author(s):  
Taufeeq Ajaz ◽  
Md Zulquar Nain ◽  
Bandi Kamaiah ◽  
Naresh Kumar Sharma
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Stock Prices ◽  
Asset Price ◽  
Asymmetric Reaction ◽  
Monetary Policies ◽  
Content Type ◽  
Financial Variables ◽  
Distributed Lag ◽  
Indian Context

Purpose This paper aims to examine the dynamic interactions between monetary and financial variables in the Indian context. Design/methodology/approach In this paper, the authors have applied a recently developed asymmetric autoregressive distributed lag (ARDL) model by Shin et al. (2014), for detecting nonlinearities focusing on the long-run and short-run asymmetries among economic variables. Findings The results point toward the presence of asymmetric reaction of stock prices to changes in interest rate and exchange rate in full sample, as well as in pre-crisis. However, no asymmetry was found in the post-crisis period. The results further suggest that tight monetary policies appear to retard the stock prices, more than easy monetary policies that stimulate them. Practical implications The findings of the study can be helpful in understanding the policy transmission mechanism through asset price channel. Originality/value To the best of the authors’ knowledge, this is the first study that examines the interactions between monetary and financial variables in the Indian context in an asymmetric framework. The findings of this study are quite interesting and are different from several existing studies in the literature.

Brazil: monetary policy and the neutral interest rate

2016 ◽  
Vol 43 (6) ◽  
pp. 966-979
Author(s):  
Cleomar Gomes da Silva ◽  
Rafael Cavalcanti de Araújo
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Real Interest Rate ◽  
Design Methodology ◽  
Macroeconomic Model ◽  
Natural Rate ◽  
Content Type ◽  
Natural Rate Of Interest ◽  
The Interest Rate ◽  
Definition Of

Purpose The purpose of this paper is to analyze the conduct of monetary policy in Brazil and estimate the country’s neutral real interest rate. Design/methodology/approach The authors make use of a state-space macroeconomic model representation. Findings The period of analysis goes from 2003 up to the end of 2013 and the results show that the country’s natural rate of interest was around 4.2 percent in December 2013. Originality/value One of the main differences of this work is the inclusion of variables such as the real exchange rate and world interest rate. This is important because these variables play an important role in the definition of the interest rate and, consequently, in the definition of the neutral interest rate.

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