Model Uncertainty and Financial Frictions: Implications for Optimal Monetary Policy

2021 ◽  
pp. 1-20
Author(s):  
ZEYNEP KANTUR ◽  
GÜLSERİM ÖZCAN
Keyword(s):  
Monetary Policy ◽  
Policy Design ◽  
Model Misspecification ◽  
Worst Case ◽  
Policy Model ◽  
Model Ambiguity ◽  
The Face ◽  
Dynamic Stochastic ◽  
Zero Sum ◽  
The Impact

The last decades proved that policymaking without considering uncertainty is impracticable. In an environment of uncertainty, policymakers have doubts about the policy models they routinely use. This paper focuses specifically on the situation where uncertainty on the financial side of the economy leads to misspecification in the policy model. We describe a coherent strategy for policymakers who are averse to model misspecification and analyze optimal policy design in the face of Knightian uncertainty. To do so, we augment a financial dynamic stochastic general equilibrium model with model misspecification in a simple minimax framework where the central bank plays a zero-sum game versus a hypothetical evil agent. The policy is tailored to insure against the worst-case outcomes. We show that model ambiguity on the financial side requires a passive monetary policy stance. However, if the uncertainty originates from the supply side of the economy, an aggressive response of interest rate is required. We also show the impact of an additional macroprudential tool on the dynamics of the economy.

Monetary Policy in Low-Income Countries in the Face of the Global Crisis

2018 ◽  
Author(s):  
Alfredo Baldini ◽  
Jaromir Benes ◽  
Andrew Berg ◽  
Mai C. Dao ◽  
Rafael Portillo
Keyword(s):  
Monetary Policy ◽  
General Equilibrium ◽  
Low Income ◽  
Dynamic Stochastic General Equilibrium ◽  
Policy Implications ◽  
Low Income Countries ◽  
Policy Response ◽  
Risk Appetite ◽  
Dynamic Stochastic ◽  
The Impact

The authors develop a dynamic stochastic general equilibrium (DSGE) model with a banking sector to analyse the impact of the financial crisis in developing countries and the role of the monetary policy response, with an application to Zambia. The crisis is interpreted as a combination of three related shocks: a worsening in the terms of the trade, an increase in the country’s risk premium, and a decrease in the risk appetite of local banks. Model simulations broadly match the path of the economy during this period. The model-based analysis reveals that the initial policy response contributed to the domestic impact of the crisis by further tightening financial conditions. The authors derive policy implications for central banks, and for dynamic stochastic general equilibrium modelling of monetary policy, in low-income countries.

scholarly journals The Impact of Monetary Policy on the Financial Stability of the Banking System: Setting a Modeling Problem

2021 ◽  
Vol 2 (517) ◽  
pp. 81-88
Author(s):  
A. D. Pilko ◽  
◽  
V. R. Kramar ◽  
Keyword(s):  
Monetary Policy ◽  
Financial Stability ◽  
Inflation Targeting ◽  
Banking System ◽  
Practical Implementation ◽  
Development Scenarios ◽  
Dynamic Stochastic ◽  
Low Efficiency ◽  
Traditional Approaches ◽  
The Impact

The publication is concerned with highlighting the results of the carried out analysis of the existing practice of developing macroeconomic models directed towards determining the main parameters of monetary policy of central banks, as well as assessing their impact on the indicators of financial stability of the banking system. Given the low efficiency of the traditional approaches to the formation of the monetary rule both in countries with developed market economies and in countries with small open economies (in particular, Taylor rule), possible ways to solve this problem are proposed taking into account the existing experience in shaping monetary policy parameters in the context of inflation targeting, which is already available at the NBU. The strengths and weaknesses of the main approaches to the modeling of the monetary transmission mechanism, as well as the forecasting of its impact on the financial stability of the banking system, which are used in the formation of basic and auxiliary models of the central bank, are analyzed. Particular attention is paid to structural econometric models, vector autoregression models and dynamic stochastic models of general equilibrium. As a result, a possible variant for developing an approach to macroeconomic modeling is proposed, in the framework of which assessment and analysis of the impact of monetary policy on the indicators of financial stability of the banking system is envisaged. The practical implementation of this approach makes it possible to develop models for assessing and analyzing the efficiency of the current monetary policy, projecting macroeconomic development scenarios in the short and medium term, which will both directly and indirectly determine the indicators of financial stability of the banking system.

scholarly journals COVID-19 Pandemic, Sustainability of Macroeconomy, and Choice of Monetary Policy Targets: A NK-DSGE Analysis Based on China

2021 ◽  
Vol 13 (6) ◽  
pp. 3362
Author(s):  
Xinping Zhang ◽  
Yimeng Zhang ◽  
Yunchan Zhu
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Social Inequality ◽  
Aggregate Demand ◽  
Labor Demand ◽  
Chinese Economy ◽  
Policy Implications ◽  
Dynamic Stochastic ◽  
The Impact ◽  
Policy Targets

This paper studies the impact of the COVID-19 pandemic on the sustainability of Chinese economic growth, government debt, and income inequality by constructing a new Keynesian dynamic stochastic general equilibrium (NK-DSGE) model. The choice of monetary policy targets is then analyzed to hedge the impact of the pandemic. We find that: (1) the aggregate demand and labor demand shocks caused by the COVID-19 pandemic posed serious challenges to the sustainable development of the economy and debt, and increased social inequality; (2) when the impact of the pandemic is mainly reflected in the recession in aggregate demand, monetary policy should pay more attention to the target of price stability; (3) when the impact of the pandemic is mainly reflected in a decline in labor demand, monetary policy should focus more on the target of economic growth; (4) when the pandemic has a significant impact on both aggregate demand and labor demand, a monetary policy which focuses more on the target of economic growth is conducive to minimizing welfare losses. Targeted policy implications, such as selecting monetary policy targets according to different manifestations of the impact of the COVID-19 pandemic and placing emphasis on monetary policy tools to stimulate consumption, alleviate unemployment, and alleviate social inequality, are suggested to improve the sustainability of the Chinese economy.

Turkish Housing Market Dynamics: An Estimated DSGE Model

2021 ◽  
Vol 15 (2) ◽  
pp. 238-267
Author(s):  
Mustafa Ozan Yıldırım ◽  
Mehmet İvrendi
Keyword(s):  
Monetary Policy ◽  
Housing Market ◽  
House Prices ◽  
House Price ◽  
Policy Instrument ◽  
Dsge Model ◽  
Macroeconomic Variables ◽  
Dynamic Stochastic ◽  
Monetary Policy Reaction Function ◽  
The Impact

In this article, we investigate the underlying driving dynamics behind house price variations in Turkey by estimating a dynamic stochastic general equilibrium (DSGE) model in which the housing market and collateral constraints are included. The model also analyses the interaction between macroeconomic variables and the housing market by making policy simulations under different loan-to-value (LTV) ratios, which are used as a housing market-specific economic policy tool. The model is extended by including the traditional Taylor rule with house prices for representing monetary policy. Our findings show that house prices in Turkey are largely explained by housing preference shocks. Besides, we find that monetary policy shock plays a small role in determining the variables of the housing market in the short-term period. However, the magnitude of the impact of housing market shocks on the rest of the economy depends on the LTV ratios. The higher the LTV ratio, the higher are the effects of the government’s housing policy instrument for stabilising the housing market on real macroeconomic variables such as consumption and output in Turkey. Finally, our findings show that the fluctuations in house prices have not played a substantial role in the monetary policy reaction function of Turkey. JEL Codes: E32, E52, E44, E51, R31

scholarly journals Stochastic Optimization and Worst-Case Analysis in Monetary Policy Design

2006 ◽  
Vol 30 (4) ◽  
pp. 329-347 ◽  
Author(s):  
Stan Žaković ◽  
Volker Wieland ◽  
Berc Rustem
Keyword(s):  
Monetary Policy ◽  
Stochastic Optimization ◽  
Policy Design ◽  
Case Analysis ◽  
Worst Case Analysis ◽  
Worst Case

scholarly journals Monetary Policy Model for Open Economy of Indonesia

2014 ◽  
Vol 16 (1) ◽  
pp. 73-86
Author(s):  
Umar Juoro
Keyword(s):  
Monetary Policy ◽  
Theoretical Model ◽  
Open Economy ◽  
Empirical Model ◽  
Effective Rate ◽  
Policy Model ◽  
Monetary Economy ◽  
Lending Rate ◽  
The Impact ◽  
Fund Rate

This paper explains stylized facts about the monetary economy in Indonesia covering the Bank Indonesia (BI) policy on the exchange rate, lending rates, inflation, real effective rate (REER), and growth. This is done to get an understanding on the impact of foreign policy (influenced by the Fed) on Indonesia’s monetary economy, with some attention to the fund rate. An empirical model of VAR (Vector Auto Regression) was developed to capture the impact of an increase in fund rate to Indonesia’s monetary sector. Furthermore, a theoretical model was developed to capture the result from empirical model. The theoretical model shows that the increase of fund rate influenced the increase of BI rate, lending rate, inflation, while reducing REER and growth. Keyword: monetary policy, lending rate, inflation, exchange rate.JEL Classification: E52, F41

scholarly journals DP 0253 - Are Fiscal VAR’s Non-Fundamentalness Easily Reversible Through the Addition of Informative Variables?

2021 ◽  
pp. 1-24
Author(s):  
Christian Vonbun ◽  
Elcyon Caiado Rocha Lima
Keyword(s):  
Moving Average ◽  
Model Misspecification ◽  
Dynamic Stochastic General Equilibrium ◽  
Vector Autoregressive ◽  
Policy Shocks ◽  
Moving Average Representation ◽  
The Usa ◽  
Dynamic Stochastic ◽  
The Impact ◽  
Average Representation

The VAR/SVAR (Vector Autoregressive and Structural Vector Autoregressive) models are the cornerstone of the contemporaneous empirical macroeconomic research, in particular for being able to measure the impact of fiscal policy shocks. They may be employed as atheoretical models, as well as a mean to support the estimation and testing of DSGE (Dynamic Stochastic General Equilibrium) models – the main theoretical tool for modern macroeconomics. Nevertheless, VAR models may be subject to pathologies, such as the non-fundamentalness. It is capable of biasing the estimates in any direction or intensity, and it consists of the non-invertibility of the MA (Moving Average) representation on the positive powers of the lag operator. This is associated with the insufficiency of the econometrician’s data to estimate the model’s correct parameters or with model misspecification. This study is the first to employ the latest and most efficient tests for non-fundamentalness on fiscal data for the USA: the Forni and Gambetti’s (2014) and Canova and Sahneh (2018) tests. The data and model were found to be non-fundamental.

scholarly journals MONEY AND MONETARY POLICY IN THE EUROZONE: AN EMPIRICAL ANALYSIS DURING CRISES

2016 ◽  
Vol 21 (3) ◽  
pp. 677-707 ◽  
Author(s):  
Jonathan Benchimol ◽  
André Fourçans
Keyword(s):  
Monetary Policy ◽  
Global Financial Crisis ◽  
Dynamic Stochastic General Equilibrium ◽  
New Keynesian ◽  
Forecasting Performance ◽  
Out Of Sample ◽  
Dynamic Stochastic ◽  
Bayesian Estimations ◽  
The Global Financial Crisis ◽  
The Impact

This paper analyzes the role of money and monetary policy as well as the forecasting performance of New Keynesian dynamic stochastic general equilibrium models with and without separability between consumption and money. The study is conducted over three crisis periods in the Eurozone, namely, the ERM crisis, the dot-com crisis, and the global financial crisis (GFC). The results of successive Bayesian estimations demonstrate that during these crises, the nonseparable model generally provides better out-of-sample output forecasts than the baseline model. We also demonstrate that money shocks have some impact on output variations during crises, especially in the case of the GFC. Furthermore, the response of output to a money shock is more persistent during the GFC than during the other crises. The impact of monetary policy also changes during crises. Insofar as the GFC is concerned, this impact increases at the beginning of the crisis, but decreases sharply thereafter.

Why do people believe in a zero-sum economy?

2018 ◽  
Vol 41 ◽  
Author(s):  
Samuel G. B. Johnson
Keyword(s):  
Perspective Taking ◽  
Evolutionary Model ◽  
Everyday Experience ◽  
Coalitional Psychology ◽  
The Face ◽  
Zero Sum

AbstractZero-sum thinking and aversion to trade pervade our society, yet fly in the face of everyday experience and the consensus of economists. Boyer & Petersen's (B&P's) evolutionary model invokes coalitional psychology to explain these puzzling intuitions. I raise several empirical challenges to this explanation, proposing two alternative mechanisms – intuitive mercantilism (assigning value to money rather than goods) and errors in perspective-taking.

Dampak Kebijakan Moneter Pada Output Di Negara-Negara ASEAN Tahun 1980-2014

2017 ◽  
Vol 4 (1) ◽  
pp. 58-70
Author(s):  
Nur Widiastuti
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Fixed Effects ◽  
Empirical Studies ◽  
Negative Relationship ◽  
Least Square ◽  
Fixed Effects Model ◽  
State Data ◽  
Ordinary Least Square ◽  
The Impact

The Impact of monetary Policy on Ouput is an ambiguous. The results of previous empirical studies indicate that the impact can be a positive or negative relationship. The purpose of this study is to investigate the impact of monetary policy on Output more detail. The variables to estimatate monetery poicy are used state and board interest rate andrate. This research is conducted by Ordinary Least Square or Instrumental Variabel, method for 5 countries ASEAN. The state data are estimated for the period of 1980 – 2014. Based on the results, it can be concluded that the impact of monetary policy on Output shown are varied.Keyword: Monetary Policy, Output, Panel Data, Fixed Effects Model

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