A First Look at the Trilemma Vis-à-Vis Quadrilemma Monetary Policy Stance in a Pacific Island Country Context

2018 ◽  
Vol 21 (01) ◽  
pp. 1850002
Author(s):  
Jen Je Su ◽  
Lavenia Cocker ◽  
Disusu Delana ◽  
Parmendra Sharma
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Policy Implications ◽  
Capital Account ◽  
Pacific Island ◽  
Sample Period ◽  
Foreign Reserves ◽  
Full Sample ◽  
Pacific Island Country ◽  
Monetary Independence

Initiated by a central bank, this is the first study to examine and understand the trilemma as well as the quadrilemma monetary policy challenges in the case of Pacific Island countries. Taking Fiji as an example, over the 1975–2013 period, the trilemma, monetary independence and exchange rate stability might have been the more fervently pursued stance; the quadrilemma focus appears to have shifted to foreign reserves and capital account openness. When the full sample period is split into two subsamples, results show that the policy emphasis might have shifted from monetary independence, capital account openness, and foreign reserves to exchange rate stability, monetary independence, and foreign reserves. Policy implications are discussed.

scholarly journals The Search for a Stable Money Demand Function for Pakistan: An Application of the Method of Cointegration

1994 ◽  
Vol 33 (4II) ◽  
pp. 969-983 ◽  
Author(s):  
Akhtar Hossain
Keyword(s):  
Monetary Policy ◽  
Money Demand ◽  
Demand Function ◽  
Policy Implications ◽  
Annual Data ◽  
Sample Period ◽  
Money Demand Function ◽  
Full Sample ◽  
Use Of Data ◽  
Better Than

Despite an impressive number of studies on money demand in Pakistan since the early 1970s, the question of stability of the money demand function did not receive much attention. This paper examines the question of whether there exists a stable money demand function in Pakistan. The novelty of the study comes from the application of the method of cointegration to Pakistani annual data over 1951-91.1 The empirical findings of this study are somewhat different from those of earlier studies on money demand in Pakistan and have monetary policy implications. However, besides some inherent shortcomings of the method of cointegration, one possible weakness of the paper is the use of data which extend over the 1950s and 1960s when Bangladesh was a part of Pakistan. It creates an unavoidable problem of data conformability. It induced me to take the risk of being somewhat complacent about the sample size as I report empirical results for a shorter sample period 1972-91. One consolation is that empirical findings for this sub-sample appear qualitatively better than those obtained for the full sample period.

scholarly journals Trilemma to Quadrilemma: An empirical study from Indonesia

2020 ◽  
Vol 18 (2) ◽  
pp. 119-128
Author(s):  
Sri Andaiyani ◽  
Ariodillah Hidayat ◽  
Fida Muthia ◽  
Nona Widharosa ◽  
Mardalena Mardalena
Keyword(s):  
Monetary Policy ◽  
Least Square ◽  
Capital Account ◽  
External Shocks ◽  
Foreign Reserves ◽  
Policy Objective ◽  
Full Sample ◽  
Foreign Reserve ◽  
Ordinary Least Square ◽  
Policy Objectives

The objective of this study is to test the trilemma and the quadrilemma monetary policy using Indonesia data with covering years 1983 – 2017. The research suggest that the monetary independence and capital account openness might have been more passionately pursued by Bank Indonesia for testing the trilemma; while testing of the quadrilemma, the concentration seems to have shifted to take a middle position within each policy objectives. In this study, the full sample period is split in three subsamples: 1983-2017, 1983 – 1999 and 2000 – 2017. The methodology used in this research is ordinary least square. Our findings show that the policy might have shifted from exchange rate stability, capital account openness and foreign reserves in the first subsample to other four policy objectives in the second subsample. It indicates that foreign reserve plays as fourth objective leading the central bank to achieve at the same time the three “impossible” goals. Therefore, taking into account foreign reserve as a monetary policy objective is deserved. Adequacy of reserves could higher our capacity to prevent or mitigate external shocks.

scholarly journals What Drives Stops in Cross-Border Bond Flows?

2019 ◽  
Vol 11 (14) ◽  
pp. 3763
Author(s):  
Seung-Gwan Baek ◽  
Chi-Young Song
Keyword(s):  
Exchange Rate ◽  
Financial Markets ◽  
Emerging Economies ◽  
Exchange Rate Regimes ◽  
Real Exchange Rates ◽  
Flexible Exchange Rate ◽  
Regression Method ◽  
Policy Implications ◽  
Capital Account ◽  
Cross Border

This paper empirically explores the determinants of stop episodes driven by bond flows using quarterly data from 38 economies over the period 1995–2011. Drastic bond-led stop episodes may greatly destabilize domestic financial markets and lead to financial crisis, threatening the sustainability of the financial system. Using the complementary log–log regression method, we found that bond-led stop episodes were associated with contagion and domestic factors rather than global factors. The results of our estimation showed that the probability of bond-led stop episodes was higher in countries with larger financial markets or with more overvalued real exchange rates. The main policy implications of our results, particularly for emerging economies, are that bond-led stop episodes were less likely to occur in countries with higher levels of institutional quality, lower capital account restrictions, or more flexible exchange-rate regimes. Finally, we found that capital control played a relatively greater role in predicting bond-led stops in emerging economies than did exchange-rate regimes.

Exchange Rate Pass-Through: A Case Study of a Small Open Economy

2007 ◽  
Vol 7 (3) ◽  
pp. 1850112 ◽  
Author(s):  
Olajide Oladipo
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Nominal Exchange Rate ◽  
Production Costs ◽  
Policy Implications ◽  
Relative Price ◽  
The Exchange Rate ◽  
Pass Through ◽  
Exchange Rate Pass Through ◽  
Future Path

The exchange rate pass-through for Nigeria imports is estimated by applying an econometric procedure to sectoral data which avoids the pit-falls in previous studies. We use the mark-up approach, which implies setting export prices as a mark-up on production costs. So, the price facing importers is the exchange rate adjusted production costs where mark-up depends on the competitive pressures in the import's market and the nominal exchange rate. Our results indicate incomplete pass-through at varying degrees across sectors, which implies that the foreign exporters passed on only part of the increase in their costs of production to import prices. Also, it reveals that the effort of the Nigerian government in encouraging companies to use local inputs where possible instead of relying on imported intermediate inputs is gradually yielding positive results. Important policy implications that follow from our results of incomplete pass-through to domestic prices could influence CBN forecasts of future path of inflation, a key element in the conduct of monetary policy. Indeed, the successful implementation of monetary policy presupposes that CBN has not only a good understanding of inflation dynamics but is also relatively successful at predicting the future path of inflation. Also, our results imply that the exchange rate policy may be a blunt instrument when used to restore external balance since relative price adjustments will be limited. Furthermore, the incomplete pass-through suggests that exchange rate changes are likely to lead to smaller real effects on the economy through lower changes in both the terms of trade and import volumes and finally, the extent of inflation (deflation) effects of exchange rate depreciation (appreciation) operating through changes in the prices of imported goods will be moderated.

scholarly journals Trilemma Challenges for the People's Republic of China

2015 ◽  
Vol 32 (1) ◽  
pp. 49-89 ◽  
Author(s):  
Masahiro Kawai ◽  
Li-Gang Liu
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
The United States ◽  
People’S Republic Of China ◽  
Capital Account ◽  
People's Republic Of China ◽  
Republic Of China ◽  
Interest Rate Liberalization ◽  
Recent Developments

This paper first reviews recent developments in exchange rate regimes, capital account liberalization, interest rate liberalization, and monetary policymaking in the People's Republic of China (PRC). It then observes that the PRC's monetary policy autonomy may have been reduced with falling capital control effectiveness and a rigid exchange regime that is still tightly managed against the United States (US) dollar. This hypothesis is investigated empirically using both the Taylor rule and a McCallum-like rule to test whether the PRC's money market interest rate and/or quantity of money supply are being increasingly influenced by the US interest rate or reserve accumulation. The paper concludes that there is considerable evidence suggesting diminishing monetary policy autonomy in the PRC. To regain policy autonomy, the monetary authority needs to substantially increase exchange rate flexibility of the renminbi as long as it continues to pursue capital account opening.

scholarly journals A Review of the Impact of External Shocks on Monetary Policy Effectiveness in Non-WAEMU Countries

2021 ◽  
Vol 31 (3) ◽  
pp. 37-59
Author(s):  
Kordzo Sedegah ◽  
Nicholas M. Odhiambo
Keyword(s):  
Monetary Policy ◽  
Foreign Aid ◽  
Capital Account ◽  
External Shocks ◽  
Foreign Reserves ◽  
Policy Effectiveness ◽  
Exchange Rate Flexibility ◽  
Monetary Policy Effectiveness ◽  
The Impact ◽  
Effectiveness Of Monetary Policy

Abstract In this paper, the extant literature on the impact of external shocks on monetary policy effectiveness with reference to non-WAEMU countries is reviewed. The importance of this literature review is to provide contemporary perspectives to scholars and policymakers on the relevance of the incidence of external shocks to the effectiveness of monetary policy with reference to non-WAEMU countries. The literature reviewed in this study shows that, on the whole, the extent and the degree to which external shocks are transmitted to the domestic economy substantially depend on a plethora of features, namely the absence of exchange rate flexibility; a strong export concentration, especially with respect to commodities; the level of global economic integration; restricted capacities of production; the absence of competitiveness in exports; over-reliance on foreign aid; foreign reserves that are not adequate and capital account openness.

scholarly journals HOUSING MARKET DYNAMICS UNDER A PEGGED EXCHANGE RATE – A STUDY OF HONG KONG

2018 ◽  
Vol 22 (2) ◽  
pp. 93-109 ◽  
Author(s):  
Ka Hung YU ◽  
Eddie Chi Man HUI
Keyword(s):  
Monetary Policy ◽  
Hong Kong ◽  
Exchange Rate ◽  
Housing Market ◽  
Housing Prices ◽  
Policy Implications ◽  
Rate System ◽  
Macroeconomic Factors ◽  
Property Price ◽  
Exchange Rate System

This study explores the major determinants of prices and rents of properties in the mass housing market and in the luxury housing market of Hong Kong. The findings show that property price (and rental) dynamics are primarily driven by demand factors, rather than by housing supply. While macroeconomic factors and the provision of subsidized homeownership, to varying degrees, influence housing prices and/or rents, it is the result of U.S. monetary policy which has directly (through changes in money supply) and indirectly (through the wealth effect from a bullish stock market fuelled by unconventional monetary policy such as Quantitative Easing (QE) triggered the current affordability issue. Some policy implications with reference to recent U.S. monetary policy developments as well as to the Linked Exchange Rate System between Hong Kong Dollar and U.S. Dollar are then discussed.

Policy Trilemma in India: Exchange Rate Stability, Independent Monetary Policy and Capital Account Openness

2017 ◽  
Vol 17 (3) ◽  
pp. 20170012 ◽  
Author(s):  
Sayantan Bandhu Majumder ◽  
Ranjanendra Narayan Nag
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Foreign Exchange Market ◽  
Capital Account ◽  
Ample Evidence ◽  
Long Run ◽  
Reserve Bank ◽  
Short Run ◽  
The Cost ◽  
Reserve Bank Of India

This paper aims to investigate the situation of policy trilemma in India. Analysing the quarterly data from 1991 to 2015, we find that though the trilemma constraint is binding in the long run, there is ample evidence of short-run deviations from the constraint. Intervention in the foreign exchange market by the Reserve bank of India has successfully helped to relax this constraint. The policy mix has changed over this period – the degree of capital account openness has gradually increased, mainly at the cost of exchange rate stability. We further examine the determinants and the macroeconomic effects of the trilemma policy configuration. We find that the trilemma efficiency depends on the financial stress, financial development, intervention by the Central bank and the liquidity in the economy. Higher monetary policy independence helps to reduce the inflation rate while exchange rate stability and capital account openness are associated with the higher growth rate and the larger output gap.

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