scholarly journals Redefining monetary policy rules: A threshold approach

PLoS ONE ◽  
2021 ◽  
Vol 16 (5) ◽  
pp. e0252316
Author(s):  
Carmen Diaz-Roldan ◽  
María A. Prats ◽  
Maria del Carmen Ramos-Herrera
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Threshold Model ◽  
Threshold Value ◽  
Output Gap ◽  
Policy Rule ◽  
Key Variables ◽  
The Interest Rate ◽  
The Relationship

In this paper, we try to analyse the extent to which a redefinition of the monetary policy rule would help to avoid the zero-lower bound, as well as to explore the conditions needed to avoid that constraint. To that aim, we estimate the threshold values of the key variables of the policy rule: the inflation gap and the output gap. The threshold model allows us to know which are the turning points from which the relationship between the key variables and the interest rate revert. In the Eurozone countries, we have found that the inflation gap always contributes to increasing the nominal interest rate. On the contrary, the output gap works differently when it reaches values above or below the threshold value, which would favour the reduction of the interest rates towards the zero level.

scholarly journals Monetary policy rule for Poland – results for various specifactions

2011 ◽  
Vol 2 (3) ◽  
pp. 5-21 ◽  
Author(s):  
Paweł Baranowski
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Monetary Authority ◽  
Output Gap ◽  
Reaction Function ◽  
Policy Rule ◽  
Policy Rules ◽  
Monetary Policy Rules ◽  
Monetary Policy Rule ◽  
The Interest Rate

The aim of the paper is to analyse monetary policy rules for Poland. We estimate models based on the proposition of Taylor (1993), augmented with interest rate smoothing. We deal with the case of instantaneous as well as forward-looking relationship between interest rate and inflation. In the latter case, the proposition of data-rich reaction function (Bernanke and Boivin, 2003) was also considered. The evidence show that Polish monetary authority reaction to inflation is strong, contrary to the output gap. In addition, we found strong interest smoothing, which implies time-distributed response of the interest rate.

scholarly journals Safe Assets, Liquidity, and Monetary Policy

2017 ◽  
Vol 9 (2) ◽  
pp. 182-227 ◽  
Author(s):  
Pierpaolo Benigno ◽  
Salvatore Nisticò
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Risk Sharing ◽  
Balance Sheet ◽  
Multiple Assets ◽  
Interest Rate Spreads ◽  
The Interest Rate ◽  
Liquidity Shock ◽  
Deep Recession

This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and “pseudo-safe” assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest rate spreads and can cause a deep recession-cum-deflation. Expanding the central bank’s balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers. (JEL E31, E32, E43, E44, E52)

Monetary-Policy Rule as a Bridge: Predicting Inflation without Predictive Regressions

2018 ◽  
Vol 53 (6) ◽  
pp. 2559-2586 ◽  
Author(s):  
Jian Hua ◽  
Liuren Wu
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Historical Analysis ◽  
Policy Rule ◽  
Estimation Errors ◽  
Predictive Regressions ◽  
Inflation Rates ◽  
Monetary Policy Rule ◽  
Out Of Sample

A major issue with predicting inflation rates using predictive regressions is that estimation errors can overwhelm the information content. This article proposes a new approach that uses a monetary-policy rule as a bridge between inflation rates and short-term interest rates and relies on the forward-interest-rate curve to predict future interest-rate movements. The 2-step procedure estimates the predictive relation not through a predictive regression but far more accurately through the contemporaneous monetary-policy linkage. Historical analysis shows that the approach outperforms random walk out of sample by 30%–50% over horizons from 1 to 5 years.

scholarly journals “WAIT-AND-SEE” MONETARY POLICY

2017 ◽  
Vol 23 (5) ◽  
pp. 1793-1814 ◽  
Author(s):  
Xiaowen Lei ◽  
Michael C. Tseng
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Taylor Rule ◽  
Adjustment Costs ◽  
Optimal Timing ◽  
Bank Of Canada ◽  
Wait And See ◽  
The Interest Rate ◽  
Better Than

This paper develops a model of the optimal timing of interest rate changes. With fixed adjustment costs and ongoing uncertainty, changing the interest rate involves the exercise of an option. Optimal policy therefore has a “wait-and-see” component, which can be quantified using option pricing techniques. We show that increased uncertainty makes the central bank more reluctant to change its target interest rate, and argue that this helps explain recent observed deviations from the Taylor Rule. An optimal wait-and-see policy fits the target interest rates of the Fed and Bank of Canada better than the Taylor Rule.

scholarly journals Interest rates and prices causality in the Czech Republic – Granger approach

2009 ◽  
Vol 55 (No. 7) ◽  
pp. 347-356 ◽  
Author(s):  
J. Poměnková ◽  
S. Kapounek
Keyword(s):  
Monetary Policy ◽  
Czech Republic ◽  
Interest Rate ◽  
Interest Rates ◽  
Inflation Rate ◽  
Aggregate Demand ◽  
Real Economy ◽  
Investment Activity ◽  
The Czech Republic ◽  
The Interest Rate

Monetary policy analysis concerns both the assumptions of the transmission mechanism and the direction of causality between the nominal (i.e. the money) and real economy. The traditional channel of monetary policy implementation works via the interest rate changes and their impact on the investment activity and the aggregate demand. Altering the relationship between the aggregate demand and supply then impacts the general price level and hence inflation. Alternatively, the Post-Keynesians postulate money as a residual. In their approach, banks credit in response to the movements in investment activities and demand for money. In this paper, the authors use the VAR (i.e. the vector autoregressive) approach applied to the “Taylor Rule” concept to identify the mechanism and impact of the monetary policy in the small open post-transformation economy of the Czech Republic. The causality (in the Granger sense) between the interest rate and prices in the Czech Republic is then identified. The two alternative modelling approaches are tested. First, there is the standard VAR analysis with the lagged values of interest rate, inflation and economic growth as explanatory variables. This model shows one way causality (in the Granger sense) between the inflation rate and interest rate (i.e. the inflation rate is (Granger) caused by the lagged interest rate). Secondly, the lead (instead of lagged) values of the interest rate, inflation rate and real exchange rate are used. This estimate shows one way causality between the inflation rate and interest rate in the sense that interest rate is caused by the lead (i.e. the expected future) inflation rate. The assumptions based on money as a residual of the economic process were rejected in both models.

scholarly journals Revival of Legacy of Tooke and Gibson: Implications for Monetary Policy

2015 ◽  
Vol 4 (2) ◽  
pp. 37-58 ◽  
Author(s):  
Atiq-ur Rehman
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Monetary Economics ◽  
Mainstream Economic ◽  
Monetary Policy Rules ◽  
Simple Logic ◽  
The Interest Rate ◽  
Economic Thinking ◽  
The Relationship ◽  
Effectiveness Of Monetary Policy

Abstract The monetary policy rules used by central banks these days are based on the assumption that inflation could be reduced by increasing interest rate. On contrary, Tooke (1774-1858), the forefather of monetary economics, was of the view that the relationship between interest rate and inflation should be positive. His view was based on simple logic, ‘interest is a part of cost, and therefore, the increase in interest rate should increase inflation by increasing cost of production (Tooke, 1838)’. Tooke’s view has got support from a number of empirical evidence including Gibson (1923) who found positive correlation between two variables for UK data over a period of 200 years. On the other hand, mainstream economic thinking on which the actual monetary practices are based ignored any possibility of positive relationship between interest rate and inflation throughout the history. The existence of Tooke’s cost side effects of monetary policy is a serious concern because if these effects exist than the use of monetary policy would be counterproductive. Using the data from entire globe, I attempt to explore the nature of relationship between the interest rate and inflation. I found that the data supports the perception of Tooke and Gibson and denies that the effectiveness of monetary policy currently adapted by the correlation between interest rate and inflation is positive. The results are robust to sample size, sample period, and various definitions of interest rate and inflation.

scholarly journals Mortgage Prepayment and Path-Dependent Effects of Monetary Policy

2021 ◽  
Vol 111 (9) ◽  
pp. 2829-2878
Author(s):  
David Berger ◽  
Konstantin Milbradt ◽  
Fabrice Tourre ◽  
Joseph Vavra
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Current Level ◽  
Fixed Rate ◽  
Mortgage Prepayment ◽  
Recent Interest ◽  
Household Model ◽  
Path Dependent ◽  
The Relationship

How much ability does the Fed have to stimulate the economy by cutting interest rates? We argue that the presence of substantial debt in fixed-rate, prepayable mortgages means that the ability to stimulate the economy by cutting interest rates depends not just on their current level but also on their previous path. Using a household model of mortgage prepayment matched to detailed loan-level evidence on the relationship between prepayment and rate incentives, we argue that recent interest rate paths will generate substantial headwinds for future monetary stimuli. (JEL E32, E43, E52, E58, G21, G51)

scholarly journals COMPARISON OF THE PASS-THROUGH SPEED MODELS OF DIFFERENT MARKETS: AN EMPIRICAL STUDY OF THE MARKETS OF MAINLAND CHINA AND TAIWAN

2020 ◽  
Author(s):  
Chi Ming Ho ◽  
Wu Yih Lin
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Mainland China ◽  
Rate Sensitivity ◽  
Interest Rate Spread ◽  
Spread Model ◽  
Pass Through ◽  
Loan Interest Rates ◽  
The Interest Rate

This paper adopted the Boone Indicator, developed by Boone et al. (2008) and Van Leuvensteijn et al. (2011; 2013), to investigate the influence of different pass-through spread models in the competition among banks in emerging markets. With the market share of banks as a dependent variable and marginal cost as an independent variable, this paper probed into the competition among banks regarding the loan market to determine whether competition on the loan interest rates of banks affected the pass-through of monetary policy-related interest rates. After analyzing approximately 5,657 entries of records of the banking industries in Taiwan and mainland China, this paper reached three significant conclusions: 1) the Boone Indicator Model pointed out that, competition in the banking market of mainland China was more intense than that of Taiwan; 2) empirical research based on the Interest Rate Spread Model indicated that the spread of mainland China was lower than that of Taiwan; 3) the Passthrough Speed Model implied that, the interest rate sensitivity of the market of mainland China was higher than that of the Taiwan market. The above results indicate that the influence of monetary policy pass-through on the interest rate of the market in mainland China is faster than in Taiwan.  

scholarly journals Analysis of Macroeconomics Stability Control of ICI Countries (Indonesia, China, India) Based on Transmission of Monetary Policy through Interest Rate Channel

2021 ◽  
Vol 8 (4) ◽  
pp. 226-234
Author(s):  
Annisa Anggreini Siswanto ◽  
Ahmad Albar Tanjung ◽  
Irsad Lubis
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Gross Domestic Product ◽  
Interest Rates ◽  
Domestic Product ◽  
Economic Stability ◽  
The Interest Rate ◽  
Transmission Of Monetary Policy ◽  
Interest Rate Channel

This study aims to analyze variable control of macroeconomic stability based on monetary policy transmission through interest rate channels in Indonesia, China, India (ICI). Variables used in the interest rate are rill interest rates, consumption, investment, gross domestic product, and inflation. This study used secondary data from 2000 to 2019. The results of the PVECM analysis through the interest rate channel show that the control of economic stability of the ICI country is carried out by investment variables and gross domestic product in the short term, while in the long run it is carried out by consumption, investment and gross domestic product. The results of the IRF analysis are the response stability of all variables is formed in the medium and long term periods. The results of the FEVD analysis show that there are variables that have the greatest contribution in the variable itself either in the short, medium, long term. The results of the interaction analysis of each variable transmission of monetary policy through interest rates can maintain and control the economic stability of the ICI country. Keywords: Interest Rate Channel, Interest Rate, Consumption, Investment, Gross Domestic Product, Inflation.

scholarly journals Excess Real Interest Rates and the Inflation Targeting Regime in Brazil: Monetary Policy Ineffectiveness and Rentiers’ Interests

2018 ◽  
Vol 5 (6) ◽  
pp. 84
Author(s):  
Fernando Ferrari Filho ◽  
Marcelo Milan
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Inflation Targeting ◽  
Negative Impact ◽  
Policy Instruments ◽  
Output Growth ◽  
International Standards ◽  
Real Interest Rates ◽  
The Interest Rate

Brazil has had, since the middle 1990s, one of the highest real interest rates in the world, yet not one of the lowest inflation rates. By the end of that decade, an inflation targeting regime (ITR) was introduced. Real interest rates have remained extremely high for international standards, while macroeconomic performance has been dismal on the same grounds. This article argues that these results can be explained by, among others reasons, pressures from the rentiers to frame monetary policy in a way to sustain very high interest earnings in a context where inflation is not very sensitive to monetary policy instruments. Under the ITR, the interest rate seems to have been kept above what would be required to maintain low inflation under normal conditions (even if one assumes a demand-pull inflation, which is not necessarily the case), with a potentially negative impact on growth and employment. This is interpreted as an indicator of monetary policy ineffectiveness. On the empirical ground, this article compares interest rate, inflation, unemployment, and real output growth for Brazil with both ITR and non-ITR countries selected by judgment sampling.

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