scholarly journals Optimal monetary policy in a model of vertical production and trade with reference currency

2018 ◽  
Vol 20 (1) ◽  
Author(s):  
Liutang Gong ◽  
Chan Wang ◽  
Heng-Fu Zou
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Nominal Exchange Rate ◽  
Intermediate Goods ◽  
Optimal Monetary Policy ◽  
Monetary Cooperation ◽  
Monetary Authorities ◽  
Solution Methods ◽  
First Time ◽  
Vertical Production And Trade

Abstract This paper examines optimal monetary policy rules in a model of vertical production and trade with reference currency. As evidenced by empirical findings, we assume that final-goods prices are sticky, but intermediate-goods prices are flexible. We find that even if intermediate-goods prices are flexible, monetary authorities need to respond to the shocks at the stage of intermediate-goods production. We also find that, when a shock occurs at the stage of final-goods production, monetary responses are independent of the expenditure share of final-goods producers on intermediate goods. For the first time in the literature, our model gives a condition under which both countries are willing to participate in monetary cooperation. Thus the gains from cooperation are real. In addition, we compare the volatility of the nominal exchange rate in Nash case with that in cooperative case, and compare the volatility of the nominal exchange rate in our model with that in a model without vertical production and trade as well. We also extend the model to consider a case of dual price stickiness. We find that the change in solution methods completely alters the conclusions of the model.

scholarly journals Difference in intensity of exchange rate factors in countries with targeting inflation regime

2021 ◽  
Vol 51 (3) ◽  
pp. 125-143
Author(s):  
A.M. Grebenkina ◽  
◽  
A.A. Khandruev ◽  
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Inflation Targeting ◽  
Emerging Market ◽  
Exchange Rate Volatility ◽  
Developed Countries ◽  
Exchange Rate Policy ◽  
Nominal Exchange Rate ◽  
Vector Autoregressive ◽  
Market Factors

The paper analyzes features of prime factors of nominal exchange rate in countries with inflation targeting regime and high cross-border financial openness. The paper aims to test the hypothesis about different strength of these factors in developed countries and emerging market economies (EMEs). Using a panel vector autoregressive model and panel data for 2010 — 1st half-year 2020 period for 9 developed countries and 10 EMEs, the paper estimates significance of factors from the side of global commodity and financial markets, as well as the side of national monetary policy. The paper finds some evidence of greater sensitivity of EMEs’ nominal exchange rate to global commodity and financial market factors and a greater sensitivity of developed countries’ nominal exchange rate to national monetary policy. The paper regards this result as an argument for EMEs’ exchange rate policy specification, considering the necessity to cope with heightened exchange rate volatility in these countries under the influence of external factors.

scholarly journals Dynamic Relationship between RMB Exchange Rate and Interest Rate Based on VAR-DCC-GARCH Model

2020 ◽  
Vol 214 ◽  
pp. 03018
Author(s):  
Xuhang Zhao
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Exchange Rate Volatility ◽  
Garch Model ◽  
Nominal Exchange Rate ◽  
Practical Significance ◽  
Causality Test ◽  
Dynamic Relationship ◽  
Interest Rate Volatility

Based on the daily data of Shibor and nominal exchange rate from 2006 to 2019, this paper constructs VAR model and uses Granger causality test and impulse response model to analyze the dynamic relationship between exchange rate and interest rate. Based on the DCC-GARCH model, this paper analyzes the correlation between exchange rate volatility and interest rate volatility, and concludes that there is a weak negative correlation between exchange rate and interest rate. Both exchange rate and monetary policy will have an important impact on China’s economic environment, so it is of great practical significance to study the joint impact of exchange rate and monetary policy.

OPTIMAL MONETARY POLICY FOR THE EMU ACCESSION COUNTRIES. A NEW KEYNESIAN APPROACH

2014 ◽  
Vol 19 (7) ◽  
pp. 1427-1475 ◽  
Author(s):  
Anna Lipińska
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Optimal Policy ◽  
Nominal Exchange Rate ◽  
Nominal Interest Rate ◽  
Output Gap ◽  
Optimal Monetary Policy ◽  
Accession Countries ◽  
Dynamic Stochastic ◽  
Maastricht Criteria

This paper uses a dynamic stochastic general equilibrium model of a two-sector small open economy to analyze how the Maastricht criteria modify a fully credible optimal monetary policy in the Economic and Monetary Union accession countries. We show that if the country is not constrained by the criteria, optimal policy should stabilize fluctuations in PPI inflation, in the aggregate output gap, and in the domestic and international terms of trade. The optimal policy constrained permanently by the Maastricht criteria is characterized by reduced variability of the nominal exchange rate, CPI inflation, and the nominal interest rate and by lower optimal targets for CPI inflation and nominal interest rate. This policy results in higher variability and nonzero means for both PPI inflation and output gap, thus leading to additional, but small, welfare costs compared with the unconstrained policy.

scholarly journals Monetary Policy and the Predictability of Nominal Exchange Rates

2020 ◽  
Author(s):  
M S Eichenbaum ◽  
B K Johannsen ◽  
S T Rebelo
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Open Economy ◽  
Real Exchange Rates ◽  
Nominal Exchange Rate ◽  
Medium Size ◽  
Inflation Rates ◽  
Nominal Exchange Rates

Abstract This article studies how the monetary policy regime affects the relative importance of nominal exchange rates and inflation rates in shaping the response of real exchange rates to shocks. We document two facts about inflation-targeting countries. First, the current real exchange rate predicts future changes in the nominal exchange rate. Second, the real exchange rate is a poor predictor of future inflation rates. We estimate a medium-size, open-economy DSGE model that accounts quantitatively for these facts as well as other empirical properties of real and nominal exchange rates. The key estimated shocks that drive the dynamics of exchange rates and their covariance with inflation are disturbances to the foreign demand for dollar-denominated bonds.

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 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 MONETARY TRANSMISSION OF PERSISTENT SHOCK TO THE RISK PREMIUM: THE CASE OF INDONESIA

2011 ◽  
Vol 13 (4) ◽  
pp. 435-468
Author(s):  
Akhis R. Hutabarat
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Risk Premium ◽  
Nominal Exchange Rate ◽  
Monetary Transmission ◽  
Cost Channel ◽  
Long Run ◽  
Pass Through ◽  
Exchange Rate Pass Through

This paper investigates the relative importance of monetary transmission channel to inflation of passing persistent shock to the risk premium. The findings show that nominal exchange rate depreciation, triggered by a more persistent shock to interest risk premium, worsens the state of the economy in the short- and long-run. Such distinctive shocks effect is transmitted through the economy that typifies lack of response of consumer price disinflation to interest rate tightening caused by high real rigidity, strong cost channel of interest rate, strong cost channel of exchange rate pass-through and weak demand-side channel of exchange rate pass-through. This study suggests a proper monetary policy response, which is the smallest interest rate increases within the feasible set of monetary policy responses that the model recommends, to minimize the adverse effects of the shocks.Keywords: Exchange rate, Balance of Payment, Monetary transmission and policy, Dynamic General Equilibrium.JEL Classification: F41; E52; D58

Prospects of the Initiation of Inflation Targeting in RF

2008 ◽  
pp. 46-57 ◽  
Author(s):  
A. Ulyukaev ◽  
S. Drobyshevsky ◽  
P. Trunin
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Economic Performance ◽  
Inflation Targeting ◽  
Policy Regime ◽  
Monetary Authorities ◽  
The Exchange Rate

Bank of Russia officials have recently declared the possibility of switching to the inflation targeting regime in the medium run. The article considers benefits and shortcomings of monetary policy regime as well as the economic performance of the inflation targeting countries. The authors conclude that Russia now starts meeting conditions crucial for the success of inflation targeting. In such circumstances Russian monetary authorities have an opportunity to weaken the exchange rate goal in favor of the inflation goal.

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