scholarly journals The Unpleasant Arithmetic of the Taylor Rule

2020 ◽  
Vol 8 (3) ◽  
pp. p89
Author(s):  
Alejandro Rodriguez-Arana
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Phillips Curve ◽  
Taylor Rule ◽  
Independent Component ◽  
Elasticity Of Substitution ◽  
Interest Rate Rule

This paper analyzes the effect of a monetary policy that raises the reference interest rate in order to reduce inflation in a situation where the fiscal policy parameters remain constant. In an overlapping generation’s model and in the presence of an accelerationist Phillips curve and a Taylor rule of interest rates, it is observed that increasing the independent component of said rule leads to a solution that at least in a large number of cases is unstable. In the case where the elasticity of substitution is greater than one, inflation falls temporarily, but then it can increase in an unstable manner. One way to achieve stability is to establish an interest rate rule where Taylor’s principle is not met. However, in this case many times the increase in the independent component of this rule will generate greater long-term inflation.

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 A Neowicksellian in a New Classical World: The Methodology of Michael Woodford's Interest and Prices

2006 ◽  
Vol 28 (2) ◽  
pp. 143-149 ◽  
Author(s):  
Kevin D. Hoover
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Markets ◽  
Interest Rates ◽  
Theoretical Orientation ◽  
Central Banks ◽  
Point Of View ◽  
Monetary Aggregates ◽  
Classical World ◽  
Interest Rate Rule

Michael Woodford's Interest and Prices: Foundations of a Theory of Monetary Policy (2003) is an important book. Woodford's title is, of course, a conscious revival of Wicksell's own famous work and it points to an effort to recast the analysis of monetary policy as centered on interest rates. I believe that Woodford's theoretical orientation is essentially correct. In repairing to Wicksell, he places the monetary aggregates into a more reasonable perspective, correcting the distortions of the monetarist and Keynesian diversions with respect to money. My money is, so to speak, where my mouth is: My own textbook-in-progress is also based around an IS/interest-rate rule/AS model, in which financial markets cleared by price rather than the LM curve are emphasized. Such an approach, as Woodford notes, has become standard in central banks, but has not yet captured either core undergraduate or graduate textbooks and instruction. My task here, however, was not to praise Woodford's economics nor to trace or evaluate its Wicksellian routes, but to consider Interest and Prices from a methodological point of view.

scholarly journals Monetary policy special features in the context of low interest rates

2020 ◽  
Vol 2 ◽  
pp. 50-64
Author(s):  
Kristina Nesterova ◽  
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Price Level ◽  
Nominal Interest Rate ◽  
Inflation Target ◽  
Policy Rules ◽  
Monetary Policy Rules ◽  
Monetary Rules

Introduction. The paper considers a wide range of monetary policy rules: integral stabilization, NGDP targeting, price level targeting, raising the inflation target, introducing negative nominal interest rates etc. The author also considers discretionary policy used by central banks when the nominal rate is close to zero, such as dramatic preventive cut of the key interest rate and interventions in the open markets with the aim of cutting long-term interest rates. The relevance of this problem is supported by global long-term macroeconomic and demographic factors, such as the dynamics of oil prices and the aging of the population. The aim of the paper is to identify the most effective monetary policy rules in order to reduce the risk of a nominal interest rate falling to zero. Methods. Analysis of the background and the results of general equilibrium models modeling monetary policy is carried out. Analysis of the role of current global trends (based on statistics) in aggravating the problem of declining interest rates. Scientific novelty of the research. The author systematizes the conclusions of modern macroeconomic theory, which offers a number of monetary rules making it possible to reduce the likelihood of falling into the zero bound of interest rate. Results. The effectiveness of monetary rules such as targeting nominal GDP and price levels in preventing the nominal interest rate from falling to zero is shown, primarily due to more efficient public expectations management which is a weak point of discretionary intervention. Conclusions. Under the current global factors for many developed countries and some oil-exporters, the downward trend in nominal rates persists. Combined with slowdown in economic growth, such threat may have negative consequences for the Russian economy. In this case, it seems reasonable to stick to the inflation target above 2% per year and in the future to consider switching to targeting the price level or nominal GDP.

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 Analysis of the Effectiveness of Monetary Policy Transmission through a Line of Credit and Inflation Expectations in Indonesia

2021 ◽  
Vol 8 (5) ◽  
pp. 299-309
Author(s):  
Suti Masniari ◽  
Sirojuzilam . ◽  
Dede Ruslan
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Regression Model ◽  
Interest Rates ◽  
Secondary Data ◽  
Transmission Mechanism ◽  
Output Gap ◽  
Inflation Expectations ◽  
Policy Transmission

This study aims to determine the effectiveness of the transmission mechanism of monetary policy by reviewing the amount of the deadline that required the transmission mechanism of monetary policy in achieving the goals of the final form of the output gap and inflation by using the channel of credit and inflation expectations. In addition, this study also aims to determine the relationship long-term and short against the target output gap and inflation. This study uses a regression model Vector Error Correction Model (VECM) to estimate the influence of the transmission mechanism of monetary policy to the output gap and inflation through the channel of credit and the regression model of Vector Autoregression (VAR) to estimate the influence of the transmission mechanism of monetary policy to the output gap and inflation through the channel of inflation expectations. The Data used in this research is the data series time quarter from 2008 to 2018. Data peneliltian used to estimate the influence of the transmission mechanism of monetary policy to the output gap and inflation through the channel of credit in the form of secondary data consisting of the benchmark interest rate of Bank Indonesia, the interest rates on the interbank money market 1 month, loan interest rates, money supply (M2) and the amount of working capital loans disbursed. While the data used to estimate the influence of the transmission mechanism of monetary policy to the output gap and inflation through the channel of inflation expectations in the form of secondary data consisting of the benchmark interest rate of Bank Indonesia, inflation expectations. The secondary Data used is sourced from the annual reports that are published from the official website of the Bank of Indonesia, the data of the Central Bureau of Statistics and the International Monetary Fund. The results of this study showed that the effectiveness of the transmission mechanism of monetary policy through the credit channels require the deadline each of the 8 (eight) of the quarter and 10 (ten) quarter in achieving the goals of the end of the output gap and inflation. While the effectiveness of the transmission mechanism of monetary policy through the channel of inflation expectations require the deadline each of the 4 (four) quarter and 6 (six) quarter in achieving the goals of the end of the output gap and inflation. The results also showed only policy transmission mechanism built rmelalui credit lines that have long-term relationships against inflation while the transmission mechanism of monetary policy through the channel of inflation expectations have short-term relationship strong. Keywords: The Transmission Mechanism Of Monetary Policy, Output Gap, Inflation.

scholarly journals Matching NBP interest rates to different versions of the Taylor rule

2019 ◽  
Vol 14 (2) ◽  
pp. 165-177
Author(s):  
Tomasz Grabia
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Economic Crisis ◽  
Real Interest Rate ◽  
Taylor Rule ◽  
Macroeconomic Variables ◽  
The Interest Rate ◽  
Gdp Gap

The interest rate is the basic instrument of monetary policy, directly or indirectly affecting basic macroeconomic variables, such as inflation, unemployment and economic growth. The aim of the article is to compare the NBP reference rate with hypothetical rates calculated on the basis of different variants of the Taylor rule and to indicate which of those variants is best suited to the situation in Poland. The study period of 2000-2017 was adopted for the analysis. On its basis, it was found that in most cases the real interest rate of the central bank in Poland strongly coincided with rates that would have been set if one of the varieties of the Taylor rule had been in force. The best match coincided with the modified version of this rule, which was created after the economic crisis. That means that the NBP took into account both the deviations of inflation from the target and the GDP gap when making decisions regarding interest rates.

scholarly journals ANALYSIS OF THE ECB MONETARY POLICY MATCH FOR THE NEEDS OF THE EURO AREA COUNTRIES NEEDS

Ekonomika ◽  
2013 ◽  
Vol 92 (3) ◽  
pp. 41-58
Author(s):  
Tomas Reichenbachas
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Euro Area ◽  
Taylor Rule ◽  
Currency Area ◽  
The Face ◽  
Asymmetric Shock ◽  
The Interest Rate ◽  
The One

Abstract. In this paper, using the Taylor rule (Taylor, 1993), the European Central Bank (ECB) monetary policy in 2000–2012, as well as individual interest rate needs of the euro area (EA) countries are analysed. It is assumed that the estimated Taylor rule interest rates are optimal for individual members. We have analysed whether the actual ECB interest rates and the calculated rates are different and have become more balanced towards individual countries’ needs. The work focuses attention on the last period (2008–2012) when the EA faced economic problems and an asymmetric shock. The analysis shows controversial results: on the one hand, the interest deviation mean decreases (just a little), but an increasing gap between individual needs can be seen: some countries are becoming increasingly divorced from the general EA needs. It makes them very vulnerable, and there is a risk that these countries in the face of asymmetric challenges can be “left behind” by the ECB focusing on the EA as a whole. Also, in this paper, the stationarity of the calculated deviations is analysed to help understand their nature. This approach is new, and the author is unaware of similar works. Analysis of the optimal interest rate dynamics has revealed that Germany needed the interest rates that were opposite to the needs of Spain and Greece and susceptible to divergence, so this led to the ECB difficulties in determining the proper interest for all countries’ needs. The EA as a currency area is most optimal for Belgium, Cyprus, Finland, France, Italy, and the Netherlands from the interest rate setting perspective.Key words: the Taylor rule, optimal monetary policy, asymmetric shocks, optimal currency area

scholarly journals Transmission Mechanism of Monetary Policy: Case Study of Interest Rate Channel in India

2018 ◽  
Vol 4 (02) ◽  
Author(s):  
Prakash Anant Salvi ◽  
Davinder Kaur Suri
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Real Economy ◽  
Policy Transmission ◽  
Pass Through ◽  
The Interest Rate ◽  
Interest Rate Channel

In India, prior to 1991, the tightly controlled interest rates caused impediments in the functioning of the interest rate channel of monetary policy transmission while after 1991, the RBI undertook various measures to strengthen the market-determination of interest rates. This paper has examined the evolution of the interest channel in India across the period 1985 to 2014 firstly by studying the interest rate pass-through using the Correlation matrix and the OLS technique and secondly, by studying the transmission of policy rates to the real economy using the reduced VAR model. The results show that the transmission of interest rates pass-through from policy rates to market interest rates (both - short-term as well as long-term) has strengthened while desired impact of long term market interest rates on industrial production and inflation appears to be weak.

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.

Auswirkungen der anhaltenden Niedrigzinsen auf das Versicherungswesen

2015 ◽  
Vol 64 (2) ◽  
Author(s):  
Rolf Ketzler ◽  
Peter Schwark
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Capital Investment ◽  
Investment Strategy ◽  
Economic Point ◽  
Life Insurers ◽  
Low Interest Rates ◽  
Rate Environment

AbstractThe very accommodative monetary policy of the ECB and the related extremely low interest rates are involved with major challenges for the German insurance sector, in particular for life insurers. As long-term investors, insurers are not only affected in their capital investment strategy, but also by different households’ retirement saving patterns in response to the low interest rate environment. Several significant steps have already been taken in order to ensure the long-term viability of life insurance. These include changes in the product portfolio as well as new approaches in the investment strategy. In addition, new regulatory requirements have been established to strengthen the risk bearing capacity of life insurers. Given the substantial risks of low interest rates, from an economic point of view the question concerning an appropriate exit from the low interest rate environment needs more attention in the public debate. In this context, further progress regarding the economic reform policies in the euro zone is still necessary as a condition for the ECB to normalize its monetary policy as soon as possible.

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