Credit-Market Imperfection and Monetary Policy Within DSGE Models

2021 ◽  
pp. 16-42
Author(s):  
Salha Ben Salem ◽  
Nadia Mansour ◽  
Moez Labidi
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Financial Stability ◽  
Dynamic Stochastic General Equilibrium ◽  
Dsge Models ◽  
Taylor Rules ◽  
Credit Market Imperfection ◽  
Credit Cycle ◽  
Dynamic Stochastic ◽  
Financial Market Frictions

This survey presented the various ways that are utilized in the literature to include financial market frictions in dynamic stochastic general equilibrium (DSGE) models. It focuses on the fundamental issue: to what extent the Taylor rules are optimal when the central bank introduces the goal of financial stability. Indeed, the latest financial crisis shows that the vulnerability of the credit cycle is considered the main source for the amplification of a small transitory shock. This conclusion changed the instrument that drives the transmission of monetary policy through the economy and pushed the policymakers to include financial stability as a second objective of the central bank.

Modelling Monetary Policy

2021 ◽  
pp. 293-316
Author(s):  
Juan Antonio Morales ◽  
Paul Reding
Keyword(s):  
Monetary Policy ◽  
Policy Analysis ◽  
Policy Decision ◽  
Central Banks ◽  
Dynamic Stochastic General Equilibrium ◽  
Dsge Models ◽  
Dynamic Stochastic ◽  
Policy Decision Making

This last chapter deals with the toolbox that central banks use to design and implement their monetary policy strategy. Central banks develop various types of model, both for forecasting and for policy analysis. The chapter discusses the main characteristics of the models used, their strengths and limitations. It assesses how dynamic stochastic general equilibrium (DSGE) models are used for monetary policy analysis. Examples are provided on how they contribute to explore fundamental, long-term policy issues specific to LFDCs. The chapter also discusses the contribution of small semi-structural models which, though less strongly theory grounded than DSGE models, can be brought closer to the available data and are therefore possibly better suited to the context of LFDCs. Attention is also drawn to the key role of judgement as the indispensable complement, in monetary policy decision-making, to model-based policy analysis.

scholarly journals Strategic deviations in optimal monetary policy

2021 ◽  
Vol 157 (1) ◽  
Author(s):  
Fabio Canetg
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Research Question ◽  
Dynamic Stochastic General Equilibrium ◽  
Time Inconsistency ◽  
New Keynesian ◽  
Optimal Monetary Policy ◽  
Current Period ◽  
Dynamic Stochastic ◽  
Implementation Of Monetary Policy

AbstractThis paper investigates the circumstances under which a central bank is more or less likely to deviate from the optimal monetary policy rule. The research question is addressed in a simple New Keynesian dynamic stochastic general equilibrium (DSGE) model in which monetary policy deviations occur endogenously. The model solution suggests that higher future central bank credibility attenuates the current period policy trade-off between a stable inflation rate and a stable output gap. Together with the loss of credibility after a policy deviation, this provides the central bank with an incentive to implement past policy commitments. The result is valid even if the central bank may recover credibility with some probability after a policy deviation. My main finding is that the central bank is willing to implement past policy commitments if a sufficient fraction of agents is not aware of the exact end date of the policy commitment. The result challenges the time-inconsistency argument against monetary policy commitments and provides a potential explanation for the repeated implementation of monetary policy commitments in reality.

Bayesian Estimation of DSGE Models

2015 ◽  
Author(s):  
Edward P. Herbst ◽  
Frank Schorfheide
Keyword(s):  
Monte Carlo ◽  
Sequential Monte Carlo ◽  
Likelihood Function ◽  
Academic Research ◽  
Dynamic Stochastic General Equilibrium ◽  
Computational Techniques ◽  
Dsge Models ◽  
Monte Carlo Techniques ◽  
Dynamic Stochastic ◽  
Theoretical Foundations

Dynamic stochastic general equilibrium (DSGE) models have become one of the workhorses of modern macroeconomics and are extensively used for academic research as well as forecasting and policy analysis at central banks. This book introduces readers to state-of-the-art computational techniques used in the Bayesian analysis of DSGE models. The book covers Markov chain Monte Carlo techniques for linearized DSGE models, novel sequential Monte Carlo methods that can be used for parameter inference, and the estimation of nonlinear DSGE models based on particle filter approximations of the likelihood function. The theoretical foundations of the algorithms are discussed in depth, and detailed empirical applications and numerical illustrations are provided. The book also gives invaluable advice on how to tailor these algorithms to specific applications and assess the accuracy and reliability of the computations. The book is essential reading for graduate students, academic researchers, and practitioners at policy institutions.

Interactive effects between monetary policy and fiscal policy based on dynamic stochastic general equilibrium model

2020 ◽  
pp. 1-12
Author(s):  
Ying Xie
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
General Equilibrium ◽  
Equilibrium Model ◽  
Control Policy ◽  
Dynamic Stochastic General Equilibrium ◽  
Economic Effects ◽  
Interactive Effects ◽  
Supply Side ◽  
Dynamic Stochastic

From the beginning to the end, monetary policy has focused too much on the control of the supply side. At present, the single supply-based monetary policy is ineffective. Therefore, it is urgent to change the current single direct supply-side regulation and control policy and replace it with a non-single and indirect control policy that combines supply and demand. Based on machine learning algorithms, this paper constructs a monetary policy analysis model based on dynamic stochastic general equilibrium methods to analyze the interactive effects of monetary policy and other policies. Moreover, this paper uses the dynamic stochastic general equilibrium model to simulate and analyze the economic effects of fiscal policy. In addition, this paper compares the economic effects of monetary policy and other policies and conducts verification and analysis through actual data. The obtained results show that the model constructed in this paper achieves the expected effect.

scholarly journals CENTRAL BANK DIGITAL CURRENCY: ECONOMIC AND LEGAL CHARACTERISTICS

2019 ◽  
pp. 94-100
Author(s):  
T.S. Hudima ◽  
V.A. Ustymenko
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Financial Stability ◽  
Banking System ◽  
Legal Framework ◽  
Central Banks ◽  
Digital Currency ◽  
Business Entities ◽  
The Right ◽  
Article 5

The article is devoted to identifying the peculiarities of the central bank digital currency (CBDC), explaining their impact on the monetary policy of the state, and identifying the prospects for the transformation of domestic banking legislation in connection with the implementation of the CBDC. It is noted that the scope of competence of the Central Bank and the legal basis for the issuance of the CBDC will depend on the economic and legal features of the digital currency, the degree of its impact on the monetary policy, the financial stability of the country’s economy and so on. In the process of forming the appropriate legal field and defining the conceptual apparatus in the sphere of emission and circulation of the CBDC, the peculiarities of the use of the latter in economic transactions and the specific functions not inherent in ordinary means of payment should be taken. СBDC initiatives will help: 1) progressively narrow the banking system at the level of the Central Banks (such as the Chicago Plan) by allowing individuals and businesses to deposit directly into the accounts of the Central Banks; 2) increasing confidence of economic entities and individuals in the financial system; 3) strengthening the financial stability of the economy (both domestically and globally). Granting business entities or individuals the right to store digital money directly with the Central Bank can give rise to two main directions of influence on monetary policy: first, to strengthen its transmission mechanism; secondly, lead to banks being disrupted. This may lead to some legal issues regarding (1) the NBU’s area of competence; (2) the constitutional foundations of the legal economic order (Article 5 of the ECU). In particular, it cannot be ruled out that centralization of the production, servicing, and management of the СBDC turnover may violate the principles of competition in business activities, prevent abuse of monopoly position in the market, etc. Keywords: monetary policy, central bank digital currency, financial stability, competence, legal framework, economic operations, issue.

scholarly journals Outline of the Evolution of the Hungarian Monetary Policy from the Restoration of the Two-level Banking System to the Present Day

2021 ◽  
Vol 6 (1) ◽  
pp. 103-116
Author(s):  
Csaba Lentner
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Financial Stability ◽  
Banking System ◽  
Second Phase ◽  
Third Phase ◽  
Monetary Regime ◽  
New Type ◽  
Real Essence ◽  
Different Characteristics

This study outlines the development of Hungary’s monetary policy, and the course and changes in its objectives and instruments since the beginning of the market economy transition in the late 1980s. The author’s basic thesis is that the period since the two-level banking system was reinstated after four decades of a planned economy system, in 1987, can be basically divided into three development phases with significantly different characteristics. The first phase was an ‘attempt to introduce’ an imported monetary mechanism, or perhaps an urge to comply with it, while the second phase was an approach of a monetary regime change launched in 2013 and supporting economic growth and financial stability strongly and directly, which lasted until the appearance of the traumatic elements of the Covid-19 pandemic crisis. The third phase is evolving today, under the circumstances of adapting to the conditions of the real essence of the twenty-first century, i.e. a new type of international competitiveness, which is pursued by the Central Bank of Hungary as stipulated by the Fundamental Law and the cardinal Central Bank Act of Hungary.

Business cycles in Ethiopia under alternative monetary policy rules

2019 ◽  
Vol 10 (3) ◽  
pp. 299-313
Author(s):  
Wondemhunegn Ezezew Melesse
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Business Cycle ◽  
Central Bank ◽  
Capital Mobility ◽  
Developing Economies ◽  
Dsge Models ◽  
Money Growth ◽  
Content Type ◽  
Policy Shocks

Purpose The purpose of this paper is to compare business cycle fluctuations in Ethiopia under interest rate and money growth rules. Design/methodology/approach In order to achieve this objective, the author constructs a medium-scale open economy dynamic stochastic general equilibrium (DSGE) model. The model features several nominal and real distortions including habit formation in consumption, price rigidity, deviation from purchasing power parity and imperfect capital mobility. The paper also distinguishes between liquidity-constrained and Ricardian households. The model parameters are calibrated for the Ethiopian economy based on data covering the period January 2000–April 2015. Findings The main result suggests that: the model economy with money growth rule is substantially less powerful or more muted for the amplification and transmission of exogenous shocks originating from government spending programs, monetary policy, technological progress and exchange rate movements. The responses of output to fiscal policy shocks are relatively stronger under autarky which appears to confirm the findings of Ilzetzki et al. (2013) who suggest bigger multipliers in self-sufficient, closed economies. With regard to positive productivity shock, however, the model with interest rate feedback rule generates a decline in output and an increase in inflation, which are at odds with conventional empirical regularities. Research limitations/implications The major implication is that a central bank regulating some measure of monetary stocks should not expect (fear) as much expansion (contraction) in output following currency devaluation (liquidity withdrawal) as a sister central bank that relies on an interest rate feedback rule. As emphasized by Mishra et al. (2010) the necessary conditions for stronger transmission of interest-rule-based monetary policy shocks are hardly existent in emerging and developing economies targeting monetary aggregates; hence the relatively weaker responses of output and inflation in the model economy with money growth rule. Monetary policy authorities need to be cautious when using DSGE models to analyze business cycle dynamics. Quite often, DSGE models tend to mimic the proverbial “crooked house” built to every man’s advise. Whenever additional modification is made to an existing baseline model, previously established regularities break down. For instance, this paper documented negative response of output to technology shock. Such contradictions are not uncommon. For example, Furlanetto (2006) and Ramayandi (2008) have also found similarly inconsistent responses to fiscal and productivity shocks, respectively. Originality/value Using DSGE models for research and teaching purposes is not common in developing economies. To the best of the author’s knowledge, only one other Ethiopian author did apply DSGE model to study business cycle fluctuation in Ethiopia albeit under the implausible assumption of perfect capital mobility and a central bank following interest rate rule. The contribution of this paper is that it departs from these two unrealistic assumptions by allowing international risk premium as a function of the net foreign asset position of the country and by applying money growth rule which closely mimics the behavior of central banks in low-income economies such as Ethiopia.

The Over-Burdened Central Bank and the Shift Away from Autonomy

2017 ◽  
Author(s):  
Pierre L. Siklos
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Financial Stability ◽  
Central Banks ◽  
Central Banking ◽  
Forward Guidance ◽  
Self Assessments ◽  
Crisis Conditions ◽  
Central Bankers ◽  
Influence Behavior

Many central banks took on additional responsibilities. Inadequate self-assessments remain unfinished almost a decade after the crisis erupted. Government-central bank relationships need to be conditioned on whether times are normal versus crisis conditions. Transparency confronts ambiguity when central banks must communicate the outlook and the conditionality of their decisions. Forward guidance was taken too far and ended up being futile. Central bankers simply exhausted their ability to influence behavior through mere words or ambiguous statements. This is a self-inflicted wound for institutions that are seen as overburdened. These forces leave central banking more vulnerable than is commonly acknowledged. Squaring the conventional objectives of monetary policy with the unclear aims of financial stability is difficult. Adequate limitations on the authority of central banks have yet to be thoroughly debated. We are nowhere near resolving the inherent tensions between old and new sets of central bank objectives.

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