E52 - Monetary PolicyReturn

Uncertainty about monetary policy associated with uncertainty in interest rate is an important determinant of economic decisions. Due to the dominant position of the US economy on global financial markets, in addition to countries' own uncertainties, uncertainty related to the monetary policy of the USA may have an impact on other economies. In this study, we investigated the impact of interest rate uncertainties for different maturities on industrial production, inflation, unemployment and exchange rate. We used the impulse response functions based on the vector error correction model (VECM). We also conducted the Granger causality test to analyse the causality. We examined the impact of US monetary policy uncertainty on the mentioned variables of Turkey. Our findings suggest that uncertainty in long-term interest rates increases unemployment and inflation rates. Although we find that uncertainty in interest rate reduces growth of industrial production, we do not find a causal relationship between these variables. Finally, we show that a shock related to US monetary policy uncertainty tends to increase unemployment significantly, while reducing the growth of production.

The active participation of the central bank in exchange rate management has accelerated the growth of foreign exchange reserve in India. The massive reserve stockpiling has substantially contributed to apprehensions about excess liquidity in the domestic economy. The extent to which these concerns are justified depends on the degree to which the central bank is able to mitigate its effects on monetary aggregates. This study is an attempt to assess the magnitude of the sterilization coefficient by using quarterly data from 1996 to 2019. In order to estimate sterilization and offset coefficients, the study employed the two-stage least squares (2SLS) method under the theoretical framework of simultaneous equation modelling. The findings show that the reserve accumulation through central bank interventions puts pressure on money supply. However, the RBI sterilization policy was effective as the central bank was able to sterilize 93 percent of its interventions, while the offset coefficient was 72 percent during the period of study. The low value of the offset coefficient compared to the sterilization coefficient indicates a high degree of monetary policy independence in neutralizing the central bank's purchase interventions. Based on the findings, it can be recommended that policymakers should consider the sustainability of interventions and sterilization operations as the dual policy objectives of independent exchange rate management and monetary policy cannot be achieved in the presence of a high interest rate in an inflation-targeting regime.

European emerging and transition economies are in immense need of investments and renewal of capital, yet they produce a considerable amount of unutilized resources. In particular, banks hold excess liquidity in the face of seemingly profitable lending opportunities. Is it a demand-side or supply-side problem or is this region entirely different and have we been working under the wrong paradigm? This study creates a new estimate of excess liquidity by taking into account banks' overall liquidity position. Breaking down precautionary from involuntary excess liquidity, a significant presence of the latter is evident. A part of the story deals with insensitivity of deposits to interest rates. Based on our standard understanding of how banks work, this is puzzling and this study creates a new way to look at this. Using new measures is the way to launch the investigation of causes and policy implications for involuntary excess liquidity.

This paper analyses the effects of the ECB Corporate Sector Purchase Programme (CSPP) on yields of corporate sector bonds and its impact on the corporate sector's debt markets. The CSPP started as a part of an existing asset purchase programme and significantly affected corporate bond markets. Any research undertaken in this area of the ECB's respective actions is fairly limited due to the restrained access to data and its OTC nature. This paper analyses CSPP effects by using two distinct methods - a detailed regression-controlled event study and an impulse-response analysis of constructed VAR models. This study addresses questions regarding time, size and place of effects caused by the CSPP on corporate bond markets and deals in detail with related issues and related economic theory backgrounds. A series of obtained sector, country and company-specific results gives us a picture of the non-negligible impact of the CSPP on purchased bonds and of the size and persistency of stock and flow effects of the ECB's actions.

Global economic policy uncertainty (GEPU) is one of important phenomena in the global economy; it can impact on the overall economic performance and stock market per-formance, regardless of the status of the world economy. Thus, this paper empirically investigates the impact of global economic policy uncertainty on the Malaysian stock market over the period from 10:2003 to 2017:03. Using the GARCH model, the study demonstrates that global policy uncertainty affects the Malaysian stock market negatively. Similarly, the SVAR model also shows results consistent with the GARCH estimation. Nevertheless, the Markov switching estimation uncovers that global policy uncertainty has negative impacts on stock market performance in both low and high volatile market states. The impact is, however, greater during the high volatile state. Hence, the relationship between global economic policy uncertainty and stock market returns tends to be asymmetric. The overall empirical results infer that global economic policy uncertainty has some implications for asset pricing.

Using the factor-augmented vector autoregressive (FAVAR) model proposed by Bernanke et al. (2005), this study explores the effect of monetary policy on a wide range of macroeconomic and financial variables for the US, Canada and the UK. The study makes use of financial data from 1990 to 2016, comprising 55-70 variables of the three major nations to show (1) that factors come with additional informational capability, which summarizes the performance of key macroeconomic variables and (2) the manner in which these variables are affected by contractionary monetary policies. Our findings confirm that monetary policy tightening results in decrease in industrial production, employment, share prices, housing starts and inflation; however, it leads to increase in the three-month treasury bill rate, long-term interest rates and unemployment. Overall, the impact of standardized monetary tightening is similar across the countries studied. These results from the major economies and the inclusion of larger data sets containing more variables would be relevant for policy theorists and practitioners from other countries.

We examine central banks' involvement in inflation forecast targeting by means of an index-based analysis and ordered logistic regression. The research encompasses the Bank of England, the Czech National Bank, the National Bank of Poland and the Sveriges Riksbank. They produce conditional or unconditional macroeconomic forecasts. Hence, two paths have been used to examine them. We examine whether the four central banks follow their forecasts to some extent. We have found that the CNB and SR are highly consistent in terms of compatibility of their decisions with the forecasts, timing of decisions, and communication by means of forecasts. The NBP follows its forecast much less consistently, while the BoE ignores it altogether. As some of the results for the BoE and NBP are unambiguous, we remain cautious while interpreting them. This paper contributes to the literature on the empirical evaluation of inflation forecast targeting.

Interest rates in many advanced countries have reached zero lower bound and this has led to the widespread use of unconventional monetary policies after the global crisis. Hence, it has been more and more important to better understand the effects of these policies on major economic variables and the transmission mechanism through which they influence the economy. This study analyses the impact of quantitative easing (QE) policies on local currency government bond yield in emerging market (EM) economies in a heterogeneous panel setting. An Augmented Mean Group (AMG) estimator is used that allows for cross-sectional dependence and heterogeneous slopes. Model results show that government bond interest rates in EM economies are determined by country-specific factors such as central bank policy rate, inflation and budget deficit as well as external global factors such as US ten-year government bond yield and QE policies of advanced countries' central banks.

We explore the procyclicality of monetary policy decisions towards the financial cycle in the 1995-2015 period on a sample of seven central banks. Using the real interest rate gap and the credit-to-GDP gap, we provide evidence that monetary policy procyclicality is a material issue occurring in more than 50% of observations in expansionary phase of financial cycle. It indicates that the central bank faces conflicting objectives of price and financial stability (as proxied by cyclical systemic risk). Nevertheless, taking into consideration all financial cycle phases, complementariness between price and financial stability is more frequent than cases with conflicting objectives in the UK, Euro Area and the US. The occurrence of potential procyclical behaviour of monetary policy (especially in the financial cycle expansion phases) underlines the need for proactive macroprudential policy.

We investigate commonality and heterogeneity of inflationary processes in ten Central and Eastern European (CEE) countries over the period 2001-2013. The research is important for the analysis of monetary policy as it helps understand the origin of price formation from both sectoral and country perspective. With a multi-level factor model we decompose product-level inflation rates into the CEE region-wide, sector, country, country-sector, and idiosyncratic components. The outcomes indicate that CEE region-wide and country specific components are more persistent than sector and product-level components, which is in line with similar studies for core EU countries. Regional factors explain about 17% of variance in monthly price changes, which is more than any other factors (below 10% each). This result is at odds with the assumptions of many sectoral DSGE models and empirical evidence on the importance of sectoral price shocks in developed economies. The difference may be related to the conclusion that the first regional factor is associated with common disinflationary process that occurred in CEE economies in the 2000s, whereas the second one reveals significant correlations with global factors, especially commodity prices and euro area price developments.

The goal of the article is to verify the credibility of time contingent Forward Guidance (FG) as well as its possible time-inconsistency based on the rarely addressed example of the National Bank of Poland (NBP). The NBP's FG constitutes a unique case study as this measure in its 'Odyssean' form was not introduced to overcome the limits of further policy rates cuts. It allowed us to verify the FG's credibility and time-inconsistency by applying OLS and GMM estimated contemporaneous and forward looking Taylor type rules with interest smoothing. Our empirical evidence reveals that the annual period of FG in Poland was perceived as a credible promise by consumers. We found that time-consistency could have been an additional factor enhancing the considerable credibility of FG. The satisfying results of the NBP's FG appear to be especially interesting, in particular, when contrasted with the often unfavourable experience with time-contingent FG of prominent central banks. We suppose that to achieve this, the central bank should act with caution and the NBP indeed did so by specifying carefully the short horizon of the commitment to be able to abandon FG when the circumstances change. We also discuss FG by opposing its advantages and the drawbacks indicated in the subject literature.

The question on the inflation expectations management is one of the most important ones from the central bank's point of view. The inflation forecast can be a helpful tool of managing expectations. If it actually is, the interdependences of the inflation forecast and expectations can be observed. The existence of such interdependences opens the field for determining the preconditions that might support expectations formation. The hypothesis assumes that associations of inflation forecasts and inflation expectations depend on the central bank's credibility and consistency in inflation forecast targeting. The research covers the Czech National Bank, the National Bank of Hungary, the National Bank of Poland and Sveriges Riksbank. The research combines qualitative and quantitative methods. The research uses survey-based expectations quantified with probabilistic method. The main finding is that the relatively high level of credibility and consistency in inflation forecast targeting is not sufficient to achieve strong interdependences of inflation forecast and expectations.

In this article, we investigate the actual level of monetary policy independence in the Czech Republic. We formulate the research agenda in terms of the Euro Dominance Hypothesis. The situation of the non-euro EU countries with derogation in terms of joining the EMU, like the Czech Republic, is similar to the pre-euro situation of the euro area countries, in which the problem of the stability of the European Mechanism System was predominant. We investigate the co-movement of interest rates between the Czech Republic and the Eurozone to assess the potential costs of monetary integration. Using cointegration and VECM methods we show that the ECB monetary policy influences monetary policy in the Czech Republic and the actual level of monetary independence in the Czech Republic is much lower than it is presumed. Therefore, we argue that for the Czech Republic the cost of the joining the EMU will be lower than expected.

The Czech Republic, Hungary, and Poland are set to join the Economic and Monetary Union (EMU) in the near future. This paper offers a framework for the quantitative evaluation of the economic costs of joining the EMU. Using an open economy dynamic general equilibrium model with sticky prices, we investigate the economic implications of the loss of monetary policy flexibility associated with EMU for each of these economies. The main benefit of this general equilibrium approach is that we can directly evaluate the effects of monetary policy in terms of welfare. Our findings suggest that the Czech Republic and Poland may experience sizable welfare costs as a result of joining the EMU. Results for Hungary are less striking as welfare costs in this country seem to be negligible in the benchmark economy. Nevertheless, costs of joining the EMU are higher if government shocks are important and when the trade share with the EMU is small.

Today inflation targeting regime is often used to conduct monetary policy in most developed economies. In this regime, a central bank manipulates its key interest rate to steer an economy to the objectives it wants to achieve. To implement its monetary policy, Taylor rule is claimed to be a quantitative tool used as a guide for setting interest rate in response to the state of the economy. Despite its widespread popularity, the Taylor rule is just an orientational guidance at best and cannot be followed strictly since it would be against the common practice of conducting monetary policy of most central banks. Therefore, we propose a new rule for inflation targeting monetary policy based on fuzzy control technique. This rule seems to be able to quantify those widely accepted qualitative knowledge on monetary policy. Further, the policy derived by this rule also better captures the common behaviour of central banks. We verify this rule on the monetary policy conducted by the Czech National Bank in the period from 2000 to 2011. We also compare the result of this rule with the results obtained by implementing monetary policy by some other alternative rules.

The aim of our paper is to formulate and empirically verify the simple backward looking econometric model of the monetary policy rule, which would be able to describe the development of monetary policy rate, namely only on the basis of statistically measured and at the given time available information. We focus on the Czech National Bank, the National Bank of Poland and the Magyar Nemzeti Bank in the period of January 1999 to April 2012. In the present paper we discuss some methodological problems associated with the ex-post empirical verification of the central bank's monetary policy rule. We construct an empirical model of the monetary policy rule, justify the choice and the inclusion of explanatory variables, analyse the statistical properties of time series, and verify the alternative forms of econometric models. Our analysis showed that the development of monetary policy rate in the reporting period can be explained by the past and present development of four explanatory variables: yearly inflation rate, exchange rate, ECB main refinancing rate and growth rate of M2. The annualized inflation rate proved to be statistically insignificant in the model. We find interesting that the statistical quality of the estimated model was further increased after a six-month lag of the annual inflation rate added to the model.

In case that a central bank is withdrawing excess liquidity, there arises a question whether the monetary policy based on repo operations (withdrawal repo) is identically efficient as the monetary policy relying on repo rate connected with reverse repo (issuance repo) when central banks provide liquidity. The analysis of this problem is a main subject of the article. Authors develop microeconomic model of commercial bank behaviour, which is used for the definition of conditions when the interest rate policy of central bank based alternatively on repo rates for repo and reverse repo operations is efficient. Statistical data (time series of 1998 - 2011, monthly data frequency) are analysed and econometric verification of alternative forms of econometric models is performed. The authors arrived at a conclusion that the Czech National Bank's monetary policy operating in conditions of excess liquidity withdrawal through repo operations is efficient. In case of the Czech Republic an increase in repo rate on withdrawal repo should lead to an increase in interest rates of commercial banks and to a reduction in the credit activity of commercial banks and hence to the successful implementation of Czech National Bank's restrictive monetary policy.

Channels through which monetary policy affects aggregate demand can be divided into three groups: traditional interest rate channel, other asset price channels and credit channel composed of balance sheet channel (named also broad credit channel), only recently separated bank capital channel and bank lending channel. Banks face troubles in keeping their present or acquiring new financial sources, when central bank tightens its monetary policy. Banks characterized by differences in size, capitalization, liquidity and ownership face different levels of informational asymmetry and are therefore differently affected by changes in monetary policy. If larger, better capitalized, more liquid, state owned and/or domestically owned banks respond weaker to changes in monetary policy it is possible to argue that bank lending channel is effective. This hypothesis is tested on a panel of annual data for individual Slovenian banks in the period between 1993 and 2007 using general method of moments. Results largely confirm the existence of the bank lending channel in Slovenia.

In this article we argue that the balance sheet of a central bank contains valuable information for the quality of a currency. As an illustration we analyze the balance sheet of the Federal Reserve System (FED) during the subprime crisis between June 2007 and December 2008. Until September 2008 the balance sheet of the FED did not expand strongly. However, the structure of the FED assets varied pronouncedly. Starting in September 2008 the balance sheet expanded dramatically. The calculation of certain balance sheet ratios supports the assessment of an important decrease of the quality of the currency. Our analysis shows that the analysis of central bank balance sheet policies should not rely solely on quantitative issues but rather include qualitative issues.

In this paper I use an open economy DSGE model and estimate it for Romanian economy using Bayesian techniques. Based on estimation I derive a smoothed estimation of the output gap. I compare the results with those from standard procedures to estimate the output gap, the Hodrick Prescott ilter, the production function and an unobserved components model. The results show that the DSGE approach can give a better picture of the output gap and it is more consistent with the dynamics of Romanian economy.

The paper deals with the relationship between monetary policy and asset prices. Besides surveying the general discussion, it attempts to extend it to recent developments in the New Member States of the EU (NMS), namely the Czech Republic, Hungary, Poland and Slovakia (the EU4). After a brief description of the current macroeconomic situation in the NMS, the appropriate reaction of monetary policy to asset price bubbles is analysed and the main pros and cons associated with this reaction are summarized. Afterwards, the risks of asset market bubbles in the EU4 countries are evaluated. Since the capital markets are still underdeveloped and the real estate price boom seems to be a natural reaction to the initial undervaluation, the risks are viewed as rather small. The conclusion is thus that it is crucial for central banks in mature economies as well as in the NMS to conduct their monetary policies as well as their supervisory and regulatory roles in a way that does not promote the build-up of asset market bubbles. In exceptional times, central banks of small open economies must be ready to use monetary policy steps as a kind of insurance against the adverse effects of potential asset market bubbles.

Perhaps the most notable development in the area of monetary policy over the last decade is the growing popularity of inflation targeting. This regime is based to a great extent on communication and, more specifically, on using and communicating assessments of future inflation. The central banking literature, however, devotes surprisingly little attention to some important issues connected with such assessments. There are some non-trivial choices that need to be made regarding future inflation assessments on three distinct levels: construction, decision making and communication. One of the most important choices relates to the treatment of central bank's behaviour within the assessment. We differentiate between forecast and simulation as two basic ways of assessing future inflation and we discuss the pros and cons of using the two ways of assessing future inflation on the three above-mentioned levels.

This paper tries to assess the conditions under which the CNB operates. Using a basic framework suggested by Mishkin (2000), the aim is to find out whether the central bank is able to conduct high-quality monetary policy. First, general principles that central banks should follow to succeed in their pursuit of monetary goals are theoretically introduced. Then, these theoretical principles are looked at in the Czech context. Issues of the strictness and suitability of concrete monetary policy of the CNB will not be dealt with, rather institutional circumstances that potentially allow successful policy are at the centre of this paper. It is concluded that the CNB is functioning in a moderately good environment, but still much room for improvement does exist.

The paper offers a preliminary analysis of possible spontaneous euroization in the Czech economy. After a brief general introduction of the issue of currency substitution it specifically discusses two things. First, the transmission channels of potential spontaneous euroization, through which the process could possibly complicate the implementation of domestic monetary policy. Second, it analyses the degree of euroization. Among the transmission channels, attention is paid to interest rate and exchange rate channels. The circumstances under which the transmission would be sub-optimal are discussed. Besides the impact on the monetary policy transmission, another risk of progressive spontaneous euroization is seen in the shift of the exchange rate risk from bigger to smaller enterprises in the economy. The available data do not allow a precise measurement of the degree of euroization. Nevertheless, both the ratio of euro-denominated over koruna-denominated deposits and the CNB's survey in 2003 suggest that euroization is not an obstacle for the Czech monetary policy at the moment.

Estimation of the costs of disinflation policy is usually done using the sacrifice ratio (SR) coefficient. This paper provides two alternative estimates of SR for the Czech economy. The estimates are based on relatively simple, but transparent and verified models, i.e. their vector autoregression and vector moving average representations. When we analysze our estimates of the Czech SR from the accuracy point of view, we see that the results are very sensitive to the way of definition of monetary shocks. Even though the individual estimates of the SR are generally not accurate enough for monetary policy decision making, there is a good probability that the Czech SR was negative during the transition period analysed, with relatively low absolute value. We may therefore assume that if the Czech National Bank decides to incur monetary restriction, such action would not have long-term significant negative impact on output.

This paper uses a small-scale dynamic rational expectations model based on an openeconomy version of Fuhrer-Moore-type staggered wage setting to quantify the secondround effects of selected supply-side shocks and of shocks to the nominal exchange rate on wages and subsequently on inflation. In order to analyse the desired reaction of the central bank to these shocks, optimal time-consistent policy rules are derived within the presented New-Keynesian framework. The conclusions presented in the paper suggest that the second-round effects of shocks to import prices and the nominal exchange rate on inflation should not be ignored in practical policy-making.

This paper deals with the implementation of the inflation targeting regime in Poland. The study contributes to the discussion about opportunities and constraints of inflation targeting in the more advanced transitive economies. This analysis of monetary policy issues is based on an econometric investigation of the Polish inflation time series and on the estimation of the links between monetary policy instruments and inflation. In comparison with the Czech Republic, the Polish inflation targeting strategy faces more obstacles and limitations that are caused by the structural characteristics of Polish inflation and the country's less advanced money market.

This article addresses the issue of macroeconomic policies in the pre-accession period. The key theme is an assessment of the relationship between the real and nominal convergence of the candidate countries towards the EU. Support for real convergence cannot procced on a long-term basis in contradiction to the nominal convergence criteria. Despite a renewal of growth in 1999, a whole range of persisting structural problems, chiefly in the fiscal area, confirm the benefit of voluntary pursuance of the nominal concergence criteria. Fof the central bank, the inflation criterion is particularly relevant. The issue of catchingup with the EU price level is discussed from this point of view. Neither the theoretical models (the law of one price and the Balassa-Samuelson effect) nor the empirical evidence provide arguments for abandoning the efforts for price stability. The most appropriate monetary policy regime linking the interests of monetary policy and government economic policy is inflation targeting.