E58 - Central Banks and Their PoliciesReturn

This paper uses symmetric and asymmetric testing procedures to examine the issue of the relationship between the output gap and inflation for the Turkish economy using data from 2002:01 to 2021:09. First, it analyses the cointegration by applying different cointegration tests taking into account structural breaks and asymmetric behaviour to reveal whether the relation varies between sub-periods. Afterwards, it examines the asymmetric causality between different shocks. Our empirical results indicate that there is a long-run relationship between series in the existence of two structural breaks and asymmetry. The results also show asymmetric causality running from positive (negative) output gap to positive (negative) inflation shock, and running from negative inflation shock to negative output gap shock. The overall findings indicate the importance of having in mind the structural breaks and asymmetric behaviour of macroeconomic variables in policy-making processes, such as in Turkey during high and volatile inflation.

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.

Although the use of residential real estate macroprudential tools has become common in recent years, rigorous approaches to their calibration have been relatively scarce. The goal of this paper is to present an approach to (i) evaluating direct risks to financial stability related to residential real estate exposures, and to (ii) calibrating borrower-based macroprudential measures. First we present a macroprudential indicator of potential losses related to the provision of new mortgage loans. Then we show how to determine risky values of the loan-to-value, loan-to-income and loan service-to-income ratios by per-forming stress tests on the individual new mortgage loans. Finally, we demonstrate the applicability of this approach on the case of the Czech Republic. We conclude by show-ing that simultaneous adoption of several macroprudential measures may enhance their efficiency without imposing higher restrictions on the mortgage market.

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.

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.

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.

This study offers a scientific and methodical approach to identifying systemically important domestic banks based on the indicator-based measurement approach recommended by the Basel Committee on Banking Supervision. By improving both a set of criteria and indicators of a bank's systemic importance it is offered to distinguish its five levels - low, moderate, medium, significant and high. The approach was tested on 26 Ukrainian banks representing different groups (depending on the size of assets) according to the classification of the National Bank of Ukraine. We have discovered the absence of banks with high systemic importance in the period 2007-2011 - the majo-rity of banks are characterized by their moderate or low level. In our opinion, the best solution for systemic risk regulation would be the introduction of a differentiated regime of supervision over banks depending on their level of systemic importance and risk profile.

This study analyses the Czech, Hungarian, and Polish currencies by examining the statistical characteristics of the Swiss franc as well as the ECB monetary policy in order to indicate shocks in these markets between 2002 and 2013. The abundance of monetary easing decisions can be used as a viable sign of market misbehaviour in addition to the low probability of extreme exchange rate fluctuations. Indeed, the temporal distribution of extreme currency fluctuations provides vital information about the nature of the recent crisis. Contagions can be defined as increased correlations during periods of crisis, while divergence means a significant decrease in this regard. Methodologically, common movements in this study were calculated by using DCC-GARCH modelling. The findings of this study underline the special features of the Swiss franc exchange rate, notably that its extreme fluctuations can be managed by using swap agreements and that it tended towards divergences during the crisis era. These results support the idea of avoiding lending in reserve currencies.

The purpose of the paper is to analyse the current crisis of the eurozone. The irst part explains why the eurozone is not an optimum currency area. The second part points out that euro is an intensiier of the business cycle. The third part examines the Greek crisis. The fourth part explains the inner tensions in the eurozone. The ifth part asks whether euro is suitable for the countries of Central and East Europe. The sixth part examines the debt crisis within the eurozone.

Central banks do not seem to account for the impact of interest rates close to zero on the natural interest rate after the bursting of the asset bubble that triggered the financial crisis in 2008. We claim that this omission may have harmful consequences. Should interest rates close to zero persistently decrease natural interest rates that would mean a fall in TFP growth and more limited central bank's capacity to influence aggregated demand and price dynamics. We explain that interest rates close to zero may persistently reduce the natural interest rate because in the economy, requiring post-crisis restructuring, they impede the process of restructuring and facilitate forbearance lending, which crowds viable economic agents out of credit through a number of channels. To reduce these risks, the central bank could voluntarily set a lower bound for interest rates cuts at, for instance, 2%. The boundary appropriate for a given economy should be a function of its growth rate and interest rates in the pre-crisis period. We argue that irrespectively of the central bank's credibility such a change in the monetary policy conducting in economies requiring post-crisis restructuring would bring better outcomes than keeping interest rates close to zero.

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.

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 we discuss the estimation and methodology of the real equilibrium exchange rate partial equilibrium models and analyse to what extent the resulting estimates are applicable for setting the central parity prior to ERM II entry in the New EU Member States. Given the uncertainty surrounding the estimates, we argue that they are informative in the sign rather than the size of the misalignment of the exchange rate, but may still serve as useful consistency checks for the decision on the setting of the central parity. We argue that policy makers should consider the estimates in their decision-making only if the real exchange rate is substantially misaligned.

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 article presents an empirically tested assessment of the Bank of Slovenia (BS), national central bank, adjustment policy to surges in capital flows during the last decade. Exchange rate appreciation, undeveloped banking sector, immoderate money market oscillation, unstable economic trends (all phenomena that can also be found in other transition countries) are just some of the detrimental effects that can be provoked by surges in capital flows if the national economy is faced with some fundamental sectoral deficiencies. Empirical results indicated that BS quite successfully mitigated listed effects of excessive foreign currency inflows during the last decade. With the suitable combination of direct and indirect adjustment methods, BS succeeded in preventing, still vulnerable Slovenian economy from a major form of financial crisis and stronger nominal tolar appreciation (this was not the case in some other countries like Hungary, Poland, Czech Republic, Croatia) although there was some real appreciation.

This theoretical paper maps the transition experience of the financial sector using evidence from the Czech money market. Especially, the respect is paid to the structure of interest rates during the period from 1993 to 2001. The main components of the money market that mostly determine the term structure are the interbank deposit market and the market for short-term securities. The study abstains from interbank market survey and provides a detailed description of the default-free short-term securities market and its impact on past interest rate movements.

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.