This paper examines whether government ideology has influenced monetary policy in OECD countries. We use quarterly data in the 1980.1-2005.4 period and exclude EMU countries. Our Taylor-rule specification focuses on the interactions of a new time-variant index of central bank independence with government ideology. The results show that leftist governments have somewhat lower short-term nominal interest rates than rightwing governments when central bank independence is low. In contrast, short-term nominal interest rates are higher under leftist governments when central bank independence is high. The effect is more pronounced when exchange rates are flexible. Our findings are compatible with the view that leftist governments, in an attempt to deflect blame of their traditional constituencies, have pushed market-oriented policies by delegating monetary policy to conservative central bankers.
{"title":"Does Government Ideology Matter in Monetary Policy? A Panel Data Analysis for OECD Countries","authors":"A. Belke, N. Potrafke","doi":"10.2139/ssrn.1980686","DOIUrl":"https://doi.org/10.2139/ssrn.1980686","url":null,"abstract":"This paper examines whether government ideology has influenced monetary policy in OECD countries. We use quarterly data in the 1980.1-2005.4 period and exclude EMU countries. Our Taylor-rule specification focuses on the interactions of a new time-variant index of central bank independence with government ideology. The results show that leftist governments have somewhat lower short-term nominal interest rates than rightwing governments when central bank independence is low. In contrast, short-term nominal interest rates are higher under leftist governments when central bank independence is high. The effect is more pronounced when exchange rates are flexible. Our findings are compatible with the view that leftist governments, in an attempt to deflect blame of their traditional constituencies, have pushed market-oriented policies by delegating monetary policy to conservative central bankers.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130245161","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.
{"title":"Housing and Monetary Policy","authors":"John B. Taylor","doi":"10.3386/W13682","DOIUrl":"https://doi.org/10.3386/W13682","url":null,"abstract":"Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123021914","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The design of interest rate rules for conducting monetary policy have recently been examined for two key concerns. The first issue is determinacy of equilibria. Indeterminacy (multiplicity of stationary rational expectations equilibria) is a concern in models of monopolistic competition and price stickiness are currently a popular framework for the study of monetary policy. The second issue is stability of equilibria under adaptive learning. Some interest rate rules do not perform well when the expectations of the agents get out of equilibrium, e.g. as a result of structural shifts.
{"title":"Discussion of Preston, 'Learning About Monetary Policy Rules When Long-Horizon Expectations Matter'","authors":"S. Honkapohja","doi":"10.2139/ssrn.2482539","DOIUrl":"https://doi.org/10.2139/ssrn.2482539","url":null,"abstract":"The design of interest rate rules for conducting monetary policy have recently been examined for two key concerns. The first issue is determinacy of equilibria. Indeterminacy (multiplicity of stationary rational expectations equilibria) is a concern in models of monopolistic competition and price stickiness are currently a popular framework for the study of monetary policy. The second issue is stability of equilibria under adaptive learning. Some interest rate rules do not perform well when the expectations of the agents get out of equilibrium, e.g. as a result of structural shifts.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116219820","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper considers the implications of an important source of model misspecification for the design of monetary policy rules: the assumed manner of expectations formation. Following a considerable literature on learning, it is assumed that private agents seek to maximize their objectives subject to standard constraints and the restriction of using an econometric model to make inferences about future uncertainty. Agents do not know other agents’ tastes or beliefs and therefore do not have a complete economic model with which to derive true probability laws. Because agents solve a multi-period decision problem, their actions depend on forecasts of macroeconomic conditions many periods into the future, unlike the analysis of the Bullard and Mitra (2002) and Evans and Honkapohja (2002). The central question addressed is whether the learning dynamics converge to the equilibrium predicted by rational expectations equilibrium analysis. This question is considered for several prominent instrument rules for the determination of the nominal interest rate. A key result is that a Taylor rule ensures convergence to rational expectations equilibrium, if the so-called Taylor principle is satisfied, under any of a broad class of specifications of the learning dynamics. This suggests the Taylor rule to be desirable from the point of view of eliminating instability due to self-fulfilling expectations. A companion paper, Preston (2002b), demonstrates that several policy rules argued to be desirable in the recent literature on monetary policy and learning frequently lead to the propagation of self-fulfilling expectations and hence economic instability.
{"title":"Learning About Monetary Policy Rules When Long-Horizon Expectations Matter","authors":"Bruce Preston","doi":"10.2139/ssrn.2482575","DOIUrl":"https://doi.org/10.2139/ssrn.2482575","url":null,"abstract":"This paper considers the implications of an important source of model misspecification for the design of monetary policy rules: the assumed manner of expectations formation. Following a considerable literature on learning, it is assumed that private agents seek to maximize their objectives subject to standard constraints and the restriction of using an econometric model to make inferences about future uncertainty. Agents do not know other agents’ tastes or beliefs and therefore do not have a complete economic model with which to derive true probability laws. Because agents solve a multi-period decision problem, their actions depend on forecasts of macroeconomic conditions many periods into the future, unlike the analysis of the Bullard and Mitra (2002) and Evans and Honkapohja (2002). The central question addressed is whether the learning dynamics converge to the equilibrium predicted by rational expectations equilibrium analysis. This question is considered for several prominent instrument rules for the determination of the nominal interest rate. A key result is that a Taylor rule ensures convergence to rational expectations equilibrium, if the so-called Taylor principle is satisfied, under any of a broad class of specifications of the learning dynamics. This suggests the Taylor rule to be desirable from the point of view of eliminating instability due to self-fulfilling expectations. A companion paper, Preston (2002b), demonstrates that several policy rules argued to be desirable in the recent literature on monetary policy and learning frequently lead to the propagation of self-fulfilling expectations and hence economic instability.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"47 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115626119","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper estimates a dynamic stochastic equilibrium model in which agents use a Bayesian rule to learn about the state of monetary policy. Monetary policy follows a nominal interest rate rule that is subject to regime shifts. The following results are obtained. First, the author’s policy regime estimates are consistent with the popular view that policy was marked by a shift to a high-inflation regime in the early 1970s, which ended with Volcker’s stabilization policy at the beginning of the 1980s. Second, while Bayesian posterior odds favor the “full-information” version of the model in which agents know the policy regime, the fall of inflation and interest rates in the disinflation episode in the early 1980s is better captured by the delayed response of the “learning” specification. Third, the author examines the magnitude of the expectations-formation effect of monetary policy interventions in the “learning” specification by comparing impulse responses to a version of the model in which agents ignore the information contained in current and past monetary policy shocks about the likelihood of a regime shift.
{"title":"Learning and Monetary Policy Shifts","authors":"F. Schorfheide","doi":"10.2139/ssrn.2482556","DOIUrl":"https://doi.org/10.2139/ssrn.2482556","url":null,"abstract":"This paper estimates a dynamic stochastic equilibrium model in which agents use a Bayesian rule to learn about the state of monetary policy. Monetary policy follows a nominal interest rate rule that is subject to regime shifts. The following results are obtained. First, the author’s policy regime estimates are consistent with the popular view that policy was marked by a shift to a high-inflation regime in the early 1970s, which ended with Volcker’s stabilization policy at the beginning of the 1980s. Second, while Bayesian posterior odds favor the “full-information” version of the model in which agents know the policy regime, the fall of inflation and interest rates in the disinflation episode in the early 1980s is better captured by the delayed response of the “learning” specification. Third, the author examines the magnitude of the expectations-formation effect of monetary policy interventions in the “learning” specification by comparing impulse responses to a version of the model in which agents ignore the information contained in current and past monetary policy shocks about the likelihood of a regime shift.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130976629","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using a structural vector autoregression, we document that a contractionary monetary policy shock triggers a decline in durable and non-durable outputs as well as a contraction in bank equity and a rise in the excess bond premium. The latter points to an important transmission channel of monetary policy via financial markets. It has long been recognized that a standard two-sector New Keynesian model, where durable goods prices are flexible and prices of non-durables and services sticky, does not generate the empirically observed sectoral co-movement across expenditure categories in response to a monetary policy shock. We show that introducing frictions in financial markets in a two-sector New Keynesian model can resolve its disconnect with the empirical evidence: a monetary tightening generates not only co-movement, but also a rise in credit spreads and a deterioration in bank equity.
{"title":"Monetary Policy, Sectoral Comovement and the Credit Channel","authors":"F. Di Pace, C. Görtz","doi":"10.2139/ssrn.3872381","DOIUrl":"https://doi.org/10.2139/ssrn.3872381","url":null,"abstract":"Using a structural vector autoregression, we document that a contractionary monetary policy shock triggers a decline in durable and non-durable outputs as well as a contraction in bank equity and a rise in the excess bond premium. The latter points to an important transmission channel of monetary policy via financial markets. It has long been recognized that a standard two-sector New Keynesian model, where durable goods prices are flexible and prices of non-durables and services sticky, does not generate the empirically observed sectoral co-movement across expenditure categories in response to a monetary policy shock. We show that introducing frictions in financial markets in a two-sector New Keynesian model can resolve its disconnect with the empirical evidence: a monetary tightening generates not only co-movement, but also a rise in credit spreads and a deterioration in bank equity.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114797219","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Between 2000 and 2017, Latin America presented a positive economic performance, with an average GDP growth of 2.6%. This helped in the decrease of unemployment, poverty and inequality rates. Nevertheless, improvements prove to be deficient and did not better social discontent and mistrust. Hence, Latin America experienced a paradox of economic growth but simultaneous social unrest and conflicts. The present aims to address the dynamics of the paradox and provide an explanation for its occurrence. This is achieved through an analysis of the policies used by the states regarding social expenditure and macroeconomic stability, as well as their overall performance fulfilling their role as governments. It is argued that the lack of institutional presence of the government in the poorest sectors was the reason they failed in translating the economic growth into welfare.
{"title":"Understanding the Political Economy behind the Latin American Paradox: Managing Good Economic Performance but Social Discontent (2000–2017)","authors":"Enrique Vásquez","doi":"10.2139/ssrn.3443720","DOIUrl":"https://doi.org/10.2139/ssrn.3443720","url":null,"abstract":"Between 2000 and 2017, Latin America presented a positive economic performance, with an average GDP growth of 2.6%. This helped in the decrease of unemployment, poverty and inequality rates. Nevertheless, improvements prove to be deficient and did not better social discontent and mistrust. Hence, Latin America experienced a paradox of economic growth but simultaneous social unrest and conflicts. The present aims to address the dynamics of the paradox and provide an explanation for its occurrence. This is achieved through an analysis of the policies used by the states regarding social expenditure and macroeconomic stability, as well as their overall performance fulfilling their role as governments. It is argued that the lack of institutional presence of the government in the poorest sectors was the reason they failed in translating the economic growth into welfare.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123725851","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper focuses on the different perceptions about the likely impact of Islamic banks' operations on money supply. Since investment accounts with the Islamic banks carry some withdrawal facility, new money is created when the funds in these accounts go to entrepreneurs on profit sharing or murabaha basis. The paper argues that as compared to the conventional banks money creation by Islamic banks is more closely associated with the creation of additional wealth in the real sector. The resulting expansion in money supply will be smaller compared to that resulting from conventional banks' lending Out of their time and saving deposits. The Islamic banks should, therefore, be subjected to a reserve ratio smaller than that applied by the central bank to the conventional banks*.
{"title":"Impact of Islamic Modes of Finance on Monetary Expansion","authors":"M. N. Siddiqi","doi":"10.4197/ISLEC.4-1.2","DOIUrl":"https://doi.org/10.4197/ISLEC.4-1.2","url":null,"abstract":"This paper focuses on the different perceptions about the likely impact of \u0000Islamic banks' operations on money supply. Since investment accounts with the Islamic \u0000banks carry some withdrawal facility, new money is created when the funds in these \u0000accounts go to entrepreneurs on profit sharing or murabaha basis. The paper argues that \u0000as compared to the conventional banks money creation by Islamic banks is more closely \u0000associated with the creation of additional wealth in the real sector. The resulting \u0000expansion in money supply will be smaller compared to that resulting from conventional \u0000banks' lending Out of their time and saving deposits. The Islamic banks should, \u0000therefore, be subjected to a reserve ratio smaller than that applied by the central bank to \u0000the conventional banks*.","PeriodicalId":355111,"journal":{"name":"PSN: Other Monetary Policy (Topic)","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"1900-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121575791","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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