In this study I investigate what impact monetary policy shocks have on firms’ fixed investment, the less liquid portion of gross investment that requires more planning. I account for firms facing financial constraints firms by utilizing a common measure of asset size, which is used in previous literature. I use two exogenous, continuous series of monetary policy shocks to show that constrained firms have statistically different responses to policy than unconstrained firms. Specifically, I find that constrained firms’ fixed investment significantly responds more to monetary policy shocks than unconstrained firms.
In recent decades, there has been a trend in increasing the level of independence of central banks. The key factor that has contributed to a growing interest in this concept is grounded in economic theory that confirms the link between a lower inflation rate and a greater level of central bank independence. For this reason, in many countries, the existing regulations relating to central bank have been modified to protect its position from the absolute influence of the executive power of the state. This trend was particularly prevalent in transition countries, which was conditioned primarily by the EU accession criteria. The aim of this paper is to analyse independence of the Central Bank of Montenegro through the prism of functional, institutional, financial, and personal independence, and to assess the level of its legal independence by using appropriate indices.
Research background: The study contributes to the field of monetary economics. In the practice of monetary policy, all central banks have a vivid interest in distinguishing between signals and noise in the data.
Purpose: The study investigates from a frequency-domain perspective the interlinkages between money, loans, inflation and real GDP for the euro area.
Research methodology: The research methodology includes a combination of a time-series single-equation estimation approach with a frequency decomposition analysis.
Results: Broad monetary measures are found to add positively and significantly to euro area inflation over longer horizons and so do loan developments. Over medium-term horizons, real economic and exchange rate developments seem to exert a significant impact. Over shorter horizons, none of the variables under consideration affects inflation in a significant way. Robustness checks confirm the overall results. Monetary aggregates also seem to explain house price developments at lower frequencies. In addition, real GDP and exchange rate (possibly reflecting an income effect) exert a strong and significant impact, while stock prices show a substitution effect.
Novelty: The paper adds to the studies focusing on the driving forces of inflation and growth over various time horizons, with the conclusion that central banks should adopt medium-term orientation and always closely monitor real, monetary and exchange rate developments in conjunction.
This study examines the problem that a central bank may face after exiting a monetary quantitative easing policy. It develops a simple dynamic optimization model of a central bank, which finds that if the bank needs to absorb a substantial amount of excess reserves when exiting, the monetary base may become uncontrollable. In this case, the bank has no option but to increase the monetary base by more than the target amount, which leads to an undesirable money supply expansion and, ultimately, to inflation pressures. The model shows the condition when a central bank faces such a challenging situation.
Employing Factor Augmented Vector Autoregression (FAVAR) model where factors are obtained using the principal component analysis (PCA) and the parameters of the model are estimated using Vector Autoregression framework, we analyse how changes in monetary policy variables impact inflation, output, money supply, and the financial sector in India. Our results for the period 2001:04 to 2016:03 show that the benchmark FAVAR model showed more reliable results than baseline VAR model. Benchmark FAVAR model shows the existence of weak ‘liquidity puzzle’ in India. The impulse responses from the FAVAR approach reveal that monetary policy is more efficient in explaining the variations in inflation rather than stimulating output indicating its effectiveness in attaining the objective of price stability.
In the aftermath of the UK referendum on June 23rd, 2016 that resulted in a sonorous negative decision regarding the willingness of the British people to remain in the EU, a significant number of alarming questions have emerged. Although Europe should have forged in crises, nowadays, many compromises have to be made in order to maintain the European construction as intact as possible. The question we attempt to answer is whether a new phase of unconventional monetary policy in the form of QE would be appropriate to lessen the threat of an upcoming crisis. This is why we examine Eurozone QE perspectives through the prism of the new EU era without the UK in order to highlight the pros and cons of the historical Brexit decision. As new rounds of unconventional monetary policy are believed to be essential for supporting the weaker countries in the European south, perspectives of non-conventional success could alter and optimal policies be substantially reformulated subject to the newly-arising constraints. Based on the main scenarios about the UK’s relations to the European Union in the near future, we estimate how a new round of non-conventional measures could affect the Britons as well as the European citizens. Moreover, we try to assess the viability of each of these outcomes through the spectrum of a monetary-driven decision-making.
The article presents the results of the review of the empirical literature regarding the impact of quantitative easing (QE) on emerging markets (EMs). The subject is of interest to policymakers and researchers due to the increasingly larger role of EMs in the world economy and the large-scale capital flows occurring after 2009. The review is conducted in a systematic manner and takes into consideration different methodological choices, samples and measurement issues. The paper puts the summarized results in the context of transmission channels identified in the literature. There are few distinct methodological approaches present in the literature. While there is a consensus regarding the direction of the impact of QE on EMs, its size and durability have not yet been assessed with sufficient precision. In addition, there are clear gaps in the empirical findings, not least related to relative underrepresentation of the CEE region (in particular, Poland).
The main motives behind the adoption of an inflation targeting regime largely relate to the notion of credibility, transparency of monetary policy and the autonomy of the central bank, which explicitly undertakes to achieve a certain inflation target. This paper examines the effects of inflation targeting in emerging economies in relation to the degree of independence of the central bank and the credibility of monetary policy. We find effects in emerging economies with little central bank independence, so our findings suggest that the central bank’s credibility, transparency and independence is a prerequisite for emerging economies to experience a decline in inflation following the adoption of inflation targeting.
The aim of this paper is to analyze controversies of modern macroeconomic theories in the period of the global economic crisis. Ideas, disagreement and similarities between the most important theories in relation to state intervention and anti-crisis economic policy are presented. The topical research has found a connection between the roots of the global economic crisis and the paradigm of new liberal theories. The crisis has confirmed that the idea of self-regulation in the private sector is untenable in practice. In times of crisis, the leading theoretical framework in economic policy is reexamined. Rules-based monetary and fiscal policies are replaced by discretionary decision-making. In the world economies affected by the crisis, anti-Keynesian cyclical measures of monetary and fiscal policies were implemented. A comprehensive and unequivocal reaffirmation of Keynesianism in anti-crisis policies has confirmed the assumption of the circularity of economic theories. Central banks quickly reduced their key interest rates and increased their money supply. Fiscal authorities implemented expansive stimulus programs. When creating a new macroeconomic paradigm, market imperfection must be taken into account as well as a limited range of government economic policies.
This paper aims to survey the existing literature, both theoretical and empirical, on the relationship between monetary policy and economic growth. While there has been a wide range of studies on the existing relationship between monetary policy and economic growth, the nexus between the two remains inconclusive. This paper takes a comprehensive view of the theoretical evolution of the relationship and the respective recent empirical findings. Overall, this paper shows that the majority of findings support the relevancy of monetary policy in supporting economic growth, mainly in financially developed economies with fairly independent central banks. The relationship tends to be weaker in developing economies with structural weaknesses and underdeveloped financial markets that are weakly integrated into global markets. This paper concludes that monetary policy matters for growth both in the short-run and long-run despite the prevailing ambiguous relationship. The paper recommends intensive financial development measure for developing countries as well as structural reforms to address to supply side deficiencies.