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To analyze monetary policy implementation in a negative rate environment, we add the option to exchange central bank reserves for cash to the standard workhorse model of monetary policy implementation (Poole 1968). Importantly, we...
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To analyze monetary policy implementation in a negative rate environment, we add the option to exchange central bank reserves for cash to the standard workhorse model of monetary policy implementation (Poole 1968). Importantly, we show that monetary policy can be constrained when the target overnight rate is below the yield on cash. At this point, the overnight rate equals the yield on cash instead of the target rate. Modifications to the implementation framework, such as a reserve requirement that varies with cash withdrawals, can help restore the implementation of monetary policy such that the overnight rate equals the target rate.
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Like the gold standard, price-level targeting (FT) involves not letting past deviations of inflation be bygones; both regimes return the price level (or price of gold) to its target. The experience of suspension of the gold standa...
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Like the gold standard, price-level targeting (FT) involves not letting past deviations of inflation be bygones; both regimes return the price level (or price of gold) to its target. The experience of suspension of the gold standard in World War I andresumption in the 1920s (for some countries at a different parity) is reviewed. It suggests that, in practice, FT might operate with an escape clause that would allow rebasing of the price target in the face of large shocks. Using a calibrated general equilibrium model, we show that such an escape clause can produce multiple equilibria. For some parameterizations, there is a low credibility equilibrium (with high expectation of a reset) associated with high output volatility and frequent resets. Theseproblems reduce, or reverse, the expectational advantage FT has over inflation targeting.
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Several countries have recently adopted explicit inflation targeting (EIT). This paper applies probit analysis on data for 22 countries to show that the degree of central bank independence is positively correlated with the probabi...
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Several countries have recently adopted explicit inflation targeting (EIT). This paper applies probit analysis on data for 22 countries to show that the degree of central bank independence is positively correlated with the probability that inflation targeting is adopted. There is also evidence (depending on whether Iceland and Norway are included in the sample) that the probability that EIT is introduced is influenced by membership in the European Union, the commodity concentration and composition of exports (which are correlated with measures of the importance of supply and external shocks), and the degree of openness.
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In the years before the global financial crisis of 2008-2010, Qatar experienced a huge build-up of liquidity surplus in the banking system, mainly driven by surging net capital inflows. This paper identifies various sources of int...
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In the years before the global financial crisis of 2008-2010, Qatar experienced a huge build-up of liquidity surplus in the banking system, mainly driven by surging net capital inflows. This paper identifies various sources of interbank liquidity in Qatar and discusses the various implications of structural primary liquidity surplus for the money market in particular and the economy at large. The paper attempts to evaluate the Qatar Central Bank policy making and conduct during the pre- and post-crisis periods within a framework of the Austrian monetary overinvestment theories, and concludes that the central bank had forcibly committed several forced monetary policy mistakes, which resulted in a breakdown in the interest rate channel of the monetary policy transmission mechanism. This led to the inability of the central bank to control the interbank interest rate and to an accelerating inflation rate during the pre-crisis years. In contrast, a dramatic change in the central bank's monetary policy framework and a deliberate monetary policy mistake on behalf of the central bank resulted in a restoration of the interest rate channel of the monetary policy transmission mechanism, stabilization of the interbank interest rate close to the central bank's policy rate and a sharp deceleration in the inflation rate in the post-crisis period. The paper concludes by offering brief policy recommendations.
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This paper investigates the effects of various monetary policy instruments in China with the structural vector autoregression model. Empirical results are as follows. The effects of benchmark lending rate and short-term interest r...
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This paper investigates the effects of various monetary policy instruments in China with the structural vector autoregression model. Empirical results are as follows. The effects of benchmark lending rate and short-term interest rate shocks are larger than those of reserve requirement ratio shocks. Nonpolicy shocks exert substantial effects on intermediate targets under a quantity-based policy framework. The size and effects of short-term interest rate shocks in recent years are large. Short-term interest rate shocks have strong effects on property prices. These results suggest that the new interest rate-based policy framework is more effective than the previous quantity-based policy framework.
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Major central banks accept nonmarketable assets, such as pooled individual corporate loans, as collateral in their refinancing operations with banks. Such "eligible" loans to firms may provide a liquidity service to the banks whic...
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Major central banks accept nonmarketable assets, such as pooled individual corporate loans, as collateral in their refinancing operations with banks. Such "eligible" loans to firms may provide a liquidity service to the banks which originate them. Banks may in tum pass on a part of this benefit to their borrowers in the form of a reduced interest rate: the eligibility discount. We exploit a surprise extension of the Eurosystem's set of eligible collateral to medium-quality corporate loans, the Additional Credit Claims (ACC) program of February 2012, to assess the eligibility discount to corporate loans spreads in France. We find that becoming eligible to the Eurosystem's collateral framework translates into a relative reduction in rates by 8 bps for new loans issued to ACC-eligible firms , controlling for loan-, firm-, and bank-level characteristics. We find that this collateral channel of monetary policy is only active for the banks which have a lower opportunity cost in pledging credit claims and which are well-capitalized.
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This paper examines the 100-fold increase in reserve balances at the Federal Reserve during 2008. By looking at the balance sheet of the Federal Reserve and factors influencing the supply and demand for reserves, the paper shows t...
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This paper examines the 100-fold increase in reserve balances at the Federal Reserve during 2008. By looking at the balance sheet of the Federal Reserve and factors influencing the supply and demand for reserves, the paper shows that the increase was due to large purchases of securities and loans to certain sectors and institutions. Such actions constitute a combination of monetary policy and industrial policy, or a mondustrial policy. This characterization raises questions about the future of the Federal Reserve and suggests the need to return to a monetary framework that controls the money supply while the interest rate is zero and establishes rules for setting the interest rate.
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The adoption of inflation targeting in India has been a much debated topic which also becomes a challenge for an emerging economy. Though inflation targeting has already been adopted in some emerging and advanced countries, succes...
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The adoption of inflation targeting in India has been a much debated topic which also becomes a challenge for an emerging economy. Though inflation targeting has already been adopted in some emerging and advanced countries, successful implementation would be a concern. The paper argues that an emerging country like India needs to consider the composition of consumer price index; state of macro econometric models; and young demographics, unemployment rate and lack of social security before adopting inflation targeting. To modernize the monetary policy framework, India could consider introducing regular review of the regional economy; instituting a monetary policy committee; and separating debt from monetary management, the paper argues.
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Following a lengthy review, the FOMC recently revised its long-run monetary policy strategy statement, largely in recognition of the persistent threat the effective lower bound (ELB) on policy rates poses to its dual mandate goals...
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Following a lengthy review, the FOMC recently revised its long-run monetary policy strategy statement, largely in recognition of the persistent threat the effective lower bound (ELB) on policy rates poses to its dual mandate goals. Under traditional monetary policy strategies, the ELB imparts a persistent downward bias to inflation and inflation expectations; to offset this, new strategies are needed which will at times deliver inflation above 2%. The new framework addresses this issue and seeks to achieve inflation that averages 2% over time. It also emphasizes that maximum employment is a broad-based and inclusive goal, and that the FOMC should seek to eliminate shortfalls—rather than symmetric deviations—from maximum employment. The FOMC’s September policy statement provided forward guidance that is fully consistent with the new strategy. Historical retrospection of the 2015–2018 liftoff period suggests that, if it were in place over that time, the new framework and forward guidance likely would have forestalled rate increases and potentially delivered better macroeconomic outcomes. More, generally, to reduce employment shortfalls and average 2% inflation over time, the FOMC needs to have an “in it to win it” attitude toward our inflation objective. The September FOMC statement’s forward guidance that inflation should be at 2% and confidently on track for overshooting before we liftoff from the ELB is an important step in that direction.
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Policy responses to the tumult of the global financial crisis of 2007-9 prompt a consideration of the critical dimensions in specifying policy change. UK monetary policy between 2007 and 2009 is characterised by a remarkable degre...
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Policy responses to the tumult of the global financial crisis of 2007-9 prompt a consideration of the critical dimensions in specifying policy change. UK monetary policy between 2007 and 2009 is characterised by a remarkable degree of innovation yet counts as a 'normal' period of policy making under the Hall (1993) framework of policy change, the enduring workhorse of the comparative public policy field. This exposes its lack of conceptual refinement in describing significant but within paradigm policy change. This paper traces this failing to the notion of a policy paradigm, both its scale and the ideational mechanisms which bind policy change. The paper develops the UK monetary policy case to consider the potential of the recently-minted concept of a thermostatic policy institution for the development of Hall's framework; but finds analytical limitations in coping with significant policy spillovers. Suggestions are made to meet this important challenge for future research in policy studies on the specification of policy change.
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