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on Financial Development and Growth |
| By: | Qureshi, Irfan (Department of Economics, University of Warwick) |
| Abstract: | I study whether money growth targeting leads to indeterminacy in the price level. I extend a conventional framework and show that the price level may be indeterminate if the central bank's response to money growth is weak even when the Taylor principle is satisfied. Based on this reasoning, policy coefficients estimated using novel FOMC meeting-level data propose a new channel of the policy mistakes that may have triggered indeterminacy during the Great Inflation. I show that 'passively' pursuing money growth objectives generates significantly larger welfare loss compared to alternative specifications of the monetary policy rule but 'active' money growth targeting drastically minimizes welfare and loss. I confirm the relationship between money and growth objectives and macroeconomic volatility using cross-country evidence. |
| Keywords: | Money Growth Objectives, Time-Varying Policy, Indeterminacy, Macroeconomic Volatility |
| JEL: | I30 I31 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1123&r=fdg |
| By: | Eickmeier, Sandra; Metiu, Norbert; Prieto, Esteban |
| Abstract: | We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. Exogenous policy changes are identified by adapting an external instruments approach to the non-linear model. The lower effectiveness of monetary policy can be linked to weaker responses of credit costs, suggesting a financial accelerator mechanism that is weaker in high volatility periods. To rationalize our robust empirical results, we use a macroeconomic model in which financial intermediaries endogenously choose their capital structure. In the model, the leverage choice of banks depends on the volatility of aggregate shocks. In low volatility periods, financial intermediaries lever up, which makes their balance sheets more sensitive to aggregate shocks and the financial accelerator more effective. On the contrary, in high volatility periods, banks decrease leverage, which renders the financial accelerator less effective; this in turn decreases the ability of monetary policy to improve funding conditions and credit supply, and thereby to stimulate the economy. Hence, we provide a novel explanation for the non-linear effects of monetary stimuli observed in the data, linking the effectiveness of monetary policy to the procyclicality of leverage. |
| Keywords: | monetary policy,credit spread,non-linearity,intermediary leverage,financial accelerator |
| JEL: | C32 E44 E52 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:iwh-19-16&r=fdg |
| By: | Mikael Juselius; Claudio Borio; Piti Disyatat; Mathias Drehmann |
| Abstract: | Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing medium-term economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. As a result, policy rates have been persistently and systematically below this measure. Moreover, we find that monetary policy, through the financial cycle, has a long-lasting impact on output and, by implication, on real interest rates. Therefore, a narrative that attributes the decline in real rates primarily to an exogenous fall in the natural rate is incomplete. The influence of monetary and financial factors should not be ignored. Exploiting these results, an illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to higher output even in the long run. |
| Keywords: | natural interest rate, financial cycle, monetary policy, credit, business cycle |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:569&r=fdg |