The Effectiveness Of Monetary Policy In Small Open Economies
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The Effectiveness Of Monetary Policy In Small Open Economies
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Author : Keyra Primus
language : en
Publisher: International Monetary Fund
Release Date : 2016-09-16
The Effectiveness Of Monetary Policy In Small Open Economies written by Keyra Primus and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016-09-16 with Business & Economics categories.
This paper examines the relative effectiveness of the use of indirect and direct monetary policy instruments in Barbados, Jamaica and Trinidad and Tobago, by estimating a restricted Vector Autoregressive model with Exogenous Variables (VARX). The study assumes that the central bank conducts monetary policy using a Taylor-type rule and it evaluates the effects of a reserve requirement policy. The results show that although a positive shock to the policy interest rate has a direct effect on commercial banks' interest rates, there is a weak transmission to the real variables. Furthermore, an increase in the required reserve ratio is successful in reducing private sector credit and excess reserves, while at the same time alleviating pressures on the exchange rate. The findings therefore indicate that central banks in small open economies should consider using reserve requirements as a complement to interest rate policy, to achieve their macroeconomic objectives.
Unconventional Monetary Policy In A Small Open Economy
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Author : Margaux MacDonald
language : en
Publisher: International Monetary Fund
Release Date : 2017-12-01
Unconventional Monetary Policy In A Small Open Economy written by Margaux MacDonald and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017-12-01 with Business & Economics categories.
This paper investigates the effects of unconventional monetary policy in a small open economy. Using recently proposed shadow interest rates to capture unconventional monetary policy at the zero lower bound (ZLB) we estimate a Bayesian structural vector autoregressive model for Canada - a useful case where foreign shocks can be proxied by U.S. variables alone. We find that, during the ZLB period, Canadian unconventional monetary policy increased output (measured by industrial production) by 0.013 percent per month on average while US unconventional monetary policy raised Canadian output by 0.127 percent per month on average. Our results demonstrate the effectiveness of domestic unconventional monetary policy and the strong positive spillover effects that foreign unconventional monetary policies can have in a small open economy.
Essays On Monetary Policy In Small Open Economies
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Author : Inhwan So
language : en
Publisher:
Release Date : 2016
Essays On Monetary Policy In Small Open Economies written by Inhwan So and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with Banks and banking categories.
This dissertation studies the effects of monetary policy in small open economies. In Chapter 1, I investigate how the openness of banking sector influences the transmission channels of home and international monetary policy shocks in small open economies. For the analysis, I construct a small open economy DSGE model enriched with a globalized banking sector. I consider two forms of bank globalization: international bank capital finance and foreign loan account import. By comparing the effect of each type of bank globalization on monetary policy transmission, the analysis delivers the following results. First, bank globalization leads to a significant attenuation of domestic monetary policy transmission. This is because, in response to home monetary shocks, banks' global activities allow them to maintain bank rates and demands on deposit to some extent compared to those in financial autarky. On the other hand, opening of the banking sector intensifies the impact of foreign interest rate shocks on the local bank activities. In addition to the conventional channel of international monetary transmission through interest-parity condition, global bank operation opens a new channel which makes bank rates more responsive to foreign monetary shock. Chapter 2 investigates the nature of monetary policy transmission in four small open economies - Australia, Canada, South Korea, and the U.K. - and the U.S. (the benchmark) by estimating structural vector autoregressive models using the external instrument identification method. Differing from related studies on U.S. monetary policy, which mostly employ high-frequency futures data on monetary policy operating instruments (federal fund futures rates) to identify monetary policy shocks, we propose and test alternative sets of external instruments for the four focal open economies that do not yet have well-established futures markets in monetary policy instruments. The empirical results obtained by applying this data-oriented method yield important messages from both the econometric and macroeconomic perspectives. First, U.S. monetary policy plays an important role in monetary transmission in SOEs, presumably hampering the effectiveness of domestic monetary policy. In particular, the effect of domestic monetary policy shocks on medium- and long-term interest rates is quite weak and short-lived, while U.S. monetary innovation significantly and persistently influences domestic financial variables. Second, the paper provides some evidence that foreign exchange rates in this process respond to monetary shocks as Dornbusch (1976)’s overshooting hypothesis. Chapter 3 studies the wedge between the interest rate implied by Euler equation and money market rate in five small open economies – Australia, Canada, Finland, Korea, and the U.K. Standard Euler equation predicts strongly positive relationship between the two interest rates. However, data shows significantly large wedge between them, which causes negative correlation. We explore the systemic link between the wedge and two possible influencing factors – monetary policy and net foreign asset position. The empirical results from our analysis deliver the important message that the wedge is closely related to net foreign asset position in open economies, while its relationship to the stance of monetary policy has mixed results.
Ecb Spillovers And Domestic Monetary Policy Effectiveness In Small Open Economies
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Author : Saskia ter Ellen
language : en
Publisher:
Release Date : 2019
Ecb Spillovers And Domestic Monetary Policy Effectiveness In Small Open Economies written by Saskia ter Ellen and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
In this paper, we examine whether financial spillovers from the European Central Bank's monetary policy have consequences for the effectiveness of domestic monetary policy in three small open economies (SOEs) that are highly integrated with the European (Monetary) Union: Denmark, Norway, and Sweden. We find significant spillovers that are particularly strong for longer maturity yields. At the same time, domestic monetary policy in Norway and Sweden is effective for the shorter end of the yield curve, but much less so for the longer end of the curve. Recent work suggests that the trilemma in international economics as we used to know it, may be a dilemma: SOEs can only have effective monetary policies when the capital account is managed. Our results imply something in between: although spillovers impose challenges on domestic monetary policy effectiveness, small open economies still have some control over their yield curve.
The Effectiveness Of Monetary Policy Transmission Under Capital Inflows
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Author : Ms.Sonali Jain-Chandra
language : en
Publisher: International Monetary Fund
Release Date : 2012-11-02
The Effectiveness Of Monetary Policy Transmission Under Capital Inflows written by Ms.Sonali Jain-Chandra and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012-11-02 with Business & Economics categories.
The effectiveness of the monetary policy transmission mechanism in open economies could be impaired if interest rates are driven primarily by global factors, especially during periods of large capital inflows. The main objective of this paper is to assess whether this is true for emerging Asia’s economies. Using a dynamic factor model and a structural vector auto-regression model, we show that long-term interest rates in Asia are indeed predominantly driven by global factors. However, monetary policy transmission mechanism remains effective in the region, as it operates predominantly through short-term interest rates. Nevertheless, the monetary transmission mechanism, though effective, is somewhat weaker in Asia during the periods of surges in capital inflows.
Quantitative Easing And Long Term Yields In Small Open Economies
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Author : Antonio Diez de los Rios
language : en
Publisher: International Monetary Fund
Release Date : 2017-09-29
Quantitative Easing And Long Term Yields In Small Open Economies written by Antonio Diez de los Rios and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017-09-29 with Business & Economics categories.
We compare the effectiveness of Federal Reserve's asset purchase programs in lowering longterm yields with that of similar programs implemented by the Bank of England, the Swedish Riksbank, and the Swiss National Bank's reserve expansion program. We decompose government bond yields into (i) an expectations component, (ii) a global, and (iii) a country specific term premium to analyze two-day changes in 10-year yields around announcement dates. We find that, in contrast to the Federal Reserve's asset purchases, the programs implemented in these smaller economies have not been able to affect the global term premium and, furthermore, they have had limited, but significant, effect in lowering long-term yields.
Monetary Policy In Small Open Economies
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Author : Ana Maria Santacreu
language : en
Publisher:
Release Date : 2019
Monetary Policy In Small Open Economies written by Ana Maria Santacreu and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
Understanding the costs and benefits of alternative monetary policy rules is important for economic welfare. Within the context of a small open economy model and building on the work of Mihov and Santacreu (2013), the author analyzes the economic implications of two monetary policy rules. The first is a rule in which the central bank uses the nominal exchange rate as its policy instrument and adjusts the rate whenever there are changes in the economic environment. The second is a standard interest rate rule in which the central bank adjusts the short-term nominal interest rate to changes in the economic environment. The main finding of the analysis is that, if the uncovered interest parity condition that establishes a tight link between the interest rate differential in two countries and the expected rate of depreciation of their currencies does not hold, the exchange rate rule outperforms the standard interest rate rule in lowering the volatility of key economic variables. There are two main reasons for this: First, the actual implementation of the exchange rate rule avoids the overshooting effect on exchange rates characteristic of an interest rate rule. And second, the risk premium that generates deviations from the uncovered interest parity condition is smaller and less volatile under an exchange rate rule.
Inflation Targeting Lite In Small Open Economies
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Author : International Monetary Fund
language : en
Publisher: International Monetary Fund
Release Date : 2005-09-01
Inflation Targeting Lite In Small Open Economies written by International Monetary Fund and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005-09-01 with Business & Economics categories.
This paper develops a new macrofinance model for small open economies, allowing the investigation of Mauritius's experience with 'inflation targeting lite' as described in Stone (2003). It finds that this monetary policy regime has been associated with a general reduction in inflation, principally through a reduction in inflation expectations. The credibility the Bank of Mauritius has established with its 'inflation targeting lite' regime has allowed it to shift from an emphasis on exchange rate targeting towards inflation targeting. By estimating a model in which the yield curve is modeled explicitly we are able to obtain estimates of inflation expectations.
Interest Rate Targeting In A Small Open Economy
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Author : Mr.Guillermo Calvo
language : en
Publisher: International Monetary Fund
Release Date : 1990-03-01
Interest Rate Targeting In A Small Open Economy written by Mr.Guillermo Calvo and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 1990-03-01 with Business & Economics categories.
An important hurdle in analyzing interest rate targeting is that standard models usually lead to price level or inflation rate indeterminacy. This paper develops a simple framework in which such problems do not arise because the bonds whose interest rate is controlled provide liquidity services. This framework is used to examine interest rate targeting in a small open economy under predetermined exchange rates. A permanent increase in the interest rate has no real effects. In contrast, a temporary increase in the interest rate leads to higher consumption and to a current account deficit that worsens over time.
Effectiveness Of Monetary Policy In A Small Open Economy
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Author : Paul Kaun
language : en
Publisher:
Release Date : 2004
Effectiveness Of Monetary Policy In A Small Open Economy written by Paul Kaun and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2004 with Monetary policy categories.