Monetary policy reaction function pre and post the global financial crisis

Raputsoane, Leroi (2018): Monetary policy reaction function pre and post the global financial crisis.

Abstract

This paper analyses the monetary policy reaction function pre and post the recent global financial crisis in South Africa. This is achieved by comparing the reaction function of the the monetary policy interest rate to changes in the target variables that comprise the inflation rate, output gap and financial stress index pre and post the recent global financial crisis. The results show a negligible reaction of the monetary policy to changes in inflation in the pre and post the recent global financial crisis period. The results further show a relatively loose monetary policy stance during the financially stressful economic conditions in the pre and post the recent global financial crisis period. Most importantly, the results show that the reaction of monetary policy to changes in the target variables pre the recent global financial crisis period has not changed significantly compared to post the recent global financial crisis period. Therefore the paper concludes that there is no material difference in the conduct of monetary policy by the monetary authority in South Africa pre and post the recent global financial crisis.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary policy, Financial stress, Foreign exchange rate
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Assenmacher-Wesche, K. (2006). Estimating Central Banks’ Preferences from a Time varying Empirical Reaction Function. European Economic Review, 50(8):1951–1974.

Balakrishnan, R., Danninger, S., Elekdag, S., and Tytell, I. (2011). The Transmission of Financial Stress from Advanced to Emerging Economies. Emerging Markets Finance and Trade, 47(2):40–68.

Banbura, M., Giannone, D., and Reichlin, L. (2010). Large Bayesian Vector Autoregressions. Journal of Applied Econometrics, 25(1):71–92.

Baxa, J., Horvath, R., and Vasicek, B. (2014). How Does Monetary Policy Change? Evidence on Inflation Targeting Countries. Macroeconomic Dynamics, 18(3):593–630.

Bernanke, B. S. and Gertler, M. (2001). Should Central Banks Respond to Movements in Asset Prices? American Economic Review, 19(2):253–257.

Bernanke, B. S. and Gertler, M. (2003). Monetary Policy and Asset Price Volatility. Economic Review, 50:17–51. Federal Reserve Bank of Kansas City.

Bernanke, B. S., Laubach, T., Mishkin, F. S., and Posen, A. S. (1999). Inflation Targeting. Princenton University Press.

Bernanke, B. S. and Mihov, I. (1998). Measuring Monetary Policy. The Quarterly Journal of Economics, 113(3):869–902.

Boivin, J., Kiley, M. T., and Mishkin, F. S. (2010). How Has the Monetary Transmission Mechanism Evolved Over Time? Handbook of Monetary Economics, 3(1):369–422.

Borio, C. (2014). The Financial Cycle and Macroeconomics: What Have We Learnt? Journal of Banking and Finance, 395(C):182–198.

Borio, C. and White, W. (2004). Whither Monetary and Financial Stability? The Implications of Evolving Policy Regimes. Working Paper, 147. Bank for International Settlements.

Canova, F. (1993). Modelling and Forecasting Exchange Rates With a Bayesian Time Varying Coefficient Model. Journal of Economic Dynamics and Control, 17(1-2):233–261. Canova, F. (2011). Methods for Applied Macroeconomic Research. Princeton University Press, New Jersey.

Cardarelli, R., Elekdag, S., and Lall, S. (2011). Financial Stress and Economic Contractions. Journal of Financial Stability, 7(2):78–97.

Cevik, I., Dibooglu, S., and Kutan, A. (2013). Measuring Financial Stress in Transition Economies. Journal of Financial Stability, 9(4):597–611.

Clarida, R., Gali, J., and Gertler, M. (2000). Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory. Quarterly Journal of Economics, 115(1):147–180.

Cogley, T., Primiceri, G. E., and Sargent, T. J. (2010). Inflation gap persistence in the US. American Economic Journal, 2(1):43–69. Cogley, T. and Sargent, T. J. (2001). Evolving Post World War II US Inflation Dynamics. NBER macroeconomics annual, 16:331–373.

Cogley, T. and Sargent, T. J. (2005). The Conquest of US Inflation: Learning and Robustness to Model Uncertainty. Review of Economic dynamics, 8(2):528–563.

Curdia, V. and Woodford, M. (2010). Credit Spreads and Monetary Policy. Journal of Money, Credit and Banking, 42(S1):3–35.

Curdia, V. and Woodford, M. (2011). The Central Bank Balance Sheet as an Instrument of Monetary Policy. Journal of Monetary Economics, 58(1):54–79.

Del Negro, M. and Primiceri, G. E. (2015). Time Varying Structural Vector Autoregressions and Monetary Policy: A Corrigendum. The Review of Economic Studies, 82(4):1342–1345.

Del Negro, M. and Schorfheide, F. (2011). Bayesian Macroeconometrics. Handbook of Bayesian Econometrics, 1(7):293–387.

Hakkio, C. and Keeton, W. (2009). Financial Stress: What is it, How can it be Measured, and Why does it Matter? Economic Review, 94(2):5–50. Federal Reserve Bank of Kansas City.

Hanson, M. S. (2006). Varying Monetary Policy Regimes: A Vector Autoregressive Investigation. Journal of Economics and Business, 58(5-6):407–427.

Hodrick, R. and Prescott, E. C. (1997). Postwar U.S. Business Cycles: An Empirical Investigation. Journal of Money, Credit and Banking, 29(1):1–16.

Illing, M. and Liu, Y. (2006). Measuring Financial Stress in a Developed Country: An Application to Canada. Journal of Financial Stability, 2(3):243–265.

Judd, J. P. and Rudebusch, G. D. (1998). Taylor’s Rule and the Fed: 1970-1997. Economic Review, 3:3–16. Federal Reserve Bank of San Francisco.

Justiniano, A. and Primiceri, G. E. (2008). The Time Varying Volatility of Macroeconomic Fluctuations. American Economic Review, 98(3):604–41.

Kadiyala, K. R. and Karlsson, S. (1997). Numerical Methods for Estimation and Inference in Bayesian VAR models. Journal of Applied Econometrics, 12(2):99–132.

Kim, C. J. and Nelson, C. R. (2006). Estimation of a Forward Looking Monetary Policy Rule: A Time Varying Parameter Model Using Ex Post Data. Journal of Monetary Economics, 53(8):1949–1966.

Kliesen, K., Owyang, M., and Vermann, K. (2012). Disentangling Diverse Measures: A Survey of Financial Stress Indexes. Review of Economics, 94(5):369–398.

Koop, G. and Korobilis, D. (2010). Bayesian Multivariate Time Series Methods for Empirical Macroeconomics. Foundations and Trends in Econometrics, 3(4):267–358.

Koop, G. M. (2013). Forecasting With Medium and Large Bayesian VARs. Journal of Applied Econometrics, 28(2):177–203.

Korobilis, D. (2013). Assessing the Transmission of Monetary Policy Using Time Varying Parameter Dynamic Factor Models. Oxford Bulletin of Economics and Statistics, 75(2):157–179.

Litterman, R. (1984). Forecasting and Policy Analysis With Bayesian Vector Autoregression Models. Quarterly Review, Fall. Federal Reserve Bank of Minneapolis.

Mise, E., Kimand, T., and Newbold, P. (2005). On Suboptimality of the Hodrick Prescott Filter at Time Series Endpoints. Journal of Macroeconomics, 27(1):53–67.

Mishkin, F. S. (2009). Is monetary policy effective during financial crises? American Economic Review, 99(2):573–77.

Mishkin, F. S. (2011). Monetary Policy Strategy: Lessons from the Crisis. Working Paper, 16755. National Bureau of Economic Research.

Nelson, E. (2005). Monetary Policy Neglect and the Great Inflation in Canada, Australia, and New Zealand. International Journal of Central Banking, 1(1):133–179.

Nelson, E. and Nikolov, K. (2004). Monetary Policy and Stagflation in the UK. Journal of Money, Credit and Banking, 36(3):293–318.

OHara, K. (2015). Bayesian Macroeconometrics in R, volume Version 0.5.0. New York University.

Orphanides, A. (2002). Monetary Policy Rules and the Great Inflation. American Economic Review, 92(2):115–120.

Primiceri, G. E. (2005). Time Varying Structural Vector Autoregressions and Monetary Policy. Review of Economic Studies, 72(3):821–852.

Raputsoane, L. (2014). Financial Stress Indicator Variables and Monetary Policy in South Africa. Journal of Economics Bibliography, 3(2):203–214.

Raputsoane, L. (2015). The Lean versus Clean Debate and Monetary Policy in South Africa. Journal of Economics and Political Economy, 2(4):467–480.

Ravn, M. O. and Uhlig, H. (2002). On Adjusting the Hodrick-Prescott Filter for the Frequency of Observations. Review of Economics and Statistics, 84(2):371–376.

Rudebusch, G. D. (1998). Do Measures of Monetary Policy in a VAR Make Sense? International Economic Review, 39(4):907–931.

Sims, C. A. (1980). Macroeconomics and Reality. Journal of Economic Perspectives, 48(1):1–48.

Sims, C. A. (2001). Stability and Instability in U.S. Monetary Policy Behavior. Working Paper. Princeton University. Sims, C. A. and Uhlig, H. (1991). Understanding Unit Rooters: A Helicopter Tour. Econometrica, 59(6):1591–1599.

Stiglitz, J. E. (2010). Interpreting the Causes of the Great Recession of 2008. In Cecchetti, S. G., Dudley, W., Shirakawa, M., Stiglitz, J. E., and Wellink, N., editors, Financial System and Macroeconomic Resilience: Revisited, volume 53, pages 297–361. MIT Press, Massachusetts.

Stock, J. H. and Watson, M. W. (2001). Vector Autoregressions. Journal of Economic Perspectives, 15(4):101–115.

Svensson, L. E. O. (2013). Leaning Against the Leaners. Central Banking, 12:27–36.

Taylor, J. B. (2012). Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras. Journal of Money, Credit and Banking, 44(6):1017–1032.

Woodford, M. (2012). Inflation Targeting and Financial Stability. Economic Review, 17967. National Bureau of Economic Research.