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This paper examines the monetary policy transmission mechanism in Papua New Guinea (PNG) and its impact on the business cycle using quarterly data from 1980Q1 to 2016Q3. The paper explains the short-run dynamic relationship amongst key macroeconomic variables using a Structural Vector Autoregressive (SVAR) model in an open economy setting. The paper confirms that changes in global economic conditions are a material cause of fluctuations in the business cycle in PNG. In contrast, domestic monetary policy shocks play a smaller role in generating business cycle variations in PNG. The paper finds that oil price shocks are more important than commodity price shocks or foreign monetary policy shocks in driving domestic fluctuations. Money supply matters in the transmission of monetary policy, while interest rates contribute modestly to explaining changes in output and inflation in PNG. Monetary policy essentially acts as a stabilizer in limiting the contagion effects of external shocks. [ABSTRACT FROM AUTHOR]

India has formally adopted inflation targeting framework for conduct of monetary policy since 2016. Under this framework conduct of monetary policy heavily relies on inflation projection, and hence success and effectiveness of conduct of monetary policy is critically dependent on the understanding of the inflation dynamics. Drawing from the Stock and Watson (2007) atheoretical approach to understanding inflation dynamics, Gopinath et al. (2021) have found that trend inflation adequately explains the movements of inflation in India. In this paper, an attempt is made to understand what influences movements in trend inflation. The evidence presented supports a statistically and economically significant role for inflation expectations in explaining movements in trend inflation in India, be it headlines, core and food component. There is no evidence of any role for the output gap or slack (in levels) in explaining movements in trend inflation, partly reflecting data challenges associated with the estimation of slack. It is argued that there is merit in according significance to inflation expectations in monetary policy formulations by the Reserve Bank of India. It is also argued that monetary policy action has to respond suitably to the changes in inflation expectations, as the latter is found to be important to shape the inflation dynamics in India. [ABSTRACT FROM AUTHOR]

Monetary policy has been formulated with the purpose of achieving the twin objectives of economic growth and price stability through the successful working of the transmission mechanism. Monetary policy-induced changes in the nominal variables are expected to impact the real economic indicators like GDP and inflation. The evolution of Reserve Bank of India's (RBI) monetary policy has been divided into four distinct frameworks: pre-monetary targeting, monetary targeting, multiple indicator approach and eventually an inflation-targeting framework since 2015. RBI's monetary policy strategies have undergone substantial transformation in the last 70 years. The success of each monetary policy framework can be assessed by comparing the impact of monetary policy changes on various economic performance indicators. The purpose of this paper is to compare the performance of economic indicators under different monetary policy frameworks in the postindependence period. The economic performance indicators used in the study are inflation and output gap. Analyzing the monthly data from April 1982 to March 2017, the study finds that the multiple-indicator and the inflation-targeting regimes have had most success in balancing the twin objectives of growth and inflation. [ABSTRACT FROM AUTHOR]

This paper revisits the issue of money demand stability in the Indian context by using some variables capturing financial innovation such as equity futures, equity options, and total equity derivatives in a set of money demand specifications. The ARDL bounds test approach to cointegration is employed and a long-run relationship is found in money demand models, including equity futures, equity options and total equity derivatives, in quarterly data spanning from 2001 to 2014. The coefficients of all the derivative variables bear positive signs, indicating the presence of wealth effect. [ABSTRACT FROM AUTHOR]

This paper attempts to examine whether there is any fear of currency appreciation among countries which have accumulated foreign exchange reserves beyond what is conventionally required. In this regard, the paper estimates an augmented version of buffer stock model of reserve demand and includes undue appreciation and depreciation of domestic currency as separate explanatory variables. The empirical evidence obtained from a sample of 10 highest reserve holding countries suggests: (i) The motive behind reserve accumulation differs across countries and varies over time; (ii) It is no longer a precautionary balance to absorb shocks; and (iii) The inflow of speculative capital seems to have been a significant factor behind reserve accumulation. More importantly, there is strong evidence of asymmetry in official intervention in the foreign exchange market in the sense that the amount of official purchase of foreign exchange in response to appreciating currency is larger than the amount of selling in response to depreciating currency of the same magnitude. This evidence confirms the fact that high reserve holding countries have the fear of currency appreciation. Although such fear is often attributed to possible export loss, it is largely due to the loss in terms of fall in the value of given stock of reserves due to currency appreciation. [ABSTRACT FROM AUTHOR]

This paper investigates the impact of monetary policy stance on trade and foreign investment in the pharmaceutical sector in India. It employs the Bayesian Vector Autoregression (BVAR) approach to construct a model and then studies the said impact by the Impulse Response Function (IRF) analysis. In a Bayesian procedure, the parameters are treated as random variables and their posterior distribution is estimated via the imposition of prior beliefs on their distribution, which makes the analysis more robust when combined with Vector Autoregression (VAR). It has been found that both FDI inflows and exports are impacted by inflation and interest rate changes; however, inflationary pressure has a pronounced impact. On the other hand, GDP growth does not seem to substantially impact both FDI inflows and exports as deduced from the Bayesian VAR with Stochastic Volatility and Time Varying Parameters (BVARSV-TVP) model. These findings have been deduced alongside a benchmark VAR model. [ABSTRACT FROM AUTHOR]

The interest rate transmission mechanism of monetary policy to real economic activity has been the center of interest of many researchers globally. The aim of this paper is to study the impact of the policy interest rate (both nominal and real interest rates) on the output gap in India for the period from May 2001 to March 2015 using monthly data, and explore whether the Reserve Bank's switching to inflation targeting has hampered the growth objective. The paper uses Autoregressive Distributed Lag (ARDL) cointegration approach to study the long-run and shortrun dynamics of the objective variables. It takes sufficient number of lags to handle the problem of endogeneity mostly present amongst macroeconomic variables. The study finds presence of interest rate puzzle, where the conventional negative relationship between output and interest rate is broken. It suggests the presence of some other factors such as business mood, investment uncertainty, presence of parallel economy or the time period which was dominated by global financial crisis and its aftermath as the possible reasons for the decline in growth rate. [ABSTRACT FROM AUTHOR]

This paper employs bounds test and Unrestricted Error-Correction Model (UECM) approach to construct the Augmented Monetary Conditions Index (AMCI) over the quarterly period 1981:1-2004:4 for Singapore and compares the discrepancies using two different interest rates (i.e., time deposit rate and interbank rate). Results from the bounds test approach reveal evidence of cointegration between the real GDP and its determinants, namely, the short- and long-term interest rate, the exchange rate, and the claims on private sectors, which account for the interest rate, exchange rate, and credit transmission mechanism channels in the conduct of the monetary policy stance. The study also evidently reveals that different interest rates yield marginal difference in AMCI. The construction of AMCI using time deposit rate shows relatively tighter monetary conditions in the primary market than the secondary bond market as compared to the AMCI constructed using interbank rate. [ABSTRACT FROM AUTHOR]

Following a monetary growth rate rule, the present paper ranks four simple monetary rules under various stochastic shocks. The criteria to choose among rules are obtained using a welfare criterion derived from the utility function of the representative agent. The main results are: the effects of alternative monetary rules depend on what shocks affect the economy, exchange rate regime and the inflation index being targeted; with regard to the monetary rules, managed exchange rate rule dominates the other rules under demand or supply shocks, whereas domestic inflation targeting is the best performer under real shocks. As far as the definition of inflation targeting index is concerned, CPI inflation targeting appears to outperform the domestic inflation targeting under demand or supply shocks. [ABSTRACT FROM AUTHOR]

This paper examines the operation of credit channel of monetary policy transmission in India during the post-Liquidity Adjustment Facility (LAF) period of 2001:3 to 2011:3. Drawing on the literature, two reduced form equations-one representing nominal bank credit, and the other, real bank credit-have been estimated following an approach similar to Hendry's general-to-specific method. It is obtained that besides the positive influence of economic activity on bank credit, policy-induced expansion or contraction in deposit or money supply makes banks to adjust their credit portfolio correspondingly. Importantly, the credit channel of monetary transmission is found to be significant and robust. Specifically, the transmission of policy rate to nominal or real bank credit growth takes about seven months over the full sample period as well as across various subsample periods. Over the full sample period, 100 basis points increase in policy rate is found to reduce the annualized growth in nominal and real bank credit by 2.78% and 2.17%, respectively. However, a decline in the magnitude of the impact of policy interest rate on bank credit has been observed during the post-global financial crisis period. [ABSTRACT FROM AUTHOR]

This paper discusses in some detail various existing approaches of measuring core inflation, evaluating their potential advantages and disadvantages. Then a variety of measures of core inflation for India based on three methods are constructed. Among these measures, three are based on conventional ex-food and energy principle and one measure excludes 15 of the most volatile components. While constructing exclusion-based indices of core inflation, measures are constructed in such a way that only a small weight gets excluded from the index of the core inflation. The other two core measures that are variations of 'Neo-Edgeworthian index' are constructed by reweighting 69 disaggregated components series of WPI. Then another class of core measures is computed based on weighted exponential smoothing which was primarily developed by Cogley (2002). Estimates of core inflation based on their indexes are then calculated for the period from 1995 to 2007 (on monthly basis). Subsequently, an empirical evaluation of these estimated core measures is performed. While choosing criteria for empirical evaluation, the following were considered: first, forward-looking monetary policy framework, viz., tracking trend inflation, and second, an attractor property of core inflation and their relative predictive power for future transient movement in inflation. The empirical findings show that the weighted exponential smoothing-based measures of core inflation perform far better compared to all other measures of core inflation in terms of similarity in means, lower volatility, tracking trend inflation and an ability to predict future transient movement in headline inflation at both 12-month and 24-month horizons. [ABSTRACT FROM AUTHOR]

This paper investigates the impact of monetary policy shocks on a wide range of macroeconomic variables in Malaysia. To achieve this, it uses the Factor Augmented Vector Autoregression (FAVAR) approach that combines factor analysis and vector autoregression. The information set consists of 78 monthly time series from 2000:3 to 2010:10. This approach is supposed to provide a more comprehensive and precise forecast of the economy. The results from the impulse response function show that the effect of the price puzzle is reduced with this approach. It is also found that financial and real variables react negatively to the monetary policy shocks in line with the economic theory. [ABSTRACT FROM AUTHOR]

Empirical evidences on the transmission mechanism by which monetary policy affects the economy, particularly general prices and real activity, are essential, both for effective policy making and understanding the alternate macroeconomic theories. A consensus has largely been established on the influence of monetary policy on the economy through its impact on the spending decisions on consumption and investment. Banks play a central role in monetary transmission as monetary policy impulses through bank credit affect consumption and investment decisions of the individuals and thus affect the aggregate demand, which in turn transmits the impact to the final objectives of price and output stabilization. The present study attempts to empirically examine the nature and strength of monetary policy influence on inflation and real activity in India, with special emphasis on the role of banking channel in the transmission process. Considering the fact that the Reserve Bank of India adopted 'multiple indicator approach' in the conduct of monetary policy since April 1998, the present paper uses a Monetary Policy Indicator (MPI) to capture the policy stance appropriately. The empirical evidences reiterated monetary policy influence on inflation and real activity. The lag effect of monetary policy on inflation (about 18 months) was found to be longer as compared to real activity (about a year), implying the impact of policy shocks being realized initially in aggregate demand subsequently gets transmitted to prices. Monetary policy shocks were observed to have desired influence on interest rates and bank investments, while the effect on bank credit was observed with a lag of around one year. The empirical evidences revealed high importance of bank investment in the monetary transmission process, which seems plausible given the relevance and size of bank investment portfolio in the Indian context. [ABSTRACT FROM AUTHOR]

This paper estimates the aggregate import demand function for Latin American and Caribbean countries, using the dynamic panel data methods, over the period 1975-2005. Consistent with theoretical postulates, this paper finds that the demand for import responds negatively to an increase in the relative prices and positively to an increase in real income. The results imply that fiscal or monetary policies may be used as policy instruments to keep inflation at a reasonable rate so as to rectify any trade imbalances. In addition, for a sustainable trade balance, the development of more local industries should be encouraged to lower the import content. [ABSTRACT FROM AUTHOR]

Money is a medium of monetary policy transmission. In this connection, no other macro-behavioral function is subjected to more modeling modifications and regression rigors than the macro-money demand function. Monetary policy planning hinges on the parameter estimates of the money demand function. An emerging market economy undergoes structural change in the sector GDP composition unlike a structurally-invariant advanced economy. This is likely to introduce bias in the income elasticity parameter estimate especially. The present study investigates this using the Herfindahl (H) index as a proxy for the GDP composition concentration. The 1-3 years deposit rate and call money rate are alternately used for the opportunity cost variable. Maximum likelihood estimates have shown a statistically highly significant positive coefficient for the H variable besides equally highly significant scale and opportunity cost variables with their expected respective signs. This empirical evidence suggests that the conventional specification contains a serious specification error. The implication of the result is that as the sector GDP concentration increases, the demand for real money balances also increases though quite less proportionately, indicating the absence of any economies of GDP concentration. [ABSTRACT FROM AUTHOR]

Monetary authorities, in order to have an accurate assessment of the timing and effects of their policy on the economy, must have an understanding of the monetary transmissions that are present in their economies. Many studies on developing countries, whose financial system is characterized by the absence of organized markets for securities, presence of capital controls, and ceiling on bank borrowing and lending rates, have shown that credit channel is present. Since the beginning of the 1990s, there have been many structural and economic reforms and subsequent transition to new policy regimes in India, which has made the analysis of monetary transmission gain importance. This study examines the transmission of monetary policy in India. Considering the external constraints on monetary policy, a benchmark VAR model is used to examine the presence of bank lending channel, asset price channel, and exchange rate channel. The results suggest that bank lending channel plays an important role in the transmission of monetary policy, which aligns well with the theory, as India is a developing country. [ABSTRACT FROM AUTHOR]

Generally it is believed that the central monetary authority can, and should, exercise control over the exchange rate only in case of fixed/pegged exchange rate regime. However, such a regulation is essential even in an economy that has adopted floating exchange rate policy. This is because no economy can stay immune to the extreme external shocks that affect the domestic economic stability through exchange rate channel. These shocks may be due to changes in the trade balance and relative terms of trade, purchasing power of the two currencies, capital movements, and differences in the general price levels of the two economies under consideration. Especially, when the economy is open to capital movements, the expectations regarding forward exchange rate play an important role in deciding the capital flows as well as the actual exchange rates in future. And, if unguarded, the fluctuations in the exchange rate can cause deep financial crisis in any economy regardless of its size and dependence on the external sector. This paper makes an attempt to define such a relation between the capital movements and the forward exchange rate through the Covered Interest Parity (CIP) model. Monthly data from April 1996 to May 2008, relating to Indian and the US economies, are used for establishing this hypothesis. A comparative analysis of the CIP model with the Uncovered Interest Parity (UIP) model indicates that the former is more efficient in projecting the forward exchange rate movements with greater accuracy. The ability to forecast the future exchange rate based on the same model is an added advantage of adopting the CIP for monitoring the exchange rate and capital movements in India. [ABSTRACT FROM AUTHOR]

The present world economy has, increasingly, been interconnected in terms of small units such as industries, regions and national economies as discontinuous systems. Changes in these systems have varied impact across the world economies. This paper tries to trace out various triggers, trails and travails of the present crisis, with a view to suggest solutions or treatments for the global financial crisis of 2008-09. For instance, one of the triggers identified is the prolonged implementation of low interest rate policy. This, coupled with the savings glut in the world economy has led to sub-prime lending in the US, as it was used to finance the US mortgage debts. The author indicates that some new lessons have been learnt from the current financial crisis, the most important of them being the need for retooling the finance and economics models. Further, globalization, along with its bestowed benefits, brings in increased frequency and spread of financial and economic crises. [ABSTRACT FROM AUTHOR]

Despite the recent implementation of a number of economic reforms and structural adjustment programs to liberalize Egypt's financial system, this study finds that a stable broad money demand function exists when proper account of asset substitution is taken and an appropriate estimation technique is employed. In particular, the use of measures for economic uncertainty and monetary uncertainty in the formulation of the demand for broad money provides strong evidence that the demand for broad money in Egypt is stable. Furthermore, the results show that both the measures of uncertainty have significant short-run and long-run effects on the demand for broad money in Egypt. [ABSTRACT FROM AUTHOR]