IMF高级宏观经济学研修班课程CT1405MMF-L03Moneta

1、Monetary Policy Transmission Mechanism,CTP Training Program Macroeconomic Management and Financial Sector Issues CT14.05,Presenter Tao Wu,Content Outline,General Issues about Monetary Policy Objectives: What monetary policy can and cannot do. Choice of policy instruments: direct or indirect ? Choice

2、 of operating target: interest rate or monetary aggregates? Transmission Mechanism: How does monetary policy work? Interest rate, Credit, Asset price, Exchange rate Recent Monetary Policy Issues: The U.S. Federal Reserves Unconventional Monetary Policy Operations,2,This training material is the prop

3、erty of the International Monetary Fund (IMF) and is intended for use in IMF Institute courses. Any reuse requires the permission of the IMF Institute.”,What Monetary Policy Can and Cannot Do,What Monetary Policy Can and Cannot Do,“We are in danger of assigning to monetary policy a larger role than

4、it can perform, in danger of asking it to accomplish tasks that it cannot achieve, and, as a result, in danger of preventing it from making the contribution that it is capable of making.” Presidential address of Milton Friedman at the 80th Annual Meeting of the American Economic Association, 1967.,W

5、hat Monetary Policy Can and Cannot Do,Long-run effects vs. Short-run effects Monetary policy may be effective in short run, but its effects in determining the real economic growth or employment in long run are almost negligible. The best way for monetary policy to promote long-run economic growth is

6、 to ensure price stability. Pricing system works more efficiently to allocate resources when prices are on average stable; To avoid distortions caused by the interaction of inflation and a tax system based on the assumption that prices are stable.,What Monetary Policy Can and Cannot Do,Central banks

7、 cannot have any substantial effect on trend growth in output or trend growth in employment. policies by government that can have a material influence on both: education, human capital, technological innovations, taxation, protection of private property rights, etc. However, by keeping inflation low

8、 and stable, central banks can operate monetary policy with the objective of keeping actual output and employment as close as possible to the trend of potential output and employment.,Monetary Policy: Objectives,Price Stability (low and stable inflation); Reduced Volatility of business cycles; Centr

9、al banks may also be concerned about Interest rate stability and financial market stability; Exchange rate stability.,Monetary Policy: Objectives,What do we mean by price stability? Prices are not changing on average. However, individual prices may rise or fall. Why not zero percent inflation? Upwar

10、d bias in measured inflation Reduce the risk of deflation (to avoid a “liquidity trap”zero bound on nominal interest rates).,Time,GDP,Central Bank may also be able to reduce volatility of business cycles,What Monetary Policy Cannot Do: Lessons from the Phillips Curve,Is there a trade-off between inf

11、lation and unemployment? The Phillips curve: Williams Phillips (1958), using 97 years of the U.K. data, showed a tradeoff between unemployment and nominal wage growth. Data for the US up to 1969 showed the same. What happens if a central bank tries to exploit continuously the short-run trade-off and

12、 wants to persistently push the unemployment rate below its potential level?,Phillips Curve in the U.S.: 1960 - 2007,Trade-offs between Inflation and Unemployment,For instance, a central bank may decide to increase money supply or keep interest rates low, thereby pushes unemployment rate below its p

13、otential level at the price of a higher inflation, thus there seems to be a trade-off in short run. However, inflation surprises cannot stimulate short-term employment very often. In the long run, economic agents will adjust their inflation expectations accordingly. Therefore, discretionary policies

14、 will most likely end up with higher inflation but no lower unemployment.,Trade-offs between the Volatilities of Inflation and Unemployment,Assume that the objective of a central bank is to minimize where is the target unemployment rate; is the target inflation rate; is the inflation-aversion parame

15、ter. Central banks can trade more unemployment or output volatility for less inflation volatility, and vice versa.,Instruments of Monetary Policy,15,Operating Targets (reserves, money market interest rate, etc),Indicator variables,Intermediate Targets (M2, ER, LT interest rates, Inflation forecast,

16、etc),Policy Objectives (low and stable inflation),Monetary Policy Framework,Policy Instruments (OMO, discount rate, etc),Domestic shocks,External shocks,Inflation Targeting,Policy Decision,Monetary Policy Framework,Need to answer three questions when designing a monetary policy framework: Which poli

17、cy instruments to use? Direct instruments vs. indirect instruments? What is the operating target variable? Targeting prices (interest rates) or quantities (money supply, credit)? What is the monetary policy transmission mechanism? How does policy actions on operating target transmit to intermediate

18、target and then policy objectives? How accurate and how fast is the transmission? Choices between policy instruments, intermediate targets, and final objectives must be compatible.,Policy Instruments,When implementing monetary policy, central banks can either act directly, using its regulatory power

19、, or indirectly, using its influence on money market conditions. Direct instruments operate by setting or limiting either prices or quantities through regulations Focus on the balance sheets of commercial banks; Indirect instruments act through the market, by adjusting the underlying demand for, and

20、 supply of, bank reserves; Initial effects are on the balance sheet of the central bank.,Direct Instruments,Direct Controls on interest rates For instance, minimum and maximum interest rates, preferential rates for certain loan categories, etc; Credit ceilings At aggregate level or on individual ban

21、ks; Directed lending policies For instance, preferential central bank refinance facilities to direct credit to priority sectors; High reserve and liquid asset requirements Designed both to absorb liquidity and to provide government deficit financing.,Direct Instruments,Effective means to achieve nar

22、rowly defined targets: For instance, maintaining a particular interest rate at a certain level, or keeping a banks overall credit expansion below a certain ceiling, or directing credit to or away from specific sectors. Most effective or practical approach in countries with under-developed financial

23、markets; However, the macroeconomic effects of the controls is hard to predict, because of the scope for evasion and avoidance. For instance, effective credit ceiling forces banks to build up excess liquidity, which in turn discourages deposit taking and causes disintermediation.,Direct Instruments,

24、Prevent competition and limit the expansion of more efficient banks; Discourage correct pricing of credit risk, thus preventing financial resources from being efficiently allocated; Discourage the development of money and capital markets; Inconsistent with freedom of international capital movement a

25、nd may encourages “capital flight.” Create various administrative problems and encourage the development of unregulated “grey” market or “shadow banking.”,Indirect Instruments,Open-market operations Outright transactions and repo/reverse repo agreements Standing facilities “Lender of last resort.” D

26、iscount window, lending and deposit facilities, etc. Reserve requirements Less popular in recent years; Recent tendency toward lower reserve requirements.,Indirect Instruments,Indirect instruments are considered more market friendly and are less distortionary than direct instruments. Focus on system

27、-wide liquidity; Transmit policy signals; Allow for optimal allocation of financial resources on the basis of risk and return. Most countries have moved or are moving towards using indirect instruments.,Transitional Considerations,Degree of financial development. For instance, How developed are the

28、financial markets? How competitive are the commercial banks? How vulnerable is the banking sector? Selection of appropriate target variables and the interpretation of monetary indicators as guides to policy. Difficulties in controlling monetary aggregates and credit growth during and after the trans

29、ition. A gradual approach may be preferred, but not always.,Choice of Operating Target,25,Operating Targets (reserves, money market interest rate, etc),Indicator variables,Intermediate Targets (M2, ER, LT interest rates, Inflation forecast, etc),Policy Objectives (low and stable inflation),Monetary

30、Policy Framework,Policy Instruments (OMO, discount rate, etc),Domestic shocks,External shocks,Inflation Targeting,Policy Decision,Choice of Operating Target,Instrument Interest Rate,Interest Rate,Mo,Ro,M1,Money,Md,R1,Ro,Mo,Money,Interest Rate,Money Target,Interest Rates (R) vs. Money Stock (M),Choic

31、e of Operating Target,Interest Rates (R) vs. Money Stock (M) Pooles (1970) conclusion: Vol. (aggregate demand shock) Vol. (money demand shock) Choose M; Vol. (aggregate demand shock) Vol. (money demand shock) Choose R; Quantity Theory of Money,Choice of Monetary Policy Instruments,In recent years, i

32、nterest rates have been preferred among advanced economies as the primary monetary policy instrument. provides a more transparent signal of monetary policy stance; automatic response to money demand shocks, in the face of financial innovations. For instance, the simple Taylor Rule in the U.S.,Moneta

33、ry Transmission Mechanism,Monetary Transmission Mechanism,How do monetary policy actions affect the macro-economy? Money-Interest rate channel Credit channel Asset price channel Exchange rate channel,Monetary Policy,Market rates,Asset prices,Expectations/ Confidence,Exchange rate,Aggregate Demand,Im

34、port prices,Inflation,A transmission mechanism of monetary policy,Output,Productivity,Exchange Rate Pass-Through,Policy Rate Pass-Through,32,Traditional monetary transmission channel; The effect is felt on the demand for credit. Marginal cost of credit Costs of business investment Cost of housing or

35、 durables purchases Rate of return to savings It is the real interest rate that determines savings/ investment decisions. Real interest rate = Nominal Interest rate - E (),Money-Interest rate Channel,Interbank Call Rate,Discount Rate,3-Month T-bill Rate,1-Year T-Bond Rate,5-Year T-Bond Rate,10-Year

36、T-Bond Rate,Lending Rate,Policy Rate,Deposit Rate,Crucial to the conduct of monetary policy is how the policy rate is transmitted to market rates at various maturity spectrainterest rate pass-through.,Interest Rate Pass-Through,Pass-through to Inter-bank Money Market Rates,The effect of a change in

37、the policy rate on interest rates in the money market, i.e., major commercial banks borrowing costs. Generally money-market rates respond pretty quickly if markets are well developed; Money market rates may change even before the policy rate changes (if anticipated); However, in periods of financial

38、 turbulence, the response may be impaired (e.g., owing to default risk during the U.S. financial crisis).,Source: Tao Wu, 2011. “The U.S. Money Market and the Term Auction Facility in Financial Crisis of 2007-2009,” Review of Economics and Statistics, Volume 93.,Source: Tao Wu, 2011. “The U.S. Money

39、 Market and the Term Auction Facility in Financial Crisis of 2007-2009,” Review of Economics and Statistics, Volume 93.,Long-term interest rates are the expected future short-term rates plus term premiums: Impact on longer-term interest rates can go either way, because long-term interest rates depen

40、d on current and expected future short-term interest rates, and term premiums.,Pass-through to Long-term Interest Rates,The Bond Yield “Conundrum”,The Bond Yield “Conundrum”,Long-term interest rates have trended lower in recent months even as the Federal Reserve has raised the level of the target fe

41、deral funds rate by 150 basis points. This development contrasts with most experience, which suggests that, other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields For the moment, the broadly unanticipated behavior of world bond markets

42、 remains a conundrum.,Testimony of Fed Chairman Alan Greenspan to the U.S. Senate, February 16, 2005,Long-term interest rates are the expected future short-term rates plus term premiums: Thus in principle, central banks can adjust markets expectations of inflation and future policy rate, or term pre

43、miums (liquidity and risk premiums) to affect long-term interest rates. Recent examples include the U.S. Federal Reserves monetary policy exercises during and after the most recent financial crisis.,Pass-through to Long-term Interest Rates,41,Credit view examines the effect of monetary policy on the

44、 supply of credit instead. It stresses on the implications of asymmetric information between borrowers and lenders. External finance premium is the difference between the cost of funds raised externally and the opportunity cost of internal funds. Monetary policy affects not only the general level of

45、 interest rates but also the size of the external finance premium.,Credit Channel,42,Two mechanisms to explain the linkage between monetary policy and external finance premium. Policy tightening tends to reduce the net worth of businesses and individuals, making it harder for them to qualify for loa

46、ns at any interest rate, thus reducing spending and price pressures balance sheet channel Policy rate hikes also make banks less profitable in general and thus less willing to lend bank lending channel,Credit Channel,43,Factors raising the importance of the credit channel: High dependence upon bank

47、credit Low development of domestic capital markets Inadequate legal protection of creditors Empirically, the relative availability of bank credit may be a useful predictor of future investment and output.,Credit Channel,Asset Price Channel,Monetary policy affects asset prices (equities and real esta

48、tes); Changes in asset prices, in turn, affect consumption and investment.,Effects on Household Consumption,Equity and real estate prices affect: Household wealth and hence consumption (wealth effect) Households borrowing capacity to finance current consumption.,Equity prices affect corporate invest

49、ment via Tobins q: Investment increases when the market value of a firm relative to its replacement cost rises. Corporate balance sheet effect: The net worth of a firm affects the external finance premium and the cost of capital Changes in collateral values affect eligibility for bank loans and thus

50、 investment. Bank balance sheet effect: Banks capital position and lending capacity declines when the net worth is adversely affect by declines in asset price credit crunch.,Effects on Business Investment,47,Asset prices,Expectations/ Confidence,External Financing Cost,Balance Sheets: Investors and

51、Banks,Tobins q,Asset Price Channel: Financial Accelerator,Investment Output,A spiral between asset prices and aggregate demand,The Exchange Rate Channel,When the exchange rate is floating, monetary policy could have systematic effects on the exchange rate. Tighter monetary policy leads to exchange r

52、ate appreciation, which reduces price pressures: Aggregate demand: appreciation reduces net exports Aggregate supply (cost): appreciation reduces domestic currency value of imports,Pass-through from Exchange Rate to Inflation,Pass-through from exchange rates to import prices exhibits cross-sectional

53、 differences In emerging markets usually faster than in advanced countries It depends on price setting behavior or concern about market share Pass-through effects could be endogenous For the U.S., long-run pass-through only 24-29%; for Germany 40-100%; for Japan 80-100%. Choi and Cook (2008, IMFWP/0

54、8/213) estimate pass-through effects using a new Keynesian model. The estimated pass-through effect is filtering very slowly. For the U.S., only 7% of the importers will change their prices in response in each quarter after the shock.,50,It takes time for changes in monetary policy instrument to hav

55、e maximum impact on macro economy.,Change in instrument,Market rates,Asset prices,Expectations/ confidence,Exchange rate,Domestic inflationary pressure,Inflation,18-24 months,12-18 months,Changes can be anticipated,Lags for the Monetary Policy to Take Effect,Lags for the Monetary Policy to Take Effe

56、ct,Therefore, monetary policy needs to be pre-emptive. This requires clear understanding of macroeconomic structure, correct identification of the underlying shocks, accurate data collection, and reliable forecasting. Challenges faced by policy-makers in real time are daunting model uncertainty, par

57、ameter uncertainty, data uncertainty, etc. The conduct of monetary policy will remain both a science and an art.,The U.S. Federal Reserves Unconventional Monetary Policy,U.S. Monetary Policy During the Crisis,Overview of financial crisis and recession Federal Reserves Policy Response Extraordinary p

58、rovision of liquidity Cuts in short-term interest rates Communication of future policy guidance Purchases of long-term debt securities Excess reserves and inflation expectations Exit strategy of the unconventional monetary policy,Credit Boom and Housing Bubble: 2000-2005,Flood of international capit

59、al, low interest rates, and ample liquidity induced a credit boom with especially rapid growth in residential borrowing. Investors underestimated underlying credit risks. They were misled by unreliable credit ratings and complicated structured finance products. Inadequate financial supervision and regulation.,Credit Boom and Housing Bubble: 2000-2005,Credit boom was reinforced by rising home prices, low default rates, and a loosening of underwriting standardsespecially on loans to be securitized.