Browsing by Subject "Monetary policy"

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A research program on monetary policy for Europe
(Elsevier BV, 2024-08-28) Altavilla, Carlo; Bussiere, Matthieu; Gali, Jordi; Gorodnichenko, Yuriy; Gürkaynak, Refet Soykan; Rey, Helene
European macroeconomies remain under-researched. There are compelling reasons for this to change. European issues pose significant economic challenges, are theoretically intriguing, and provide ample data for empirical studies. In this call to action, we outline a research program focused on monetary policy questions relevant for Europe.
Open Access
Appropriate policy tools to manage capital flow externalities
(Palgrave Macmillan, London, 2015) Gürkaynak, Refet S.; Stiglitz; Gürkaynak, Refet S.
Central banks are at the forefront of cyclical policymaking. They therefore become natural candidates to take over all cyclical policy objectives. This is often the case in policies for controlling capital inflows. Giving the duty of controlling capital flows to central banks, explicitly or implicitly, without giving them the appropriate policy tools, leads to inefficient outcomes. It is clear that when a central bank has to use its interest rate tool to satisfy multiple objectives, it will have to make sacrifices. More subtly, but perhaps more importantly, when central banks incur the cost of capital inflows, mostly in terms of taking the public blame, other policymakers often engage in policies that have the side effect of increasing these flows. It then becomes doubly important to give the capital flow management mandate to the policymaker who fosters the inflows, so their possible negative effects will be internalized.
Open Access
Assessing the effects of a policy rate shock on market interest rates: interest rate pass-through with a FAVAR model–the case of Turkey for the inflation-targeting period
(2018-07-29) Ceylan, N. B.; Berument, Hakan; Varlik, S.
The purpose of this paper is to investigate the effectiveness of the central bank’s policy rate on market interest rates in Turkey for the inflation-targeting period. Empirical evidence suggests that (i) all interest rates respond to a positive policy rate shock positively for all periods and have a hump shape for government debt security yields as well as for domestic-currency‒ and foreign-currency‒denominated time deposit interest rates; (ii) as maturities increase, the responses of all interest rates to the policy shock increase; (iii) the responses to the policy shock of credit interest rates with higher demand elasticity and longer maturity, such as vehicle and housing rates, is lower than those of others that we consider and (iv) the interest-rate responses of foreign-currency‒denominated commercial credits are lower than those of domestic-currency‒denominated commercial credits.
Open Access
Asymmetric effects of central bank funding on commercial banking sector behaviour
(Taylor & Francis, 2019-02) Şahin, A.; Berument, Hakan
In this paper, we assess the effects of Central Bank Funding (C.B.F.) on commercial bank lending behaviour by using weekly Turkish data from 7 January 2011 to 5 June 2015. To be specific, using the Nonlinear Autoregressive Distributed Lag Error Correction Model, we assess the effects of C.B.F. provided daily by the Central Bank of the Republic of Turkey through Open Market Operations to financial markets. Our empirical evidence reveals that for all types of lending, an increase in C.B.F. (which has a higher cost for commercial banks relative to alternatives) forces commercial banks to borrow from higher-cost channels, i.e., we find that increasing C.B.F. discourages commercial bank lending. We also find that decreases in C.B.F. that proxy what commercial banks can borrow more cheaply from alternative sources increase commercial bank lending. However, increasing C.B.F. is more effective than decreasing C.B.F. for Total Bank Loans, Total Credit Cards and Automobile Loans, and decreasing C.B.F. is more effective in the short run for Consumption Loans, Housing Loans and Commercial Loans: short-run asymmetry. Therefore, we can report only limited support for long-run asymmetry, and consequently, claim that there is magnitude (an increase versus decrease in C.B.F.) and category asymmetry (across different lending categories).
Open Access
Asymmetric effects of monetary policy shocks on economic performance: empirical evidence from Turkey
(Routledge, 2016) Ülke, V.; Berument, Hakan
This study investigates the asymmetric effects of monetary policy shocks on the macroeconomic variables of exchange rate, output and inflation for an emerging economy ‒ Turkey ‒ by using monthly data between 1990 and 2014. We employ the innovative nonlinear vector autoregressive model of Kilian and Vigfusson (2011), which allows us to observe the effect of different stances (tight or loose) and different sizes (small or large) of monetary policy actions. Our empirical evidence reveals that tight monetary policy, which, in this case, is captured with a positive shock to interest rate, decreases exchange rate, output and prices, as economic theory suggests. Loose monetary policy, which is captured with a negative shock to interest rate, has the opposite effect on these variables. However, the effects of loose monetary policy are weaker than the effects of tight monetary policy because loose monetary policy shocks are less effective than tight monetary policy shocks. Moreover, as the magnitude of a shock increases, the difference between the effects of tight and loose monetary policy policies also increases. © 2015 Taylor & Francis.
Open Access
Asymmetric effects of U.S. monetary policy on stock market volatility: an analysis using asymmetric GARCH model
(2024-08) Rehman, Ubaid Ur
This thesis examines the asymmetric effects of U.S. monetary policy and interest rates on the volatility of returns in the stock market of emerging countries using an asymmetric generalized autoregressive conditional heteroscedasticity model. The model incorporates the interest rate movements in the U.S. in the conditional variance equation and uses a dummy to explicate the asymmetric response of the volatility of the returns. Using daily returns data of 14 indices from a selection of countries and creating a dummy variable for the daily federal funds rate, the results show that the response of volatility to the contractionary movement in interest rate is significantly higher than the expansionary movement. The results also the differences in the response across the countries given the heterogeneity in global trade integration, financial structure, and financial developments. Moreover, the high-frequency identification of monetary policy surprises is also used for the analyses of the response of monetary policy. This exercise shows that the markets perceive the contractionary policy differently and differentiate between growth shocks and pure monetary policy shocks as well as the information effect of the FOMC decisions on the meeting dates.
Open Access
Cari açık, bütçe dengesi, finansal istikrar ve para politikası: Heyecanlı bir dönemin izi
(Bilgesel Yayıncılık San. ve Tic. Ltd., 2012-06-01) Akkaya, Y.; Gürkaynak, R. S.
2001 krizi Türkiye iktisat tarihinde önemli bir milattır. Bu makalede kriz sonrası dönemi 2002-2006 ve 2007-2012 alt dönemlerinde inceliyoruz. 2002-2006 güçlü bir stabilizasyon programının başarıyla uygulandığı, ekonominin normalleştiği bir dönemdir. Daha yakın döneme ilişkin başlıca hususlar ise (i) 2006 sonundan beri genel bir iktisat politikası boşluğu olduğu, (ii) cari açığın düzey olarak çok yüksek bir platoya yerleştiği ve bunun artık eskisi gibi bütçe açığı tarafından sürüklenmediği, (iii) ekonominin karşılaştığı yeni risk ve sorunlar eskilerinden farklı olduğu için kurumsal yapının bunlara karşılık vermekte zorlandığı, (iv) bu nedenle toplam kredi büyümesi, cari açık ve bunun finansmanı gibi konuların sahipsiz kaldıkları ve aslında bunlardan sorumlu olmayan Merkez Bankası’nca sahiplenildikleri ve (v) elinde bu sorunlar ile baş etmek için uygun araçlar olmayan Merkez Bankası’nın bu çabasının kurumsal olarak MB için ve bir bütün olarak Türkiye ekonomisi için önemli maliyetler doğurduğudur. Makalede birçok değişik bağlamda vurgulanan husus herhangi bir amacın vazife olarak verildiği kurumun o amaca ulaşmak için gereken araçları haiz kurum olması gerektiğidir.
Open Access
A century and three-quarters of bank rate and long-term interest rates in the United Kingdom
(Wiley-Blackwell Publishing Ltd., 2017) Berument, Hakan; Cabezon, E.; Froyen, R.
Over the years from 1844 to 2013, the United Kingdom had several distinct monetary policy regimes. This paper examines the relationship between the Bank of England policy rate and UK long-term rates in each regime. Our starting point is R. G. Hawtrey's A century of Bank Rate, which focused mainly on the classical Gold Standard. We also examine the Interwar years, post-Second World War years of policy by discretion and the recent regime of inflation targeting. We find that policy regimes that firmly anchor inflationary expectations result in long-run interest rates becoming less responsive to changes in monetary policy rates. This suggests a conflict between a regime that anchors inflationary expectations and one that allows a central bank to have significant effects on long-term rates via a short-term policy rate. © 2017 John Wiley & Sons Ltd
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Coordination between monetary policy and fiscal policy for an inflation targeting emerging market
(Pergamon Press, 2010) Aktas, Z.; Kaya, N.; Özlale, Ü.
Several studies including Blanchard (2004) and Favero and Giavazzi (2004) imply that in emerging market economies, a tight monetary policy within an inflation-targeting framework could actually increase the price level due to the lack of fiscal discipline and the associated high risk premium. We extend their arguments in two ways. First, we introduce a semi structural model with time-varying parameters, where the risk premium is 'unobserved' and it is derived within the system. Such an approach fits better with the volatile nature of emerging market economies by allowing us to track down the time-varying effects of macroeconomic dynamics on both the model-consistent risk premium and the other key variables. Second, we obtain impulse response functions and analyze the implications of a tight monetary policy on major macroeconomic variables. Taking the Turkish economy as our reference point, we find that the arguments of Blanchard (2004) and Favero and Giavazzi (2004) seem to be valid. © 2009 Elsevier Ltd. All rights reserved.
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Dynamic integration and network structure of the EMU sovereign bond markets
(Springer, 2019) Şensoy, Ahmet; Nguyen, D. K.; Rostom, A.; Hacıhasanoğlu, E.
In this paper, we propose a novel concept of correlation-based stable networks to empirically investigate the dynamic integration and network structure of the European Monetary Union (EMU) sovereign bond markets. The obtained results uncover a high degree of market integration between sample markets over the period preceding the recent financial crises, while segmentation is found afterwards. The stable network analysis shows, for its part, the existence of two different network structures before and after the onset of the European debt crisis, where the in-crisis network structure is characterized by two groups of countries with respect to their fiscal performance. In particular, Belgium is the unique vertex connecting the two groups, making it the channel for shock transmission in the event of worsening debt crisis in the EMU.
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Effect of central bank governor speeches on financial markets
(2024-09) Turan, Fatma Senem
This thesis examines the impact of speeches by central bank governors from European Central Bank (ECB), Deutsche Bundesbank, Bank of France, Bank of Spain and Bank of Italy on OIS yields, bond yields, stock prices and exchange rate. Using two standard event study designs via Rigobon and Sack (2004) and Gürkaynak et al. (2005), the study finds that financial markets are sensitive to central bank governor speeches. OIS and sovereign bond yields with maturities from 5 to 30 years respond significantly to central bank speeches. For stock prices, the analysis includes the Euro Stoxx50, Euro SX7E, German DAX30, French CAC40, Spanish IBEX35, and Italian MIB30. Even if there are some positive responses, the results align with the typical understanding that a negative relationship exists between stock prices and monetary policy shocks. Lastly, the exchange rate is the least responsive asset among the others, with significant reactions observed in speeches by the ECB governor and the Bundesbank governor on the euro- USD dollar exchange Overall, national central bank governors affect financial markets. Among various assets, their voices are particularly influential. However, while the speeches of periphery countries’ central bank governors have an impact, ECB governor speeches usually dominate those of the periphery countries’ central bank governor speeches. In contrast, the central bank governor speeches of core countries, Germany and France, often have more influence than ECB governor speeches.
Open Access
Effectiveness of monetary policy under different levels of capital flows for an emerging economy: Turkey
(Routledge, 2015) Ülke, V.; Berument, Hakan
This article assesses the effect of tight monetary policy on economic performance under different levels of capital flows. Empirical evidence from Turkey between 1990 and 2013 suggests that tight monetary policy measured with a positive innovation on interest rate appreciates the Turkish Lira and decreases output and prices. However, the effectiveness of monetary policy decreases for interest rate and increases for exchange rate and prices if capital flows are high. Specifically, interest rate, local currency value of foreign currency and prices will be lower for higher levels of capital flows. However, the relative effectiveness of monetary policy on output is virtually unchanged. © 2014 Taylor & Francis.
Open Access
The effects of anticipated and unanticipated federal funds target rate changes on domestic interest rates: international evidence
(S.E.I.F at Paris, 2010) Berument, Hakan; Ceylan, N. B.
This paper assesses the effects of anticipated and unanticipated United States Federal Funds target rate changes on the domestic interest rates of a set of countries for the period from June 1989 to August 2008. The empirical evidence provided here suggests that i. unanticipated changes have a greater effect than anticipated changes; and ii. evidence from developed markets is stronger than that from developing/emerging markets.
Open Access
The effects of changes in the anticipated and unanticipated fed funds target rate on financial indicators: the case of an emerging market country-Turkey
(European Journals Inc., 2007) Berument, Hakan; Ceylan, N. B.; Olgun, H.
This paper puts forward the thesis that neither the changes in FED Funds anticipated target rate nor the FED Funds unanticipated target changes can be expected to affect the financial indicators of all emerging markets. The paper supports this thesis using the original framework developed by Kuttner (2001) for Turkey. Its basic argument is that FED’s decisions become relevant for an emerging market only after it becomes sufficiently open both on the capital and current account, has established the prerequisite institutional framework, its financial markets have been sufficiently developed and has established economic and political stability. Moreover, the paper shows that the unanticipated component of the FOMC decisions affect the financial indicators more than the anticipated component.
Open Access
Essays on forward guidance
(2014) Akkaya, Yıldız
This dissertation consists of three essays on forward guidance, central bank verbal guidance on future policy rates, and shows how economies respond to it both theoretically and empirically. In the first essay the effects of forward guidance on real economy through interest rate uncertainty is studied as explicit numerical guidance lowers the uncertainty around future interest rates. To analyze the effects of such a policy a New Keynesian model framework incorporating interest rate uncertainty is developed. The results show that a decrease in the uncertainty of interest rates is expansionary in its own right, independent of the level of interest rates the central bank commits to. Thus, distinct from the literature, a new channel for the effectiveness of forward guidance is suggested. The second essay studies the question of whether the optimal amount of interest rate uncertainty is always zero, or whether monetary policy makers may benefit from an increase in the uncertainty. For this purpose a two-country open economy New Keynesian model with interest rate uncertainty is developed, and the effects of interest rate uncertainty on capital flows and exchange rates are studied. The results emphasize that the impact of an increase in the volatility of interest rate mimics the impacts of an increase in the level of the interest rate, and this suggests that uncertainty about the policy rate path can be used by the central bank as a policy tool. The third essay is empirical, and analyses the sensitivity of the interest rates of various maturities to monetary policy uncertainty, which depends on the language used in the monetary policy statements. To measure market responses to the announcements, I first calculate monetary policy surprises and uncertainty surprises by using Federal Funds Futures and Eurodollar Options, respectively. In the event-study analysis it is shown that the reduction in the variability of monetary policy rate expectations due to the explicit content of the statements, has significant effect on the long-term treasury notes.
Open Access
Essays on macroeconomics
(2015-09) Kantur, Zeynep
This dissertation consists of three essays on two topics in macroeconomics. The first essay focuses on the monetary policy implications in an aging society. The second and third essays revisit the famous Shimer puzzle in a theoretical and an empirical framework in a different perspective. The first essay shows the impact of aging on effectiveness of monetary policy. To do so, it introduces an OLG-DNK framework where the demand side is represented by a two period overlapping generations setup and the supply side of the economy follows a New Keynesian framework. The model enables the study of the interaction of monetary policy with demographics in a coherent general equilibrium model. The main finding is that this merger of two basic strands of the macroeconomics literature implies monetary policy should be expected to be less effective as societies age since the interest rate sensitivity of real economic activity declines as the population ages. The second essay studies the effect of employment-to-employment ows in a New Keynesian model with labor market frictions. Although New Keyne sian models with labor market frictions found an increase in unemployment and a decrease in labor market tightness in response to a positive technology shock (which appears to be in line with the recent empirical findings), the volatilities of these variables are not as high as their empirical counterparts. In that regard, we assume two types of firms which offer different wage levels, thereby incentivizing low-paid agents to search on-the-job. Differently from the literature, the main source of wage dispersion is the assumption of different bargaining powers of firms. The proposed model generates a higher volatility of unemployment and labor market tightness in response to a positive technology shock compared to the model without on-the-job search. Moreover, it is shown that bargaining power and on-the-job search intensity have an amplifying effect on the unemployment rate. Finally, the last essay is an empirical application of the theoretical model proposed in Chapter 3. This essay revisits the Shimer (2005) puzzle by covering a longer period, 1951-2014, than Shimer's exercise. Firstly, essay shows some stylized facts on U.S. labor market by using raw data and a structural VAR model. Then, the study tests the performance of the model utilized in Chapter 3. The structural VAR models shows that there is a positive correlation between productivity and unemployment and negative correlation between productivity and labor market tightness conditional to technology shock. In addition, I show that the model with on-the-job search component adds more amplification to the standard New Keynesian model with labor market frictions and it is capable of generating both the magnitude and the sign of the fluctuations of labor market variables to productivity shocks.
Open Access
Essays on macroeconomics
(2017-09) Özcan, Gülserim
This dissertation consists of four essays on macroeconomics with a special focus on monetary economics, and shows the rationale behind non-optimality of expectation formation both empirically and theoretically. The first essay is empirical, and studies the role of inflation experience in the formation of inflation expectations in the euro area by investigating whether and to what extent inflation expectations of different forecasters are affected by the inflation they observe in the area they are residing in. We exploit the fact that many forecasters provide forecasts of the euro area inflation and these forecasters are in different firms, located in different countries. Hence there is a spatial dimension in the inflation experience of the forecasters. In particular, we first focus on the expectations of professional forecasters from different countries and ask whether their forecast errors are correlated with the observed inflation in the forecaster’s country at the time the expectation was formed. We find that current home inflation unduly affects expectations of next year’s euro area inflation, which may be because forecasters think euro area is more like their own country than it actually is (spatial) and/or think inflation is more strongly auto correlated everywhere than it actually is (temporal). We devise tests to decompose this effect into i) spatial error and ii) temporal error. We provide evidence showing that the source of this error is exclusively the temporal dimension. Forecasters perceive the world to be more serially correlated than it actually is for their home country, and for other countries as well which results in more pronounced and forecastable forecast errors. They understand the spatial dimension of inflation correctly. The second essay analyzes whether and how model uncertainty affects the amplification mechanism of the New Keynesian models. A first finding on a benchmark New Keynesian model with staggered price setting is that a robust optimal commitment policy necessitates more aggressive policy under a demand shock. Further, bringing additional persistence into the model deteriorates the effectiveness of monetary policy. Hence, allowing for either habit formation or partial indexation of prices to lagged inflation rate requires a stronger response for the policy to a demand shock. Together with the specification doubts, in order to reassure the private sector and signal that it will stabilize the fluctuations in the output gap, the policymaker reacts more aggressively as persistence rises. Although inflation persistence does not change the impact of model uncertainty, habit formation in consumption eliminates -even reverses- the impact of uncertainty on the policy reaction to a supply shock. The policymaker always attributes less importance to nominal interest rate inertia when there are concerns about model uncertainty. The third essay analyzes how the optimal behavior of a central bank changes if the central bank has a concern for robustness regarding model uncertainty when there is a possibility of a regime switch in the economy in which the transmission mechanism of monetary policy weakens. The aim is to stress the expectational effects arising from the regime-switching structure. The framework allows identifying the contribution of time-varying doubts about model misspesification on top of the risk of a future weakening of the policy transmission. The result implies a more active policy stance to reduce the possibility to experience a deterioration of monetary transmission mechanism even in normal times. The fourth essay takes a different turn and measures the monetary policy transmission mechanism in Turkey. Quantifying the impact of policy decisions on financial markets is complicated because of the simultaneous response of policy actions to the asset prices, and possible omitted variables that both variables respond to. This chapter applies a heteroscedasticity-based generalized method of moments (GMM) technique for financial markets in Turkey to overcome these problems. This approach is based on the heteroscedasticity of the policy surprises on monetary policy committee meeting dates to identify the financial market reaction to monetary policy. The findings are used as a cross-check for the widely-used identification technique, namely the OLSbased event study. The results suggest that event study estimates are biased for some asset returns.
Open Access
Five essays on monetary policy applications in an open economy under economic uncertainty and shocks
(2004) Dinçer, Nazire Nergiz
In this dissertation, we analyzed the monetary policy applications under uncertainty and shocks and their effects on the economy. The uncertainties we concern are inflation uncertainty and exchange rate risk, whereas the shocks are the unexpected exchange rate shocks, change in parity and capital flights. The case study is Turkey, except the analysis on inflation uncertainty, which is on G-7 countries. The analyses on inflation uncertainty suggest that inflation increases inflation uncertainty for G-7 countries, whereas inflation uncertainty decreases inflation for four countries. Therefore, when uncertainty is high, the central bank reduces those real costs at the margin by reducing inflation. On the other hand, the effects of exchange rate risk are an increase in prices, a depreciation of the real exchange rate, and a decrease in the output. In the face of unexpected currency depreciation or appreciation, the economic activity decreases. The effects of an improvement in the USD-Euro parity on an open economy, where the denomination composition of trade is asymmetric is an appreciation of the real exchange rate, an increase in the relative income and an improvement in the trade balance. The empirical analyses on capital outflows suggest that growth decreases, inflation increases and exchange rate depreciates, which are critical negative signals for an economy. Overall this dissertation suggests that when designing a policy program, it is important to consider the possible deviations from the policies. Otherwise, it would not be possible to achieve the targets, moreover the costs would be too high for the economy.
Open Access
The implicit reaction function of the Central Bank of the Republic of Turkey
(Routledge, 2000) Berument, Hakan; Malatyali, K.
Reviewing the implicit reaction function estimation under different specifications, it appears that the Central Bank of the Republic of Turkey (CBRT) responds to the lagged inflation rate rather than the forward one, M2Y growth is targeted on an annual basis and a serious output targeting policy was implemented while neither real nor nominal depreciation of the foreign currency basket was taken into consideration during the period 1989:07-1997:03. Also, we conclude that the CBRT does not target currency issued, M2, net domestic assets or net foreign assets nor does it take any of the budget deficit measures into account while determining its monetary policy.
Open Access
Inflation and inflation uncertainty in the G-7 countries
(Elsevier BV, 2005) Berument, Hakan; Dincer, N. N.
This study examines the relationship between inflation and inflation uncertainty in the G-7 countries for the period from 1957 to 2001. The causality between the inflation and inflation uncertainty is tested by using the Full Information Maximum Likelihood Method with extended lags. Our results suggest that inflation causes inflation uncertainty for all the G-7 countries, while inflation uncertainty causes inflation for Canada, France, Japan, the UK and the US. Furthermore, we find that in four countries (Canada, France, the UK and the US) increased uncertainty lowers inflation, and in only one country (Japan), increased uncertainty raises inflation. © 2004 Elsevier B.V. All rights reserved.