Abstract

Keywords

JEL classification

1. Introduction

2. Argument

3. Research design

3.1. CBI conditionality

3.2. Checks and balances

3.3. Control variables

3.4. Methods

4. Results

4.1. The determinants of CBI conditionality

4.2. Related outcomes

5. Conclusion

Appendix A. Supplementary data

Data availability

References

Abstract

International organizations (IOs) often drive policy change in member countries. Given IOs’ limited political leverage over a member country, previous research argues that IOs rely on a combination of hard pressures (i.e., conditionality) and soft pressures (i.e., socialization) to attain their political goals. Expanding this literature, we hypothesize that IOs can enhance their political leverage through loan conditions aimed at enhancing the political independence of key administrative units. Studying this mechanism in the context of the International Monetary Fund (IMF), we argue that through prescribing structural loan conditions on central banks (CBI conditionality), the IMF empowers central banks to gain more political leverage with the aim to limit a government’s ability to (ab)use monetary policy for political gain. Divorcing monetary authorities from their respective government, the IMF intends to alter political dynamics towards achieving greater program compliance and enhance long-term macro-financial stability. Relying on a dataset including up to 124 countries between 1980 and 2012, we find that the IMF deploys CBI conditionality to countries with fewer checks and balances, a less independent central bank, and where the government relies more heavily on the monetization of public debt.

1 Introduction

International organizations (IOs) often drive policy change in member countries. However, given that IOs have few (if any) means of direct enforcement, it remains unclear how they achieve policy change in member countries. Scholars have distinguished between policy conditionality, the practice of providing loans in exchange for commitments to policy reform (Steinwand and Stone, 2008); ‘naming and shaming’, the practice of reviewing country policies against best-practice standards (Kelley and Simmons, 2015); and socialization, the practice of acculturating policymakers into specific sets of policies emanating from consistent belief systems (Chwieroth, 2013)— as tools for IOs to drive policy reform in member countries.

The goal of our paper is to introduce a novel mechanism into this debate. We argue that IOs can promote policy reform through loan conditions that target the institutional foundations of a member country. In particular, IOs can deploy institution-building measures to divorce key administrative or bureaucratic units from a government through enhancing their political independence. Applying such a strategy, an IO can shield central administrative units from political interference, constrain a government’s ability to (ab)use its power for short-run political gain, and thus enhance its own political leverage.1 Hence, we argue that such institution-building measures can work as an important instrument to attain desired policy change.

We study this mechanism in the context of the International Monetary Fund (IMF). In this respect, IMF conditionality provides a unique laboratory for our theoretical claim. Since the 1980s, IMF has been using a combination of quantitative targets and structural conditions when coming to the financial rescue of countries (Vreeland, 2003; Dreher and Vaubel, 2004; Kentikelenis and Babb, 2019). In prescribing these adjustment programs, the Fund aims to achieve its twin goals of short-term stabilization and long-term policy reform. Knowing about the political costs of these adjustment programs, governments often try to avoid turning to the Fund for financial relief.

1- Introduction

2- Empirical analysis

3- Analytical illustration

4- Conclusion

References

Abstract

Under inflation targeting, central banks are supposed to set an inflation target in advance and then try to make the actual inflation reach the target. However, central banks may have an incentive to adjust their targets to meet their goals. Panel data analysis with a sample of 19 inflation-targeting countries show that changes in the inflation target significantly and positively respond to the deviation of the inflation rate from the target in the previous period. This result supports the idea that inflation-targeting central banks adjust the inflation target to meet the target when they miss it. Further analysis suggests that such a relationship is more evident in central banks with low credibility or weak performance compared with high credibility or strong performance. Finally, we show that such behavior of central banks can lead to equilibrium indeterminacy in the standard New Keynesian model. Further, such behavior renders achieving equilibrium determinacy harder for central banks even in more realistic models. This result may imply that when central banks respond to missed inflation targets by adjusting their targets and to enhance the credibility and stabilize the inflation rate, they may end up destabilizing inflation expectations and the inflation rate.

Introduction

Since New Zealand adopted inflation targeting in 1990, an increasing number of countries have adopted this policy as well. As a result, actual inflation rates in many economies, even emerging ones, have decreased sharply after the inflation targeting system was introduced. The inflation rate in our sample of 19 countries dropped by 9.3% points on average in 5 years after adopting inflation targeting. Although inflation targeting has been successful in reducing the inflation rate, the inflation-targeting central banks have not always been successful in meeting the inflation target. In our sample of 19 countries, the absolute value of deviation of the actual inflation rate from the target is 2.0% points at an annual average. This study aims to find out how inflation-targeting central banks behave when they miss the target. Particularly, do inflation-targeting central banks respond to misses on their targets by adjusting their targets to close the gap between the actual inflation rate and the inflation target? For example, in 2004, the Bank of Indonesia set the following three-year inflation target: 6 ± 1% (2005), 5.5 ± 1% (2006), and 5 ± 1% (2007). However, when the inflation rate departed from the upper bound of the target (10.5% in 2005), the Bank of Indonesia revised upwards the mid-point of the target by more than 1% point to 8 ± 1% (2006), 6 ± 1% (2007), and 5 ± 1% (2008) in 2005.

We examine the European Central Bank’s ad-hoc communication and explore how it informs future monetary policy decisions. Using the rich dataset of the inter-meeting verbal communication by the members of the European Central Bank’s Governing Council between 2008 and 2016, we construct a measure of communication evaluating its inclination towards easing, tightening or maintaining the monetary policy stance. We find that this measure provides useful additional information about future monetary policy decisions, even when we control for market-based interest rate expectations and lagged decisions. Our results also suggest that, in particular, communication related to conventional measures and/or by the ECB President explain the future ECB rate changes well. All aforementioned results hold also in the environment of the zero lower bound. Overall, these results point to the importance of transparent communication in understanding the future course of monetary policy.

Introduction

Central banks currently use a wide set of communication tools to manage financial markets’ expectations, and the use of these tools has become more intensive during the financial crisis (Blinder et al., 2017). Many central banks started operating in ultra-low interest rate environments and complemented their conventional monetary policy with several unconventional measures, such as asset purchases and forward guidance. As a result, the content of central bank communication has broadened, and central banks have started regularly communicating their views about asset purchases, liquidity conditions or interest rate commitments when referring to the stance of monetary policy. In this paper, we examine whether central bank communication contributed to better monetary policy predictability in the (post)-crisis period (2008–2016) using detailed data on the European Central Bank’s (ECB) verbal communication.1 To our knowledge, this is a novel examination because the empirical literature investigating the effect of communication on monetary policy predictability has largely focused on examining how the voting records and minutes from monetary policy meetings are informative about the future course of monetary policy (Gerlach-Kristen, 2004; Horvath et al., 2012; El-Shagi and Jung, 2015; Jung, 2016).

1- Introduction

2- Conceptual framework

3- Data

4- Asset price sensitivity to central bank communication: An overview

5- Stock-yield comovement and the nature of central bank news

6- Stock-yield comovement and unconventional monetary policy

7- Decomposing asset price responses to central bank communication

8- Conclusion

References

Abstract

Using evidence from four major central banks, we decompose news conveyed by central-bank communication into news about monetary policy (monetary news), as well as non-monetary news, i.e., news about economic growth and news affecting financial risk premia. Our approach exploits high-frequency comovement of stocks and interest rates combined with monotonicity restrictions across maturities in the yield curve. We find significant differences in the news composition depending on the communication channel used by central banks. Monetary news prevails in policy decision announcements. However, the non-monetary component accounts for more than half of communications that provide context to policy decisions such as press conferences and minutes. We show that non-monetary news drives a significant part of financial markets’ reaction during the financial crisis and in the early recovery, while monetary news gains importance since 2013.

Introduction

The relevance of central bank communication has risen significantly over the past decade as policy goals and associated operations have becomemore complex. Constrained by the effective lower bound on policy rates, major central banks have resorted to unconventional measures. Communicating these policies poses a challenge, as evidenced by the rise in the verbosity of central bank statements. New empirical methods are needed to quantify the effects of monetary policy, especially when monetary shocks measured using interest rate changes around announcements can be conflated with other information about the economic and financial conditions. This paper proposes a new approach to analyzing the information content of central bank communication. Drawing on the joint dynamics of government bond yields with equity returns around central bank releases, we quantify the importance of different economic shocks that drive the response of financial markets to policy communication. Specifically, we classify the information revealed by central banks into monetary policy, economic growth, and risk premium news. By the latter, we mean news that affects investors’ risk valuations (via changes in risk appetite or sentiment) separately from changes in economic fundamentals. Collectively, we refer to news about economic growth and news affecting risk premia as non-monetary news. Our approach to dissecting the news content of central bank communication exploits both the direction of the comovement between stocks and yields as well as the effect of news across the maturity dimension of the yield curve. We build our intuition using a stylized macro-finance model that delivers the following predictions. A conventional monetary policy shock affects the real rate and induces a negative comovement of stocks and yields that is stronger at short maturities. Both growth and risk premium shocks induce a positive comovement of stocks and yields.

مقاله سال 2016

Few technological advances have come to dominate the debate on public policy in recent times as information and communications technology (ICT). Within the realm of ICT, the advancements in mobile telephony and internet have been rapid and furious. According to Statista, a leading statistics company, globally, the number of internet users has increased from 413 million in 2000 to 2.5 billion in 2012. Likewise, the total subscriber base has reached 3.2 billion in 2012 and aided by multiple devices or use of multiple subscriber identification modules (SIMs) to access the best tariffs, the number of mobile phone users has increased 7 billion in 2012, with a major chunk of this increase taking place in emerging economies (GSM Association, 2013). Coupled with technological advancements, this revolution has not only re-shaped the way people think and analyse, but in a much broader sense, transformed the way they work and communicate.

In tandem with these global advancements, the experience of India has been nothing short of phenomenal. To illustrate, the number of mobile users in India has increased from 5.5 million in 2000 to nearly 500 million in 2012 (Internet Stat Live. com). Likewise, the mobile internet subscriber base has grown from around 3 million subscribers in 2000 to reach 150 million by early 2007, registering an average growth of 700% over a 7-year period (International Telecommunications Union, 2012). It has since increased to over 850 million by 2012. Coupled with the fact that a fifth of the global population without bank accounts resides in India (Demirguc Kunt, Klapper, Singer and Van Oudheusdhen, 2015), this brings to the forefront the relevance of mobile telephony as a tool for enhancing financial inclusion.

The low levels of financial inclusion in relation to the large number of mobile phone subscribers makes it imperative to investigate whether an expansion of mobile phone deployment in general can contribute to greater financial inclusion. Research has documented that the some of the major barriers to financial inclusion include costs, distance and documentation (World Bank, 2014). Illustratively, high costs and fees charged tend to raise the costs of making small transactions, impeding access. Besides, distance is an equally important consideration: low branch penetration raises overall transactions costs and hinders access. In addition, onerous documentation requirements might compel workers with no formal proof residence or credit history to be excluded from the formal financial system. The challenges of such financial exclusion can be manifold, ranging from credit constraints to greater vulnerability to adverse shocks (Claessens, 2006), lower investment (Chakrabarty, & Pal, 2013) as well as the perpetuation of income inequality and poverty (Beck, Demirguc Kunt, & Levine, 2005; Demirguc Kunt, Beck, & Honohan, 2008; Demirguc Kunt & Levine, 2008).

مقاله سال 2016

Short-term analyses in central banks and other policy institutions are intended to provide policy makers, and possibly larger audiences, with assessments of the recent past and current business cycle. There is a long tradition in business cycle analysis of separating periods of contraction from periods of expansion (see Schumpeter, 1954). Policy decisions vary depending on whether the economy is in an expansionary or a recessionary period. Most of the research to date has focused on US data, where the cycle defined by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) cycle is regarded as the official reference cycle.

There is no authoritative dating of classical business cycles for the Norwegian economy. Norway is characterized by being a small open economy with large exports of energy (gas and oil) goods, and it is not obvious whether Norwegian business cycles are synchronized fully with the cycles of other Scandinavian countries, or with the European or US cycles.

The contributions of this paper are twofold. First, we define classical business cycle turning points for the Norwegian economy for the period 1978Q1–2011Q4, exploring a widely used set of methods. Second, in a real-time out-of-sample forecasting exercise, we study the timeliness and accuracy of the different methods in order to predict the peak and trough of the last recession.