IMF高级宏观经济学研修班课程CT1405MMF-L03Moneta

1、Monetary Policy Transmission MechanismCTP Training ProgramMacroeconomic Management and Financial Sector IssuesCT14.05PresenterTao Wu1Content OutlineGeneral Issues about Monetary PolicyObjectives: What monetary policy can and cannot do.Choice of policy instruments: direct or indirect ?Choice of opera

2、ting target: interest rate or monetary aggregates?Transmission Mechanism: How does monetary policy work?Interest rate, Credit, Asset price, Exchange rateRecent Monetary Policy Issues: The U.S. Federal Reserves Unconventional Monetary Policy OperationsThis training material is the property of the Int

3、ernational Monetary Fund (IMF) and is intended for use in IMF Institute courses. Any reuse requires the permission of the IMF Institute.”2What Monetary Policy Can and Cannot Do3What Monetary Policy Can and Cannot Do“We are in danger of assigning to monetary policy a larger role than it can perform,

4、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, 1967.4What Monetary Pol

5、icy Can and Cannot DoLong-run effects vs. Short-run effectsMonetary 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 to ensure price st

6、ability.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.5What Monetary Policy Can and Cannot DoCentral banks cannot have any subst

7、antial 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 and stable, central ban

8、ks 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.6Monetary Policy: ObjectivesPrice Stability (low and stable inflation);Reduced Volatility of business cycles;Central banks may also be concer

9、ned aboutInterest rate stability and financial market stability;Exchange rate stability.7Monetary Policy: ObjectivesWhat do we mean by price stability?Prices are not changing on average.However, individual prices may rise or fall.Why not zero percent inflation?Upward bias in measured inflationReduce

10、 the risk of deflation (to avoid a “liquidity trap”zero bound on nominal interest rates).8TimeGDPCentral Bank may also be able to reduce volatility of business cycles9What Monetary Policy Cannot Do: Lessons from the Phillips CurveIs there a trade-off between inflation and unemployment?The Phillips c

11、urve: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 wants to persistently push the unemployme

12、nt rate below its potential level? 10Phillips Curve in the U.S.: 1960 - 200711Trade-offs between Inflation and UnemploymentFor instance, a central bank may decide to increase money supply or keep interest rates low, thereby pushes unemployment rate below its potential level at the price of a higher

13、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 will most likely end up with higher infla

14、tion but no lower unemployment.12Trade-offs between the Volatilities ofInflation and UnemploymentAssume that the objective of a central bank is to minimizewhere is the target unemployment rate; is the target inflation rate; is the inflation-aversion parameter.Central banks can trade more unemploymen

15、t or output volatility for less inflation volatility, and vice versa.13Instruments of Monetary Policy14Operating Targets (reserves, money marketinterest rate, etc)Indicator variablesIntermediate Targets(M2, ER, LT interest rates, Inflation forecast, etc)Policy Objectives(low and stable inflation)Mon

16、etaryPolicy FrameworkPolicy Instruments (OMO, discount rate, etc)Domestic shocksExternal shocksInflation TargetingPolicy Decision15Monetary Policy FrameworkNeed to answer three questions when designing a monetary policy framework:Which policy instruments to use?Direct instruments vs. indirect instru

17、ments?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 target and then policy objectives? How accurate and how fast is t

18、he transmission?Choices between policy instruments, intermediate targets, and final objectives must be compatible.16Policy InstrumentsWhen implementing monetary policy, central banks can either act directly, using its regulatory power, or indirectly, using its influence on money market conditions.Di

19、rect instruments operate by setting or limiting either prices or quantities through regulationsFocus on the balance sheets of commercial banks;Indirect instruments act through the market, by adjusting the underlying demand for, and supply of, bank reserves;Initial effects are on the balance sheet of

20、 the central bank.17Direct InstrumentsDirect Controls on interest rates For instance, minimum and maximum interest rates, preferential rates for certain loan categories, etc;Credit ceilingsAt aggregate level or on individual banks;Directed lending policiesFor instance, preferential central bank refi

21、nance facilities to direct credit to priority sectors;High reserve and liquid asset requirementsDesigned both to absorb liquidity and to provide government deficit financing.18Direct InstrumentsEffective means to achieve narrowly defined targets:For instance, maintaining a particular interest rate a

22、t 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 markets;However, the macroeconomic effects of the controls is hard to predict,

23、 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.19Direct InstrumentsPrevent competition and limit the expansion of more efficient banks;Discourage c

24、orrect 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 and may encourages “capital flight.”Create various administrative problems and encou

25、rage the development of unregulated “grey” market or “shadow banking.”20Indirect InstrumentsOpen-market operationsOutright transactions and repo/reverse repo agreementsStanding facilities“Lender of last resort.”Discount window, lending and deposit facilities, etc.Reserve requirementsLess popular in

26、recent years;Recent tendency toward lower reserve requirements.21Indirect InstrumentsIndirect instruments are considered more market friendly and are less distortionary than direct instruments.Focus on system-wide liquidity;Transmit policy signals;Allow for optimal allocation of financial resources

27、on the basis of risk and return.Most countries have moved or are moving towards using indirect instruments.22Transitional ConsiderationsDegree of financial development. For instance,How developed are the financial markets?How competitive are the commercial banks?How vulnerable is the banking sector?

28、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 transition.A gradual approach may be preferred, but not always.23Choice of Operating Target24Operating Ta

29、rgets (reserves, money market interest rate, etc)Indicator variablesIntermediate Targets(M2, ER, LT interest rates, Inflation forecast, etc)Policy Objectives(low and stable inflation)MonetaryPolicy FrameworkPolicy Instruments (OMO, discount rate, etc)Domestic shocksExternal shocksInflation Targeting

30、Policy Decision25Choice of Operating TargetInstrument Interest RateInterest RateMoRoM1MoneyMdR1RoMoMoneyInterest RateMoney TargetInterest Rates (R) vs. Money Stock (M)26Choice of Operating TargetInterest Rates (R) vs. Money Stock (M)Pooles (1970) conclusion:Vol. (aggregate demand shock) Vol. (money

31、demand shock) Choose M;Vol. (aggregate demand shock) Vol. (money demand shock) Choose R;Quantity Theory of Money27Choice of Monetary Policy InstrumentsIn recent years, interest rates have been preferred among advanced economies as the primary monetary policy vides a more transparent si

32、gnal 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.28Monetary Transmission Mechanism29Monetary Transmission MechanismHow do monetary policy actions affect the macro-economy?Money-Interest rate

33、 channelCredit channelAsset price channelExchange rate channel30Monetary Policy Market ratesAsset pricesExpectations/ ConfidenceExchange rateAggregate DemandImport pricesInflationA transmission mechanism of monetary policyOutputProductivityExchange Rate Pass-ThroughPolicy Rate Pass-Through31Traditio

34、nal monetary transmission channel; The effect is felt on the demand for credit.Marginal cost of credit Costs of business investment Cost of housing or durables purchases Rate of return to savingsIt is the real interest rate that determines savings/ investment decisions. Real interest rate = Nominal

35、Interest rate - E () Money-Interest rate Channel32Interbank Call RateDiscount Rate3-MonthT-bill Rate1-YearT-Bond Rate5-Year T-Bond Rate10-YearT-Bond RateLending RatePolicy RateDeposit RateCrucial to the conduct of monetary policy is how the policy rate is transmitted to market rates at various matur

36、ity spectrainterest rate pass-through. Interest Rate Pass-Through33Pass-through to Inter-bank Money Market RatesThe effect of a change in 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

37、 are well developed;Money market rates may change even before the policy rate changes (if anticipated);However, in periods of financial turbulence, the response may be impaired (e.g., owing to default risk during the U.S. financial crisis).34Source: Tao Wu, 2011. “The U.S. Money Market and the Term

38、Auction Facility in Financial Crisis of 2007-2009,” Review of Economics and Statistics, Volume 93.35Source: 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 93.36Long-term interest rates are the expected

39、future short-term rates plus term premiums:Impact on longer-term interest rates can go either way, because long-term interest rates depend on current and expected future short-term interest rates, and term premiums.Pass-through to Long-term Interest Rates37The Bond Yield “Conundrum”38The Bond Yield

40、“Conundrum”Long-term interest rates have trended lower in recent months even as the Federal Reserve has raised the level of the target federal funds rate by 150 basis points. This development contrasts with most experience, which suggests that, other things being equal, increasing short-term interes

41、t rates are normally accompanied by a rise in longer-term yields For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum.Testimony of Fed Chairman Alan Greenspanto the U.S. Senate, February 16, 200539Long-term interest rates are the expected future short-term rat

42、es plus term premiums:Thus in principle, central banks can adjust markets expectations of inflation and future policy rate, or term premiums (liquidity and risk premiums) to affect long-term interest rates.Recent examples include the U.S. Federal Reserves monetary policy exercises during and after t

43、he most recent financial crisis.Pass-through to Long-term Interest Rates40Credit view examines the effect of monetary policy on the supply of credit instead.It stresses on the implications of asymmetric information between borrowers and lenders.External finance premium is the difference between the

44、cost of funds raised externally and the opportunity cost of internal funds.Monetary policy affects not only the general level of interest rates but also the size of the external finance premium.Credit Channel41Two mechanisms to explain the linkage between monetary policy and external finance premium

45、.Policy tightening tends to reduce the net worth of businesses and individuals, making it harder for them to qualify for loans at any interest rate, thus reducing spending and price pressures balance sheet channelPolicy rate hikes also make banks less profitable in general and thus less willing to l

46、end bank lending channelCredit Channel42Factors raising the importance of the credit channel:High dependence upon bank creditLow development of domestic capital marketsInadequate legal protection of creditorsEmpirically, the relative availability of bank credit may be a useful predictor of future in

47、vestment and output.Credit Channel43Asset Price ChannelMonetary policy affects asset prices (equities and real estates);Changes in asset prices, in turn, affect consumption and investment.44Effects on Household ConsumptionEquity and real estate prices affect:Household wealth and hence consumption (w

48、ealth effect)Households borrowing capacity to finance current consumption.45Equity prices affect corporate investment 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

49、 finance premium and the cost of capital Changes in collateral values affect eligibility for bank loans and thus 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 Busin

50、ess Investment46Asset pricesExpectations/ ConfidenceExternal Financing CostBalance Sheets:Investors and BanksTobins qAsset Price Channel: Financial AcceleratorInvestment OutputA spiral between asset prices and aggregate demand47The Exchange Rate ChannelWhen the exchange rate is floating, monetary po

51、licy could have systematic effects on the exchange rate.Tighter monetary policy leads to exchange rate appreciation, which reduces price pressures:Aggregate demand: appreciation reduces net exportsAggregate supply (cost): appreciation reduces domestic currency value of imports48Pass-through from Exc

52、hange Rate to InflationPass-through from exchange rates to import prices exhibits cross-sectional differencesIn emerging markets usually faster than in advanced countriesIt depends on price setting behavior or concern about market sharePass-through effects could be endogenousFor the U.S., long-run p

53、ass-through only 24-29%; for Germany 40-100%; for Japan 80-100%.Choi and Cook (2008, IMFWP/08/213) 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

54、 quarter after the shock.49It takes time for changes in monetary policy instrument to have maximum impact on macro economy.Change in instrumentMarket ratesAsset pricesExpectations/ confidenceExchange rateDomesticinflationarypressureInflation18-24 months12-18 monthsChanges can be anticipatedLags for

55、the Monetary Policy to Take Effect 50Lags for the Monetary Policy to Take EffectTherefore, 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.Challe

56、nges faced by policy-makers in real time are dauntingmodel uncertainty, parameter uncertainty, data uncertainty, etc.The conduct of monetary policy will remain both a science and an art.51The U.S. Federal Reserves Unconventional Monetary Policy52U.S. Monetary Policy During the CrisisOverview of fina

57、ncial crisis and recessionFederal Reserves Policy ResponseExtraordinary provision of liquidityCuts in short-term interest ratesCommunication of future policy guidancePurchases of long-term debt securitiesExcess reserves and inflation expectationsExit strategy of the unconventional monetary policy53C

58、redit Boom and Housing Bubble: 2000-2005Flood of international capital, 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

59、structured finance products.Inadequate financial supervision and regulation.54Credit Boom and Housing Bubble: 2000-2005Credit boom was reinforced by rising home prices, low default rates, and a loosening of underwriting standardsespecially on loans to be securitized.Credit boom and housing bubble: 2

60、000-200555Credit Boom Inflates with Housing BubbleHouse prices increase(Housing bubble)Home equity risesDelinquencies fallCredit terms loosenHousing demand rises(Credit boom)56Financial Crisis and RecessionU.S. housing bubble started to deflate in 2005-2006.Rising mortgage delinquencies in early 200