M. A. Part - Ii Economics Group - I Paper - Iii Development Economics
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QE Equivalence to Interest Rate Policy: Implications for Exit
QE Equivalence to Interest Rate Policy: Implications for Exit Samuel Reynard∗ Preliminary Draft - January 13, 2015 Abstract A negative policy interest rate of about 4 percentage points equivalent to the Federal Reserve QE programs is estimated in a framework that accounts for the broad money supply of the central bank and commercial banks. This provides a quantitative estimate of how much higher (relative to pre-QE) the interbank interest rate will have to be set during the exit, for a given central bank’s balance sheet, to obtain a desired monetary policy stance. JEL classification: E52; E58; E51; E41; E43 Keywords: Quantitative Easing; Negative Interest Rate; Exit; Monetary policy transmission; Money Supply; Banking ∗Swiss National Bank. Email: [email protected]. The views expressed in this paper do not necessarily reflect those of the Swiss National Bank. I am thankful to Romain Baeriswyl, Marvin Goodfriend, and seminar participants at the BIS, Dallas Fed and SNB for helpful discussions and comments. 1 1. Introduction This paper presents and estimates a monetary policy transmission framework to jointly analyze central banks (CBs)’ asset purchase and interest rate policies. The negative policy interest rate equivalent to QE is estimated in a framework that ac- counts for the broad money supply of the CB and commercial banks. The framework characterises how standard monetary policy, setting an interbank market interest rate or interest on reserves (IOR), has to be adjusted to account for the effects of the CB’s broad money injection. It provides a quantitative estimate of how much higher (rel- ative to pre-QE) the interbank interest rate will have to be set during the exit, for a given central bank’s balance sheet, to obtain a desired monetary policy stance. -
Unit 18 Theories Of
UNIT 18 THEORIES OF UNDERDEVELOPMENT Structure 18.0 Objectives 18.1 Introduction 18.2 Vicious Circles of Poverty 18.3 Methods to Break the Vicious Circle 1 8.3.1 The Gradual Approach 18.3.2 The Big Push Approach 18.4 The Big Push Theory 18.4.1 Criticisms of the Theory 1 8.5 Theory of Critical Minimum Effort 18.5.1 Criticisms of the Theory 18.6 The Low-Level Equilibrium Trap Theory 18.6.1 Criticisms'of the Theory 1 8.7 Theory of Social Dualism. 18.7.1 Criticisms of the Theory 18.8 Theory of Technological Dualism 18.8.1 Criticism of the Theory 18.9 Lewis's Model 18.9.1 Criticism of the Model 1 8.1 0 Ranis and Fei Model 18.10.1 Criticism of the Model 1 8.1 1 Harris -Todaro Model 18.1 1.1 Implications of the Model 18.1 1.2 Relevance of the Model 18.12 LetUsSunUp 18.1 3 Key Words 1 8.14 Some Useful Books 18.15 AnswersIHints to Solutions to Check Your Progress Exercises 18.0 OBJECTIVES After reading this unit you shell be able to: Describe the working of the vicious circle of poverty and how it involves circular causation; explain the sectors contribute to underdevelopment; explain the role of surplus labour in initiating the process of economic growth in underdeveloped economy; and state the,role of rural-urban migration in economic transformation of an Theories of Development 18.1 INTRODUCTION In the wake of sectorisation of the post world war 11 period and consequent liberation of a host of nation, the focus of growth theory shifted to the problems of the underdeveloped nations. -
Money and Banking in a New Keynesian Model∗
Money and banking in a New Keynesian model∗ Monika Piazzesi Ciaran Rogers Martin Schneider Stanford & NBER Stanford Stanford & NBER March 2019 Abstract This paper studies a New Keynesian model with a banking system. As in the data, the policy instrument of the central bank is held by banks to back inside money and therefore earns a convenience yield. While interest rate policy is less powerful than in the standard model, policy rules that do not respond aggressively to inflation – such as an interest rate peg – do not lead to self-fulfilling fluctuations. Interest rate policy is stronger (and closer to the standard model) when the central bank operates a corridor system as opposed to a floor system. It is weaker when there are more nominal rigidities in banks’ balance sheets and when banks have more market power. ∗Email addresses: [email protected], [email protected], [email protected]. We thank seminar and conference participants at the Bank of Canada, Kellogg, Lausanne, NYU, Princeton, UC Santa Cruz, the RBNZ Macro-Finance Conference and the NBER SI Impulse and Propagations meeting for helpful comments and suggestions. 1 1 Introduction Models of monetary policy typically assume that the central bank sets the short nominal inter- est rate earned by households. In the presence of nominal rigidities, the central bank then has a powerful lever to affect intertemporal decisions such as savings and investment. In practice, however, central banks target interest rates on short safe bonds that are predominantly held by intermediaries.1 At the same time, the behavior of such interest rates is not well accounted for by asset pricing models that fit expected returns on other assets such as long terms bonds or stocks: this "short rate disconnect" has been attributed to a convenience yield on short safe bonds.2 This paper studies a New Keynesian model with a banking system that is consistent with key facts on holdings and pricing of policy instruments. -
A Shadow Policy Rate to Calibrate US Monetary Policy at the Zero Lower Bound
BIS Working Papers No 452 A shadow policy rate to calibrate US monetary policy at the zero lower bound by Marco Lombardi and Feng Zhu Monetary and Economic Department June 2014 JEL classification: E52, E58, C38, C82 Keywords: unconventional monetary policy, zero lower bound, shadow policy rate, federal funds rate, dynamic factor model, monetary VAR BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2014. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISSN 1682-7678 (online) ISBN 978-92-9131-530-7 (print) ISBN 978-92-9131-531-4 (online) A shadow policy rate to calibrate US monetary 1 policy at the zero lower bound Marco Lombardi2 and Feng Zhu3 Abstract The recent global financial crisis, the Great Recession and the subsequent implementation of a variety of unconventional policy measures have raised the issue of how to correctly measure the stance of monetary policy when policy interest rates reach the zero lower bound (ZLB). In this paper, we propose a new “shadow policy rate” for the US economy, using a large set of data representing the various facets of the US Federal Reserve’s policy stance. -
A Shadow Rate Without a Lower Bound Constraint
SVERIGES RIKSBANK WORKING PAPER SERIES 355 A shadow rate without a lower bound constraint Rafael B. De Rezende and Annukka Ristiniemi June 2018 WORKING PAPERS ARE OBTAINABLE FROM www.riksbank.se/en/research Sveriges Riksbank • SE-103 37 Stockholm Fax international: +46 8 21 05 31 Telephone international: +46 8 787 00 00 The Working Paper series presents reports on matters in the sphere of activities of the Riksbank that are considered to be of interest to a wider public. The papers are to be regarded as reports on ongoing studies and the authors will be pleased to receive comments. The opinions expressed in this article are the sole responsibility of the author(s) and should not be interpreted as reflecting the views of Sveriges Riksbank. A shadow rate without a lower bound constraint ∗ Rafael B. De Rezende† Annukka Ristiniemi‡ Sveriges Riksbank Working Paper Series No. 355 June 2018 Abstract We propose a shadow rate that measures the expansionary (contractionary) interest rate effects of unconventional monetary policies that are present when the lower bound is not binding. Using daily yield curve data we estimate shadow rates for the US, Sweden, the euro-area and the UK, and find that they fall (rise) when market participants expect monetary policy to become more expansionary (contractionary), and price this information into the yield curve. This ability of the shadow rate to track the stance of monetary policy is identified on announcements of policy rate cuts (hikes), balance sheet expansions (contractions) and forward guidance, with shadow rates responding timely, and in line with government bond yields. -
Quantitative Easing
Quantitative Easing Seven years since the near collapse of the financial system following the Lehman Brothers bankruptcy, we now seem to Quantitative Easing be at a point where some central banks – the Federal Reserve and the Bank of England in particular – are close to beginning Evolution of economic thinking as it the process of reversing the very loose monetary policy they have pursued in the last seven years. But this process is likely happened on Vox to go very slowly. Moreover, other central banks – the ECB Evolution of economic thinking as it happened on Vox in particular – are not yet in such an enviable position. This means that quantitative easing is likely to remain a fascinating Edited by Wouter J. Den Haan policy that will be discussed on VoxEU.org and elsewhere for quite some time to come. This eBook is the second of the Vox As It Happened series, which gathers together the commentary on important economic issues by the world’s best economists. It maps the evolution of thinking about this policy instrument, paving the way for a more informed debate. a ISBN 978-1-907142-96-3 CEPR Press 9 781907 142963 a A VoxEU.org Book Centre for Economic Policy Research 77 Bastwick Street, London EC1V 3PZ; Tel: +44 (0)20 7183 8801; Email: [email protected]; www.cepr.org CEPR Press Quantitative Easing Evolution of economic thinking as it happened on Vox A VoxEU.org eBook Centre for Economic Policy Research (CEPR) Centre for Economic Policy Research 33 Great Sutton Street London, EC1V 0DX UK Tel: +44 (0)20 7183 8801 Email: [email protected] Web: www.cepr.org ISBN: 978-1-907142-96-3 © CEPR Press, 2016 Quantitative Easing Evolution of economic thinking as it happened on Vox A VoxEU.org eBook Edited by Wouter J. -
Evaluating Monetary Policy at the Zero Lower Bound
Evaluating Monetary Policy at the Zero Lower Bound By Craig S. Hakkio and George A. Kahn valuating the stance of monetary policy has become very chal- lenging. In the past, policymakers could simply compare the Etarget federal funds rate to the prescriptions from simple policy rules to get a sense of whether the stance of policy was appropriate given economic conditions. However, as the economy fell deep into recession in 2008, the Federal Open Market Committee (FOMC) lowered its target for the federal funds rate to its effective lower bound. Since then, and until recently, many of the simple rules that have guided policy in the past have prescribed a negative federal funds rate target. However, with the federal funds rate constrained by the zero lower bound (ZLB) on nominal interest rates, the FOMC could not move the target federal funds rate below zero. Instead, the FOMC turned to a number of unconventional policies to provide additional monetary accommodation. These other policies included several large-scale asset purchase programs and the use of “for- ward guidance.” Purchases of longer-term Treasury and agency mort- gage-backed securities resulted in an expansion of the Federal Reserve’s balance sheet to more than $4 trillion. Forward guidance provided Craig S. Hakkio is a senior vice president and special advisor on economic policy with the Federal Reserve Bank of Kansas City. George A. Kahn is a vice president and economist at the bank. Lisa Taylor, a research associate at the bank, helped prepare the article. This article is on the bank’s website at www.KansasCityFed.org. -
A Classical View of the Business Cycle
A Classical View of the Business Cycle Michael T. Belongia Peter N. Ireland Otho Smith Professor of Economics Department of Economics University of Mississippi Boston College Box 1848 140 Commonwealth Avenue University, MS 38677 Chestnut Hill, MA 02467 [email protected] [email protected] November 2016 Abstract: In the 1920s, Irving Fisher extended his previous work on the Quantity Theory to describe how, through an early version of the Phillips Curve, changes in the price level could affect both output and unemployment. At the same time, Holbrook Working designed a quantitative rule for achieving price stability through control of the money supply. This paper develops a structural vector autoregressive time series model that allows these “classical” channels of monetary transmission to operate alongside, or perhaps even instead of, the now- more-familiar interest rate channels of the canonical New Keynesian model. Even with Bayesian priors that intentionally favor the New Keynesian view, the United States data produce posterior distributions for the model’s key parameters that are more consistent with the ideas of Fisher and Working. Changes in real money balances enter importantly into the model’s aggregate demand relationship, while growth in Divisia M2 appears in the estimated monetary policy rule. Contractionary monetary policy shocks reveal themselves through persistent declines in nominal money growth instead of rising nominal interest rates. These results point to the need for new theoretical models that capture a wider range of channels through which monetary policy affects the economy and suggest that, even today, the monetary aggregates could play a useful role in the Federal Reserve’s policymaking strategy. -
Sveriges Riksbank Economic Review 2018:3 Special Issue on the E-Krona
Sveriges Riksbank Economic Review Special issue on the e-krona 2018:3 SVERIGES RIKSBANK SVERIGES RIKSBANK ECONOMIC REVIEW is issued by Sveriges Riksbank. Editors: JESPER LINDÉ AND MARIANNE NESSÉN Advisory editorial committee: MIKAEL APEL, DILAN OLCER, AND THE COMMUNICATIONS DIVISION Sveriges Riksbank, SE-103 37 Stockholm, Sweden Telephone +46 8 787 00 00 The opinions expressed in signed articles are the sole responsibility of the authors and should not be interpreted as reflecting the views of Sveriges Riksbank. The Review is published on the Riksbank’s website www.riksbank.se/Economic-Review Order a link to download new issues of Sveriges Riksbank Economic Review by sending an e-mail to: [email protected] ISSN 2001-029X SVERIGES RIKSBANK ECONOMIC REVIEW 2018:3 3 Dear readers, The Riksbank has for almost two years been conducting a review into the possibility and consequences of introducing a Swedish central bank digital currency, a so-called e-krona. This third issue of Sveriges Riksbank Economic Review in 2018 is a special theme issue discussing the e-krona from different perspectives. Cash is becoming increasingly marginalised in Sweden and the Riksbank needs to consider the role public and private actors should play on the payments market in a digital world. The Riksbank has drawn the conclusion that a digital complement to cash, an e-krona, could be one of several ways for the bank to pro-actively meet the new digital payment market. The Riksbank has published two interim reports (The Riksbank’s e-krona project, Reports 1 and 2, available at riksbank.se) which summarise the conclusions of the project. -
The Effective Lower Bound: Some Implications for Inflation Dynamics Beyond the Current Low Interest Rate Environment
11/2016 The effective lower bound: some implications for inflation dynamics beyond the current low interest rate environment RESEARCH BULLETIN NO. 29 The effective lower bound: some implications for inflation dynamics beyond the current low interest rate environment By Sebastian Schmidt[1] The fact that there is an effective lower bound (ELB) on nominal interest rates makes it more difficult for central banks to achieve their inflation objectives with conventional policy tools. This is the case not only in the current environment where policy rates are at, or close to, the ELB, but also when the economy has recovered and policy rates have risen above the ELB. It is well understood that if the effective lower bound (ELB) on nominal interest rates is binding so that policy rates cannot be lowered further, it becomes more difficult for central banks to stabilise inflation at its objective using conventional policies. This article argues that even when economic conditions have improved and policy rates have risen above the ELB, the possibility that policy rates may have to return to the ELB in the future – known as ELB risk – is likely to complicate the tasks of central banks in achieving their inflation objectives. This reflects the fact that a forward-looking private sector takes into account such ELB risk when making economic decisions. The analysis is based on a dynamic stochastic general equilibrium (DSGE) model with rational expectations described in Hills, Nakata and Schmidt (2016). The model is solved using techniques that account appropriately for agents’ expectation formation in a non-linear environment. Monetary policy follows an interest rate rule that responds to deviations of inflation from target, the output gap, and the lagged “shadow” policy rate. -
Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound
Working Paper No. 13-77 Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound Jing Cynthia Wu University of Chicago Booth School of Business Fan Dora Xia University of California, San Diego All rights reserved. Short sections of text, not to exceed two paragraphs. May be quoted without Explicit permission, provided that full credit including notice is given to the source. This paper also can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract=2321323 Electronic copy available at: http://ssrn.com/abstract=2321323 Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound ∗ Jing Cynthia Wu Fan Dora Xia Chicago Booth and NBER Merrill Lynch First draft: August 19, 2013 This draft: July 20, 2014 Abstract This paper employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. We show that such a model offers an excellent description of the data and can be used to summarize the macroeconomic effects of unconventional monetary policy at the zero lower bound. Our estimates imply that the efforts by the Federal Reserve to stimulate the economy since July 2009 succeeded in making the unemployment rate in December 2013 0.13% lower than it otherwise would have been. Keywords: monetary policy, zero lower bound, unemployment, shadow rate, dynamic term structure model JEL classification codes: E43, E44, E52, E58 ∗We have benefited from extensive discussions with Jim Hamilton and Drew Creal. We also thank Jim Bullard, John Cochrane, Greg Duffee, Benjamin Friedman, Refet Gurkaynak, Kinda Hachem, Anil Kashyap, Leo Krippner, Randy Kroszner, Jun Ma, David Romer, Glenn Rudebusch, Jeff Russell, Frank Schorfheide, Matthew Shapiro, Eric Swanson, Ruey Tsay, Johannes Wieland, John Williams and seminar and conference participants at Chicago Booth, UCSD, NBER Summer Institute Monetary Economics Workshop, St. -
UNIT I THEORIES of ECONOMIC GROWTH MEANING of ECONOMIC DEVELOPMENT Economic Development Refers to the Problems of Under Developed Countries
UNIT I THEORIES OF ECONOMIC GROWTH MEANING OF ECONOMIC DEVELOPMENT Economic development refers to the problems of under developed countries. It is the process by which per capita income and economic welfare of the UDC increases over time. It is a wider concept than economic growth. It is taken to mean both growth and change. DEFINITION OF ECONOMIC DEVELOPMENT According to Paul Albert, “Economic Development is the exploitation of all productive resources by a country in order to expand real income”. According to Salvatore, “It defined as the process whereby a country’s real per capita, GNP or income increases over a sustained period of time through continuing in per capita productivity”. FEATURES OR CHACTERISTICS OF ECONOMIC DEVELOPMENT a. It is a dynamic process. b. It is a long term phenomenon. c. It is measured by the real per capita income. d. It refer to quantitative as well as qualitative improvement in the development variables. e. Distributive justice. f. Human approach. MEANING OF ECONOMIC GROWTH Economic growth is an increase in aggregate output of real goods and services during a given period of time, generally one year. It means growth only. It indicates sustained increase in per capita income of the country. DEFINITION OF ECONOMIC GROWTH It may defined, “As a steady and continuous rise in the aggregate real national product of an economy over a long period of time”. DIFFERENCE BETWEEN ECONOMIC DEVELOPMENT AND ECONOMIC GROWTH CONCEPTS ECO. DEV. ECO. GROWTH 1. Country 1.It relates to UDC’s. 1. It relates to developed countries. 2. Income 2. Rich country.