The lean versus clean debate and monetary policy in South Africa
Abstract. This paper contributes to the lean versus clean debate by examining whether or not monetary policy in South Africa leans against the wind or cleans up after the bubble has bust. This is achieved by analysing the behaviour of asset prices during the different phases of monetary policy stance. The models that allow the behaviour of the asset prices to differ during periods of tight and easy monetary conditions as well as during periods of contractionary and expansionary monetary conditions are specified. The results provide evidence of an asymmetric behaviour between monetary policy interest rate and asset prices during the periods of easy and tight monetary conditions. The empirical results further provide evidence of symmetric behaviour between themonetary policy interest rate and asset prices during the periods of contractionary and expansionary monetary conditions. Thus monetary policy in South Africa supports the proposition of leaning against the wind as opposed to the proposition of cleaning up after the bubble has burst.
Keywords. Lean versus clean debate, Monetary policy regimes, Financial distress.
JEL. C51, E52, E61, G01.
Aznarte, A. L., Di Narzo, A. F. & Stigler, M. (2013). tsDyn: Nonlinear time series models with regime awitching, R package, Version 0.9-32, March.
Balakrishnan, R., Danninger, S., Elekdag, S., & Tytell, I. (2009). The transmission of financial stress from advanced to emerging economies, IMF Working Paper, 09/133, Washington DC: International Monetary Fund, June. doi. 10.2753/REE1540-496X4703S203
Baxa, J., Horvath, R., & Vasicek, B. (2013). Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy? Journal of Financial Stability, 9(1), 117-138. doi. 10.1016/j.jfs.2011.10.002
Bernanke, B., & Gertler, M. (1999). Monetary policy and asset price volatility, Federal Reserve Bank of Kansas City Economic Review, 4, 17-51.
Bernanke, B. Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework, in J. Taylor and M. Woodford (eds.). (1999). Handbook of Macroeconomics, 1: 1341-1393
Bernanke, B., & Gertler, M. (2001). Should central banks respond to movements in asset prices? American Economic Review, 91(2). 253-257. doi. 10.1257/aer.91.2.253
Bernanke, B. (2002). Asset-Price “Bubbles” and Monetary Policy. Remarks before the New York Chapter of the National Association for Business Economics, New York, October 15
Bernanke, B. (2009). The crisis and the policy response. Lecture at the Stamp, London School of Economics, London, January 13.
Borio, C., & Lowe, P. (2004). Securing sustainable price stability: should credit come back from the wilderness?. Working Paper, 157, Basel: Bank of International Settlements.
Borio, C., & White, W. (2004). Whither monetary and financial stability? The implications of evolving policy regimes. Working Paper, 147, Basel: Bank of International Settlements.
Borio, C. (2007). Change and constancy in the financial system: implications for financial distress and policy. Working Paper, 237, Basel: Bank for International Settlements.
Borio, C., & Drehmann, M. (2009). Assessing the risk of banking crises – revisited. Bank for International Settlements Quarterly Review, March, 29-46.
Borio, C. (2011). Rediscovering the macroeconomic roots of financial stability policy: Journey, challenges, and a way forward. Annual Review of Financial Economics, 3(1), 87-117. doi. 10.1146/annurev-financial-102710-144819
Borio, C. (2012). The financial cycle and macroeconomics: What have we learnt?. Bank for International Settlements Working Paper, December, 395.
Borio, C. (2014). Monetary policy and financial stability: What role in prevention and recovery?. Working Paper, 440, Basel: Bank for International Settlements.
Cardarelli, R., Elekdag, S. & Lall, S. (2011). Financial stress and economic contractions. Journal of Financial Stability, 7(2), 78-97. doi. 10.1016/j.jfs.2010.01.005
Cecchetti, S., Genberg, H., Lipsky, J., & Wadhwani, S. (2000). Asset prices and monetary policy. The Geneva Report on the World Economy: 2, Geneva: International Centre for Monetary and Banking Studies, May.
Cecchetti, S.G. (2003). What the FOMC says and does when the stock market booms. in Richards, A. and Robinson, T. (eds.), Asset Prices and Monetary Policy, Proceedings of the Research Conference of the Reserve Bank of Australia, 77-96, November.
Cecchetti, S., Genberg, H., & Wadhwani, S. (2003). Asset prices in a flexible inflation targeting framework. in Hunter, W., Kaufman, G. and Pomerleano, M. (eds), Asset Price Bubbles: The Implications for Monetary, Regulatory, and International Policies, MIT press, 427-44.
Cecchetti, S.G., & Li, L. (2008). Do capital adequacy requirements matter for monetary policy?, Economic Inquiry, 46(4), 643-659. doi. 10.1111/j.1465-7295.2007.00085.x
Cevik, I., Dibooglu, S., & Kutan, A, (2013). Measuring financial stress in transition economies, Journal of Financial Stability, 9(4), 597-611. doi. 10.1016/j.jfs.2012.10.001
Christiano, L., Motto, R., & Rostagno, M. (2010). Financial factors in economic fluctuations, European Central Bank Working Paper, May, 1192.
Curdia, V., & Woodford, M. (2010). Credit spreads and monetary policy, Journal of Money, Credit and Banking, 42(S1): 3–35. doi. 10.1111/j.1538-4616.2010.00328.x
Curdia, V., & Woodford, M. (2011). The central bank balance sheet as an instrument of monetary policy, Journal of Monetary Economics, 58(1), 54-79. doi. 10.1016/j.jmoneco.2010.09.011
Davig, T. (2004). Regime-Switching debt and taxation, Journal of Monetary Economics, 51(4), 837-859. doi. 10.1016/j.jmoneco.2003.09.003
De Graeve, F., Kick, T., & Koetter, M. (2008). Monetary policy and financial (in)stability: An integrated micro-macro approach, Journal of Financial Stability, 4(3), 205-231. doi. 10.1016/j.jfs.2007.09.003
Edwards, S., & Vegh, C. (1997). Banks and macroeconomic disturbances under predetermined exchange rates, Journal of Monetary Economics, 40(2), 239-278. doi. 10.1016/S0304-3932(97)00043-3
Gali, J. (2013). Monetary policy and rational asset price bubbles, National Bureau of Economic Research Working Paper, 18806, doi. 10.3386/w18806
Gali, J., & Gambetti, L. (2014). The effects of monetary policy on stock market bubbles: Some evidence, National Bureau of Economic Research Working Paper, 19981, doi. 10.3386/w19981
Gertler, M., & Karadi, P. (2011). A model of unconventional monetary policy, Journal of Monetary Economics, 58(1), 17-34. doi. 10.1016/j.jmoneco.2010.10.004
Gertler, M., & Kiyotaki, N. (2010). Financial intermediation and credit policy in business cycle analysis, in Friedman, B. M. and Woodford, M. (eds.), Handbook of Monetary Economics, 3: 601-650.
Gilchrist, S., & Leahy, J. (2002). Monetary policy and asset prices, Journal of Monetary Economics, 49(1), 75-97. doi. 10.1016/S0304-3932(01)00093-9
Goodhart, C., & Segoviano, M. (2009). Banking stability measures. Discussion Paper, 627, London: Financial Markets Group, January
Greenspan, A. (2002). “Economic volatility,” Speech at a symposium sat Jackson Hole, Wyoming, August 30.
Greenspan, A. (2010). “The Crisis,” Brookings Papers on Economic Activity, Spring
Hakkio, C. and Keeton, W. (2009). “Financial stress: what is it, how can it be measured, and why does it matter?” Federal Reserve Bank of Kansas City Economic Review, 5-50, Quarter II
Hamilton, J. D. (2005). What's real about the business cycle?. Federal Reserve Bank of St. Louis Review, 87(4): 435-452.
Hamilton, J. D. (2008). Regime-Switching models. in Durlauf, S. and Blume, L. (eds.), New Palgrave Dictionary of Economics, May
Issing, O. (2011). Lessons for monetary policy: what should the consensus be?. Globalization and Monetary Policy Institute Working Paper, April, 81.
Liu, G., & Seeiso, N. (2012). Business cycle and bank capital regulation: Basel II procyclicality, Economic Modelling, 29(3), 848-857. doi. 10.1016/j.econmod.2011.10.015
Lo Duca, M., & Peltonen, T. (2011). Macro-Financial vulnerabilities and future financial stress - assessing systemic risks and predicting systemic events, Working Paper, 1311, Frankfurt: European Central Bank, March
Illing, M., & Liu, Y. (2006). Measuring financial stress in a developed country: An application to Canada, Journal of Financial Stability, 2(3), 243-265. doi. 10.1016/j.jfs.2006.06.002
Kasai, N., & Naraidoo, R. (2012). Financial assets, linear and nonlinear policy rules: An in-sample assessment of the reaction function of the South African Reserve Bank, Journal of Economic Studies, 39(2), 161-177. doi. 10.1108/01443581211222644
Kiyotaki, N., & Moore, J. (1997). Credit cycles, Journal of Political Economy, 105(2), 211-248. doi. 10.1086/262072
Kliesen, K., Owyang, M., & Vermann, K. (2012). Disentangling diverse measures: A survey of financial stress indexes, Federal Reserve Bank of St. Louis Review, 94(5), 369-398.
Mishkin, F.S. (2009). Is monetary policy effective during financial crises? American Economic Review, 99(2), 573-577. doi. 10.1257/aer.99.2.573
Mishkin, F.S. (2011). Monetary policy strategy: Lessons from the crisis, Working Papers, 16755, Massachusetts: National Bureau of Economic Research
Naraidoo, R., & Paya, I. (2012). Forecasting monetary policy rules in South Africa, International Journal of Forecasting, 28(2), 446-455. doi. 10.1016/j.ijforecast.2011.04.006
Naraidoo, R., & Raputsoane, L. (2010). Zone‐Targeting monetary policy preferences and financial market conditions: A flexible non‐linear policy reaction function of the SARB monetary policy, South African Journal of Economics, 78(4), 400-417. doi. 10.1111/j.1813-6982.2010.01256.x
Raputsoane, L. (2014). Disaggregated credit extension and financial distress in South Africa, Working Paper, 435, Economic Research Southern Africa, June.
Sims, C. A., & Zha, T. (2004). Were there regime switches in U.S. monetary policy?, American Economic Review, 96(1), 54-81. doi. 10.1257/000282806776157678
Stiglitz, J. E. (2009), Interpreting the causes of the great recession of 2008, Lecture at BIS Annual Conference, Basel: Bank of International Settlements, June 25-26
Taylor, J. (2008). The financial crisis and the policy responses: An empirical analysis of what went wrong, Working Paper, 14631, Massachusetts: National Bureau of Economic Research, January
Terasvirta, T. (1994). Specification, estimation and evaluation of smooth transition autoregressive models, Journal of the American Statistical Association, 89(425), 208-218. doi. 10.1080/01621459.1994.10476462
Terasvirta, T. (1998). Modelling economic relationships with smooth transition regressions, in A. Ullah and D.E.A. Giles (eds.), Handbook of Applied Economic Statistics. New York: Marcel Dekker, 507-52, February.
Trichet, J-C. (2005). “Asset price bubbles and monetary policy,” Lecture, Monetary Authority of Singapore, June 8.
Trichet, J-C. (2009). “Credible Alertness Revisited,” Speech at Jackson Hole, Wyoming, August 22.
Van Dijk, D., Terasvirta, T., & Franses, P. (2002). Smooth transition autoregressive models: A survey of recent developments, Econometric Reviews, 21(1), 1-47. doi. 10.1081/ETC-120008723
Van Dijk, D., Terasvirta, T., Stefan, L., & Lundbergh, S. (2003). Time-varying smooth transition autoregressive models, Journal of Business & Economic Statistics, 21(1), 104-121, doi. 10.1198/073500102288618810
Woodford, M. (2012). Inflation targeting and financial stability, National Bureau of Economic Research Working Paper, April, 17967, doi. 10.3386/w17967
Yellen J. (2009) A Minsky meltdown: Lessons for central bankers, Presentation to the 18th Annual H. P. Minsky Conference on the State of the US and World Economy, 16 April New York.
- There are currently no refbacks.
Journal of Economics and Political Economy - J. Econ. Pol. Econ. - JEPE - www.kspjournals.org
Editor: firstname.lastname@example.org Secretarial: email@example.com Istanbul - Turkey.
Copyright © KSP Library