Top > JACIII > Expectation Management and Financial Stability – Dynamic Stoch ...

single-jc.php

JACIII Vol.26 No.4 pp. 531-541
doi: 10.20965/jaciii.2022.p0531
(2022)

Paper:

Views over last 60 days: 370

Expectation Management and Financial Stability – Dynamic Stochastic General Equilibrium Based on News Shock

Xiaoqin Zheng*,** and Bing Xu***,†

*School of Economics and Finance, Huaqiao University
No.269 Chenghua, North Road, Fengze District, Quanzhou, Fujian 362021, China

**School of Business, Chizhou University
No.199, Muzhi Road, Guichi District, Chizhou, Anhui 247000, China

***Wenzhou Base, National Institution for Finance & Development, Wenzhou Business College
Chashan Higher Education Zone, Wenzhou, Zhejiang 325035, China

†Corresponding author

Received:
January 30, 2022
Accepted:
March 29, 2022
Published:
July 20, 2022
Creative Commons License
Keywords:
expectation management, monetary policy, business cycle, news shock
Abstract

After the financial crisis in 2008, finance has been considered a significant cause of the fluctuations in the business cycle. This study introduces the expected monetary policy into a dynamic stochastic general equilibrium (DSGE) model that includes a mechanism of finance amplifying the fluctuations in the business cycle. It compares and analyzes the effects of expected and unexpected monetary policy on financial variables that comprise real estate price and credit. The results show that regarding the shock of reinforcing monetary policy, the expected and unexpected monetary policies have resulted in the reduction of real estate price and credit. However, the unexpected monetary policy has resulted in a greater effect on real estate price and credit. The rapid decline in real estate price and credit may cause severe fluctuations in the business cycle owing to the role of financial accelerators. Therefore, the expected monetary policy can better stabilize finance. Moreover, the expected duration of monetary policy by the entities in the Chinese economic market is found to be one-quarter. Central bank should try to avoid releasing sudden and unexpected monetary policy news to the public, as this will result in severe fluctuations in credit and real estate price, which can further result in severe fluctuations in the business cycle. Central bank should also adopt the monetary policy of expectation management to stabilize finance to further mitigate the magnifying effect of financial factors on fluctuations in the business cycle and prevent systemic financial risks.

Cite this article as:
X. Zheng and B. Xu, “Expectation Management and Financial Stability – Dynamic Stochastic General Equilibrium Based on News Shock,” J. Adv. Comput. Intell. Intell. Inform., Vol.26 No.4, pp. 531-541, 2022.
Data files:
References
  1. [1] R. Lucas, “Expectations and the Neutrality of Money,” J. of Economic Theory, Vol.4, No.2, pp. 103-124, 1972.
  2. [2] Y. Guo and Y. B. Chen, “The Policy Practice and Improvement Measures of Expectation Management,” J. of Renming University of China, No.5, pp. 60-67, 2017.
  3. [3] M. Woodford, “Monetary Policy in the Information Economy,” Nber Working Papers, No.8674, Dec. 2001.
  4. [4] S. Morris and H. S. Shin, “Coordinating Expectations in Monetary Policy,” Levine’s Bibliography, 2007.
  5. [5] B. S. Bernanke, “The Federal Reverse and the Financial Crisis,” Princeton University Press, 2012.
  6. [6] J. R. Campbell, C. L. Evans, J. Fisher, A. Justiniano, and C. Woodfood, “Macroeconomic Effects of Federal Reserve Forward Guidance,” Brookings Papers on Economic Activity, 2012.
  7. [7] M. Juselius, C. Borio, P. Disyatat, and M. Drehmann, “Monetary policy, the financial cycle and ultra-low interest rates,” BIS Working Papers, No.569, July 2016.
  8. [8] Y. Ma and Y. L. Chen, “Financial Leverage, Leverage Volatility and Economic Growth,” Economic Research J., No.6, pp. 31-45, 2017.
  9. [9] M. Ehrmann, M. Fratzscher, and B. Born, “Central bank communication on financial stability,” Working Paper Series, 2011.
  10. [10] H. F. D. Mendona and C. O. D. Moraes, “Central bank disclosure as a macroprudential tool for financial stability,” Economic Systems, Vol.42, No.4, pp. 625-636, 2018.
  11. [11] A. C. Pigou, “Industrial Fluctuations,” London: MacMillan, 1927.
  12. [12] S. Gomes, N. Iskrev, and C. Mendicino, “Monetary Policy Shocks: We Got News,” J. of Economic Dynamics and Control, Vol.74, No.1, pp. 108-128, 2017.
  13. [13] P. Beaudry and F. Portier, “Stock Prices, News, and Economic Fluctuations,” American Economic Review, 2006.
  14. [14] F. Milani and J. Treadwell, “The Effects of Monetary Policy ‘News’ and ‘Surprises’,” J. of Money Credit & Banking, Vol.44, No.8, pp. 1667-1692, 2012.
  15. [15] H. B. Wu, Z. W. Xu, Y. G. Hu, and P. Yan, “Fiscal Policy and Macro-impact Under The News Shock,” J. of Management World, Vol.8, pp. 26-39, 2011.
  16. [16] X. Wang, Q. Wang, and Z. F. Chen, “Monetary Policy Expectation and Inflation Management: A DSGE Analysis Based On News Shocks,” Economic Research J., Vol.2, pp. 16-29, 2016.
  17. [17] Z. G. Zhuang, H. J. Jia, and D. M. Liu, “A study on the Macroeconomic Effects of Monetary Policy: Perspective of Anticipated and Unanticipated Shocks,” J. of Management World, Vol.7, pp. 80-97, 2018.
  18. [18] K. S. Guo and S. C. Shen, “A Perspective for Strengthening China’s Expectation Management During the 14th Five-Year Plan Period: Comparison of Japan and the United States’ Expectation Management Policies and Inspirations,” Finance & Trade Economics, Vol.41, No.11, pp. 22-36, 2020.
  19. [19] M. Iacoviello, “Financial Business Cycles,” Review of Economic Dynamics, Vol.18, No.1, pp. 140-163, 2015.
  20. [20] N. Kiyotaki and J. Moore, “Credit Cycles,” J. of Political Economy, Vol.105, No.2, pp. 211-248, 1997.
  21. [21] P. A. Neumeyer and F. Perri, “Business cycles in emerging economies: the role of interest rates,” J. of Monetary Economics, Vol.52, No.2, pp. 345-380, 2005.
  22. [22] B. S. Bernanke, M. Gertler, and S. Gilchrist, “Chapter 21: The financial accelerator in a quantitative business cycle framework,” Handbook of Macroeconomics, Vol.1, pp. 1341-1393, 1999.
  23. [23] K. Kim and A. R. Pagan, “The Econometric Analysis of Calibrated Macroeconomic Models,” Handbook of Applied Econometrics in Macroeconomics, Oxford: Blackwell, 356390, 1995.
  24. [24] R. Gao and L. T. Gong, “Land Finance, Housing Demand Shock and Economic Fluctuation,” J. of Financial Research, Vol.4, pp. 32-45, 2017.
  25. [25] X. C. Meng, Y. S. Zhang, and T. Y. Li, “The Optimal Monetary Policy against the Background of China’s Economic ‘Shifting from Real to Fictitious’,” The J. of World Economy, Vol.5, pp. 27-48, 2019.
  26. [26] C. Q. Hou and Y. Liu, “External Finance Premium and Collateral Constraint: A Comparison Based on DSGE Models,” Economic Review, Vol.4, pp. 134-147, 2015.
  27. [27] K. Chen, J. Ren, and T. Zha, “The Nexus of Monetary Policy and Shadow Banking in China,” American Economic Review, Vol.108, No.12, pp. 3891-3936, 2018.
  28. [28] L. Y. Wang, L. G. Zhang, and W. G. Liu, “Empirical Researches on Financial Accelerator Effects under Different Stickiness Conditions,” Economic Research J., Vol.9, pp. 69-81, 2012.
  29. [29] C. Q. Hou and L. T. Gong, “The Heterogeneity of Departmental Price Stickiness and the Transmission of Monetary Policy,” The J. of World Economy, Vol.7, pp. 23-44, 2014.
  30. [30] C. S. Zhang and C. Dang, “Forward-looking Monetary Policy Rules in China,” J. of Financial Research, Vol.8, pp. 1-17, 2017.
  31. [31] L. Y. Li, “Inflation and Uncertainty,” Renmin University of China Press, pp. 362-363, 1995.
  32. [32] S. Eusepi and B. Preston, “Central Bank Communication and Expectations Stabilization,” Social Science Electronic Publishing, Vol.2, No.3, pp. 235-271, 2007.
  33. [33] L. Y. Li, “A Study on Central Bank’s New Targeting,” J. of Management World, Vol.9, pp. 27-40, 2020.

Creative Commons License  This article is published under a Creative Commons Attribution-NoDerivatives 4.0 Internationa License.

*This site is desgined based on HTML5 and CSS3 for modern browsers, e.g. Chrome, Firefox, Safari, Edge, Opera.

Last updated on Apr. 29, 2024