Events at CERGE-EI

Dissertation Committee:
Byeongju Jeong (chair)
Michal Kejak
Jan Kmenta
Sergey Slobodyan
Evangelia Vourvachaki

Abstract:

This thesis deals with topics related to monetary policy in general. The dissertation consists of three chapters. The first chapter focuses on the role of monetary policy in resource-rich developing countries from a theoretical perspective. The second chapter empirically analyses the determinants of the choice of exchange rate regime in resource-rich countries. The third chapter studies the monetary transmission channels in the Czech Republic by using micro-level data.

In the first chapter we construct a DSGE model for a small, open economy to show that if fiscal indiscipline, in the form of immediate responses to foreign resource revenue changes is inevitable, then monetary policy can help improve the allocation problem. The simulation results indicate that targeting the exchange rate or price level, through foreign exchange interventions by the central bank, can soften the negative effects of Dutch Disease and stabilize the economy in the face of volatile natural resource revenues in the short run. We also find that a fixed exchange rate regime outperforms price level targeting by delivering higher isolation and hence less vulnerability to shocks in natural resource revenues. In contrast, if the central bank chooses to pursue a laissez faire policy, i.e., not to intervene, then the economy becomes vulnerable to shocks in foreign resource revenues and the resource curse becomes more severe.

The second chapter studies the specific determinants of the choice of exchange rate regime in resource-rich countries. We run multinomial logit regressions for an unbalanced panel data set of 145 countries over the 1975-2004 period. We find that resource-rich countries are more likely to adopt a fixed exchange rate regime compared to resource-poor countries. Furthermore, we provide evidence that output volatility contributes to the likelihood of choosing a fixed exchange rate regime, positively in resource-rich countries and negatively in resource-poor countries. In resource-rich countries the fluctuations in natural resource extraction and exports are the main sources of output volatility. We claim that in resource-rich countries a fixed exchange rate regime is mainly preferred due to its stabilization function in the face of turbulent foreign exchange inflows. Moreover, our results reveal that the role of democracy and independent central banks in choosing more flexible exchange rate regimes is stronger in resource-rich countries. In resource-rich countries with non-democratic institutions and non-independent central banks, the government is less accountable for spending natural resource revenues and fiscal dominance prevails. In this situation, fluctuations in natural resource revenues are more easily transmitted into the domestic economy and therefore a fixed exchange rate becomes the more favorable option.

In the third chapter, coauthored with Dana Hajkova and Ivana Kubicova, we use firm-level financial data for Czech firms in the period from 2003 to 2011 and test for the role of companies' financial structure in the transmission of monetary policy. Our results indicate that higher short-term interest rates coincide with lower shares of total debt and long-term debt, and with higher shares of short-term bank loans and trade credit. We find that firm-specific characteristics, such as size, age, collateral, and profit affect the way monetary policy influences the external financing decisions of firms. These findings indicate the presence of informational frictions in credit markets and hence provide some empirical evidence on the existence of a broad credit channel in the Czech Republic.

Full Text: “Essays on Monetary Policy” by Ruslan Aliyev