The Economic Research Framework of the National Bank of Poland for

Transcription

1 1 The Economic Research Framework of the National Bank of Poland for Introduction The principal objectives of modern central banks, including the National Bank of Poland, focus on ensuring macroeconomic stability, price stability in particular, and financial stability. Central banks actions towards achieving these objectives have to be underpinned by results of complex economic research that uses various methodological approaches and applies diverse research tools. The significance of such research is of particular importance in the times of high uncertainty the world economy is presently in. This document presents preferred research areas and key study issues that should be on the agenda of economic research conducted at the National Bank of Poland in Both NBP staff and scholars not affiliated with the NBP can participate in the research. Research project competitions organised by the NBP on an annual basis are designed to include these scholars in research that is deemed useful from the central bank s point of view. Bearing in mind the central bank s statutory objectives as well as taking into account the specific nature of the current needs of the National Bank of Poland, three preferred research areas have been identified for : I. Macroeconomic stability II. Financial stability III. Methods of quantitative research I. Macroeconomic stability Achieving macroeconomic stability, and notably price stability, is the primary task of each central bank. Therefore, monetary authorities need to have a broad knowledge of the central bank s influence on the real and nominal economy to conduct monetary policy. This implies the necessity to carry out research focused on both exploring the environment in which monetary policy is conducted and designing monetary policy optimally, subject to the conditions identified. In this area, research issues relate primarily to the environment of monetary policy, such as nominal and real rigidities or the extent to which fiscal and macroprudential policies are restrictive. The trends in macroeconomic indicators: potential output, the natural rate of

2 2 unemployment, the natural interest rate and the equilibrium exchange rate are also among significant conditions of monetary policy. Moreover, medium term changes in price relations in the economy affect the environment in which monetary policy is conducted. These factors determine the strength and persistence of the impact of monetary policy on real and nominal variables, i.e. characteristics of the monetary policy transmission mechanism. The monetary policy transmission mechanism is a research problem to which central banks devote special attention. This mechanism describes the channels through which impulses generated by the central bank affect decisions made by economic agents, and consequently, demand, output and prices. For the central bank, knowledge of the monetary transmission mechanism is the prerequisite for an effective implementation of monetary policy, while for economic agents it is the key to understand monetary policy decisions. Research on the transmission mechanism should concentrate on the analysis of the strength and speed of transmission, with reference to its individual stages and channels. Besides research on the interest rate channel and the exchange rate channel, a significant role should also be played by the analysis of credit channels, the inflation expectations channel and the risk taking channel. Studies on the trends in asset prices (real estate prices, in particular) and their role in the monetary policy transmission process are especially important. It is necessary to keep track of changes in the transmission mechanism in the course of the financial crisis and changes in monetary policy triggered by factors such as globalisation, emigration or market liberalisation. The analysis of the transmission mechanism should also concern its cyclical characteristics as well as asymmetries and non linearity of its specific relationships. Public finances and, in a broader sense, the public sector, exert a substantial influence on macroeconomic stability. Public authorities may create conditions conducive to economic growth and improve, in the long term, social welfare through appropriate fiscal or regulatory policies. On the one hand, such measures have to be closely coordinated with the monetary policy (policy mix) in order not to provide opposite stimuli and contradictory signals. On the other hand, they themselves constitute vital conditions of this policy. From the point of view of monetary policy, it is particularly important to assess relationships between the individual components of aggregate demand and net fiscal position, the impact of fiscal policy on the business cycle, the pro or counter cyclical nature of fiscal policy, the operation of automatic fiscal stabilisers as well as institutional conditions of the cyclical nature of this policy. It is also necessary to analyse the impact of taxes (and other fiscal factors) on the economy. An important research topic, especially in the context of the debt crisis some European economies are struggling with, is the analysis of long term fiscal sustainability, the feedbacks between the public and private sector debt and the influence of demographic factors on public finances and economic development. Given the conditions identified, the central bank tries to conduct monetary policy in an optimal manner. The studies supporting the decision making process in this area should focus both on determining what an optimal monetary policy is and on analysing ways of its

3 3 implementation. Given the recent financial crisis, a research issue relating to the strategy and communication of monetary policy gains particular relevance. The crisis has led economists to discuss whether it is necessary for modern central banks to change the methods and instruments of monetary policy implementation, including a more complete inclusion of monetary and credit aggregates, to improve the impact both on macroeconomic and financial stability. At the same time, it is necessary to conduct research on the effects of the use of unconventional monetary policy instruments by the major central banks in the world and on the prospects of retaining them. Yet another research problem that has recently gained particular relevance is the coordination of monetary policy and macroprudential policy. The experience of the recent financial crisis shows that it is justified to give consideration to the broadening of economic policy instruments used to stabilise the economic climate. One of the options considered in the literature is the use of macroprudential policy instruments, such as additional capital requirements in the form of counter cyclical buffers, the limits set on Loan to Value (LtV) and Debt to Income (DtI) ratios, or additional systemic limits relating to banks liquidity position. Since the application of such instruments is now fairly limited internationally, it is vital to take up research that will help to assess the efficiency of such instruments if the decision is made to apply them. An additional associated topic is the use of macroprudential policy instruments and other instruments to counteract the potential economy destabilising effects of excessive inflow of foreign capital or excessive rise in volatility of international capital flows. When analysing Poland s monetary policy, the prospect of joining the euro area cannot be ignored. Despite uncertainty over the euro area entry date, the National Bank of Poland has to be prepared for this process. This raises the need for research on the directions of macroeconomic developments in the euro area, in connection with the analysis of on going and expected institutional and structural changes taking place in the common currency area. Within this research issue, of significant importance are also studies on the cyclical effects of Poland s accession to the euro area, and studies aimed at determining the dynamics of the real convergence of the Polish economy with the euro area economy, determinants of the process and the resulting challenges to the monetary policy. In short, six key study issues have been formulated in the area of research on the role of monetary policy in ensuring macroeconomic stability: 1. Environment of monetary policy 2. Monetary transmission mechanism 3. Public finances and macroeconomic stability 4. Strategy and communication of monetary policy 5. Relationships between monetary policy and macroprudential policy 6. Monetary integration with the euro area

4 4 II. Financial stability For central banks, the global financial crisis constitutes a source of a number of experiences and new knowledge. The crisis has shown that an unstable financial system generates huge costs for the real economy, is a drain on public finances and hinders the achievement of price stability. It is necessary to carry out more extensive research on financial stability issues, including the efficiency of prudential regulations and financial system supervision, liquidity management policy and crisis management. In the past, it was widely assumed that to achieve different goals different policy instruments were needed. It was believed that interest rate policy should be primarily used to achieve the inflation target, while other instruments, especially supervisory and regulatory ones, to preserve financial stability. In turn, regulatory measures were implemented and supervision was exercised almost exclusively from the point of view of the stability of individual institutions (i.e. from the microprudential point of view), and not the financial system as a whole. The financial crisis has demonstrated that the materialisation of systemic risks has substantially larger implications than the materialisation of financial institution specific risks. Until recently, research at central banks focused on three problems: interactions of the financial system with monetary policy (the process of transmission, monetary policy implementation through financial markets), the function of a lender of last resort, and banking supervision. It is now assumed that macroprudential policy tools should be primarily used for the preservation of financial stability. All potential systematically important institutions and markets should be covered by macroprudential policy. Central banks should be instrumental in the implementation monetary policy, irrespective of whether or not they perform supervisory functions. Yet most remains to be done in developing a framework for macro prudential policy implementation, including the preparation of tools, policy implementation itself and the determination of its institutional framework. By nature, financial stability analysis should be as future oriented as possible. This implies the need to have tools that would make it possible to determine the probability distributions of factors that could negatively affect the condition of the financial sector. Such tools would also help to forecast key variables describing the capability of the financial system to absorb potential shocks. Therefore, the first research issue in the area of financial stability considered in this programme is the assessment of the scale and probability of systemic risks emerging in the financial sector. This research area is less studied in comparison with studies on monetary policy instruments. Quantification of the magnitude and probability of risk to financial stability, interdependencies between various types of risk, and the mechanisms of the risk of contagion will form the basis for central banks and other public institutions

5 5 making up the financial safety net to determine actions aimed at maintaining financial stability. The second research issue of significance for financial stability is the evolution of the financial system and its influence on the effectiveness and stability of the financial system. Studies in this area should include such problems as barriers to the development of the financial system, the scope of basic functions the system should perform, including the availability of financial services for various entities of the real economy. In Polish conditions, the research area of particular importance should be the impact of the process of financial systems integration in European countries and the establishment of a pan European system on the growth and structure of Poland s financial system, with particular emphasis of the impact of the process on financial stability and availability of financial services for entities in the real sphere. In this research area, particular attention should also be given to issues related to the development of the payment system that plays a key role in the performance of the financial system s basic functions. Knowledge gained from this research can become the basis for developing own proposals and assessing proposed institutional and regulatory solutions, including the banking union, formulated on the EU forum. The scope of research on another issue, i.e. the institutional framework for financial stability, is extensive. It covers primarily such topics as institutional arrangements that serve to maintain financial stability (safety net), regulation of the financial system (the need for such regulation, its effectiveness and costs) or counteracting the growth of speculative bubbles. The attempt to determine the impact of unregulated financial intermediation institutions as well as areas of unregulated activities of financial institutions on financial stability should also be an important objective on the research agenda. Moreover, studies on the institutional framework for financial stability should cover the actions of public institutions in case of systemic risk materialisation, that is crisis management and bank resolution. The importance of these relatively new issues has grown significantly, especially following the experience gained from the recent financial crisis, when it turned out that supervision arrangements in place were insufficient to avert the serious financial crisis. The financial crisis is cause for interest in the relationships between the development, structure and stability of the financial system and economic growth. Studies on this issue have important practical implications, as their findings can indicate whether the financial system fulfils its functions well, and can allow to determine the adequate scale of resources dedicated to preserving or restoring financial stability. These studies can relate both to the financial system as a whole as well as its segments, e.g. the capital market. In brief, five key study issues have been identified in the area of financial stability: 1. Assessment of the scale and probability of the emergence of risk to financial stability (systemic risk), including the development of relevant methods and tools

6 6 2. Evolution of the financial system and its influence on the system s effectiveness and stability 3. Development of the payment system, including non cash transactions 4. Institutional framework for financial stability 5. Relationships between the development, structure and stability of the financial system and economic growth III. Methods of quantitative research Institutional economics, behavioural economics and international comparisons have recently featured relatively more prominently in economic research methods than in the past However, irrespective of the approach applied, quantitative methods are the main instrument of economic research, especially research carried out at central banks. Both research work and on going analytical and forecasting work carried out for monetary policy needs require the use of economic and econometric models. It is necessary to have a suite of models, which facilitates answering a relatively broad range of questions. At the same time, the models based on various methodologies enable a better evaluation of the reliability of the responses obtained. In the context of work carried out at the National Bank of Poland, special attention is paid to the development of simulation and forecasting models that support the Bank s policies. The development of these models often requires application of advanced econometric methods, such as co integration, panel data analysis or Bayesian inference. The development of simulation models facilitates answering a number of interesting and important research questions. In the coming years, National Bank of Poland staff will be developing, inter alia, DSGE models containing the financial sector. Such models facilitate analysis and research on coordination of monetary and macroprudential policy. Work will also be carried out to model the interaction between monetary and fiscal policy in a more accurate way. The design and development of models with heterogeneous agents will be another important section of modelling. Models of this class allow, inter alia, to analyse credit and housing market issues. Consideration will also be given to the use of agent based models to carry out microeconomic research on household behaviour patterns. Forecasting plays a very important role in the policy of the National Bank of Poland. Since changes in the level of interest rates have a lagged impact on the economy, relevant interest rate decisions do not only take into account the current macroeconomic context, but also its future. In addition, as part of the communication strategy, inflation and GDP forecasts are presented in Inflation Reports together with a precise description of various types of risk. NECMOD is the basic forecasting model used by the National Bank of Poland, however other tools are also applied: the SOE PL dynamic stochastic general equilibrium (DSGE) model, dynamic factor models, Bayesian vector auto regression (BVAR) models, leading indicators

7 7 based models and expert knowledge. Owing to continuous changes taking place in the economy, these tools need to be updated and improved on a continuous basis. In specified circumstances, it is necessary to include a new forecasting tool to the suite of models applied at the National Bank of Poland. This justifies the need to carry out research on the development of forecasting methods. The analysis of the economy with the use of forecasting and simulation models involves the need to estimate their parameters. In the case of macroeconomic models, this is done on the basis of time series, while in the case of microeconomic models panel data are normally used. Panel data are also a valuable source of knowledge used for calibration or estimation of DSGE models. This implies the need to carry out research on the development of time series and panel data analysis methods that are tailored to the realities of the Polish economy. The necessity to monitor the situation in financial markets by the central bank requires the use of advanced analytical methods. It is particularly significant in this respect to work on three groups of tools. The first one includes probability quantification and knowledge pooling methods for systemic risk analysis needs. The second one includes tools used for modelling the maturity structure of interest rates. These tools help to compare prices resulting from the model with prices observed in the market and, consequently, to identify potential imbalances. Moreover, a correct specification of the yield curve allows to derive market expectations of future interest rate and inflation levels, and economic growth rate forecasts. Changes in the yield curve also reflect market assessment of the effectiveness of National Bank of Poland s monetary policy measures. The third group of financial market analysis relates to the examination of the interdependence between global, regional and local markets. To this end, a number of methods are used from descriptive ones to more formalised econometric methods, including methods based on multidimensional models and copulas. In this context, it is appropriate to broaden the set of instruments and study the most efficient research methods. Modelling of the Polish economy is normally based on short time series of a maximum of less than 20 years. This means that in a number of cases, the accuracy of the classic estimates of the parameters of simulation or forecasting models is low. One of the solutions is to apply Bayesian inference methods, a formal tool that allows to include information on model parameters from outside the sample, and thereby to improve accuracy of their estimations. As experience shows, the use of Bayesian methods seems particularly attractive in the context of vector auto regression (VAR) and DSGE models that are, on a standard basis, used to analyse the impact of monetary policy on the economy. Due to the above considerations, it is important to conduct research on the development of inference methods on the basis of short time series, with particular emphasis on Bayesian inference tools.

8 8 In short, five key study issues have been identified in the area of methods of quantitative research: 1. Development of simulation models 2. Development of forecasting methods 3. Development of time series and panel data analysis methods 4. Development of financial market analysis methods 5. Development of inference methods based on short time series