Estimating monetary policy reaction functions : A discrete choice approach

I propose a discrete choice method for estimating monetary policy reaction functions based on research by Hu and Phillips (2004). This method distinguishes between determining the underlying desired rate which drives policy rate changes and actually implementing interest rate changes. The method is applied to ECB rate setting between 1999 and 2010 by estimating a forward-looking Taylor rule on a monthly basis using real-time data drawn from the Survey of Professional Forecasters. All parameters are estimated significantly and with the expected sign. Including the period of financial turmoil in the sample delivers a less aggressive policy rule as the ECB was constrained by the lower bound on nominal interest rates. The ECB's non-standard measures helped to circumvent that constraint on monetary policy, however. For the pre-turmoil sample, the discrete choice model's estimated desired policy rate is more aggressive and less gradual than least squares estimates of the same rule specification. This is explained by the fact that the discrete choice model takes account of the fact that central banks change interest rates by discrete amounts. An advantage of using discrete choice models is that probabilities are attached to the different outcomes of every interest rate setting meeting. These probabilities correlate fairly well with the probabilities derived from surveys among commercial bank economists.monetary policy reaction functions, discrete choice models, interest rate setting, ECB

Towards a global interpretation of dual nitrate isotopes in surface waters

Modern anthropogenic activities have significantly increased nitrate (NO3-) concentrations in surface waters. Stable isotopes (delta N-15 and delta O-18) in NO3- offer a tool to deconvolute some of the human-made changes in the nitrogen cycle. They are often graphically illustrated on a template designed to identify different sources of NO3- and denitrification. In the two decades since this template was developed, delta N-1(5)- and delta O-1(8)-NO3- have been measured in a variety of ecosystems and through the nitrogen cycle. However, its interpretation is often fuzzy or complex. This default is no longer helpful because it does not describe surface water ecosystems well and biases researchers towards denitrification as the NO3- removal pathway, even in well oxygenated systems where denitrification is likely to have little to no influence on the nitrogen cycle. We propose a different scheme to encourage a better understanding of the nitrogen cycle and interpretation of NO3- isotopes. We use a mechanistic understanding of NO3- formation to place bounds on the oxygen isotope axis and provide a means to adjust for different environmental water isotope values, so data from multiple sites and times of year can be appropriately compared. We demonstrate that any interpretation of our example datasets (Canada, Kenya, United Kingdom) show clear evidence of denitrification or a mixture of NO3- sources simply because many data points fall outside of arbitrary boxes which cannot be supported once the range of potential delta O-1(8)-NO(3)(- )values has been considered.Modern anthropogenic activities have significantly increased nitrate (NO3-) concentrations in surface waters. Stable isotopes (delta N-15 and delta O-18) in NO3- offer a tool to deconvolute some of the human-made changes in the nitrogen cycle. They are often graphically illustrated on a template designed to identify different sources of NO3- and denitrification. In the two decades since this template was developed, delta N-1(5)- and delta O-1(8)-NO3- have been measured in a variety of ecosystems and through the nitrogen cycle. However, its interpretation is often fuzzy or complex. This default is no longer helpful because it does not describe surface water ecosystems well and biases researchers towards denitrification as the NO3- removal pathway, even in well oxygenated systems where denitrification is likely to have little to no influence on the nitrogen cycle. We propose a different scheme to encourage a better understanding of the nitrogen cycle and interpretation of NO3- isotopes. We use a mechanistic understanding of NO3- formation to place bounds on the oxygen isotope axis and provide a means to adjust for different environmental water isotope values, so data from multiple sites and times of year can be appropriately compared. We demonstrate that any interpretation of our example datasets (Canada, Kenya, United Kingdom) show clear evidence of denitrification or a mixture of NO3- sources simply because many data points fall outside of arbitrary boxes which cannot be supported once the range of potential delta O-1(8)-NO(3)(- )values has been considered.A

Nitrate sources and dynamics in a salinized river and estuary : a δ15N-NO₃⁻ and δ18O-NO₃⁻ isotope approach

To trace NO3- sources and assess NO3- dynamics in salinized rivers and estuaries, three rivers (Haihe River: HH River, Chaobaixin River: CB River and Jiyun River: JY River) and two estuaries (HH Estuary and CJ Estuary) along the Bohai Bay (China) have been selected to determine dissolved inorganic nitrogen (DIN: NH4+, NO2- and NO3-. Upstream of the HH River, NO3- was removed 30.9 +/- 22.1% by denitrification, resulting from effects of the floodgate: limiting water exchange with downstream and prolonging water residence time to remove NO3-. Downstream of the HH River NO3- was removed 2.5 +/- 13.3% by NO3- turnover processes. Conversely, NO3- was increased 36.6 +/- 25.2% by external N source addition in the CB River and 34.6 +/- 35.1% by instream nitrification in the JY River. The HH and CY Estuaries behaved mostly conservatively excluding the sewage input in the CJ Estuary. Hydrodynamics in estuaries has been changed by the ongoing reclamation projects, aggravating the loss of the attenuation function of NO3- in the estuary

Tracking sources and fate of groundwater nitrate in Kisumu City and Kano Plains, Kenya

Groundwater nitrate (NO3−) pollution sources and in situ attenuation were investigated in Kisumu city and Kano plains. Samples from 62 groundwater wells consisting of shallow wells (hand dug, depth 15 m) were obtained during wet (May–July 2017) and dry (February 2018) seasons and analyzed for physicochemical and isotopic (δ15N-NO3−, δ18O-NO3−, and δ11B) parameters. Groundwater NO3− concentrations ranged from <0.04 to 90.6 mg L−1. Boreholes in Ahero town showed significantly higher NO3− (20.0–70.0 mg L−1) than boreholes in the Kano plains (<10.0 mg L−1). Shallow wells in Kisumu gave significantly higher NO3− (11.4–90.6 mg L−1) than those in the Kano plains (<10.0 mg L−1). About 63% of the boreholes and 75% of the shallow wells exceeded the drinking water WHO threshold for NO3− and NO2− (nitrite) during the study period. Mean δ15N-NO3− values of 14.8‰ ± 7.0‰ and 20.7‰ ± 11.1‰, and δ18O-NO3− values of 10.2‰ ± 5.2‰ and 13.2‰ ± 6.0‰ in wet and dry seasons, respectively, indicated manure and/or sewage as main sources of groundwater NO3−. However, a concurrent enrichment of δ15N and δ18O was observed, especially in the dry season, with a corresponding NO3− decrease, indicating in situ denitrification. In addition, partial nitrification of mostly sewage derived NH4+ appeared to be responsible for increased NO2− concentrations observed in the dry season. Specifically, targeted δ11B data indicated that sewage was the main source of groundwater NO3− pollution in shallow wells within Kisumu informal settlements, boreholes in Ahero, and public institutions in populated neighborhoods of Kano; while manure was the main source of NO3− in boreholes and shallow wells in the Kano and planned estates around Kisumu. Waste-water sanitation systems in the region should be urgently improved to avoid further deterioration of groundwater sources

Interest rate policy or monetary base policy : implications for a central bank’s balance sheet

The article discusses the relationship between the central bank balance sheet, the monetary base, monetary aggregates and credit in the euro area. In particular, it looks at the choice of the operational procedures available to the central bank, and for this purpose it compares the current interest rate policy to a hypothetical monetary base policy. In the latter case, monetary policy would be transmitted primarily via the monetary aggregates which are already monitored by the ECB as part of its monetary analysis. The analysis points out, however, that the euro area conditions favour an interest rate policy rather than a monetary base policy. The reason is that the uncertainty created in the very short run by money demand shocks and unstable money multipliers exceeds that created by global demand shocks. This explains why central banks of countries with developed financial markets follow an interest rate policy. Such a choice is not at odds with the fact that money plays a fundamental role in the monetary policy strategy of the Eurosystem, as the comparative advantage of the monetary analysis pertains to the medium to long term. Finally, the authors point out that an interest rate policy implies an endogenous central bank balance sheet, where changes in base money demand are passed on to the balance sheet. Therefore, extra interventions, as for example those during the summer of 2007, by a central bank aiming to stabilise the official rate do not signal a change in monetary policy stance.central bank balance sheet, interest rate policy, monetary base policy

Deflation, a demon from the distant past or a real danger now ?

During the summer of 2009, Belgium and the euro area, as well as other industrialised countries, recorded negative inflation rates. Although they were the direct result of sharply falling commodity prices in the second half of 2008, policy-makers and the general public wondered whether this would be the start of a deflationary spiral. Indeed, parallels with the Great Depression in the 1930s – which was also characterised by an asset price boom-bust cycle and banking stress – were drawn. The article explains why deflation can have dramatic consequences for the economy, gauges the current deflationary risks and discusses what the policy options are in a deflationary environment. In past centuries, deflation – when defined in a broad sense as a decline in the general price level – was a frequent phenomenon and was not always accompanied by economic hardship. When deflation is defined more narrowly as a sustained decline in the general price level that gives rise to further expected falls, it is no innocent phenomenon since it confronts an economy with a number of nominal rigidities which can trigger a deflationary spiral. One such rigidity is the lower bound on nominal interest rates which can limit the central bank’s potential to stimulate the economy as real interest rates cannot fall any further. Second, the real burden of outstanding debt increases when prices fall, leading to a redistribution of wealth towards lenders who generally have a lower propensity to consume than borrowers. Third, because of money illusion, it is difficult to cut nominal wages, making the adjustment of real wages to a worsened economic situation difficult or even impossible. As shown by available indicators, risk of deflation in the euro area seems limited. The observed negative inflation rates are not a sign of widespread price falls. Inflation expectations remain in check although inflation is expected to return rather slowly to levels consistent with price stability. Taking a broader view, the IMF deflation vulnerability indicator, which combines a range of macroeconomic indicators, shows an increased risk of deflation in all industrialised countries. Having a quantitative definition of price stability that defines the latter as a low, but strictly positive rate of inflation – as the Eurosystem has –, helps to prevent deflation. Yet, when confronted with a deflationary threat, monetary policy has a range of tools to tackle deflationary risks. First, nominal policy rates can be lowered aggressively, until they hit the lower bound. If further stimulus is warranted after rates have been brought close to zero, central banks can resort to unconventional monetary policies, as they have done in previous months. Also fiscal policies can help to contain deflationary risks, especially to tackle banks’ solvency problems if they threaten financial stability, provided that the longer-term sustainability of public finances remains intact. Finally, it must be emphasised that policy-makers have to decide on appropriate policies to deal with deflationary risks in real time.deflation, Great Depression, monetary policy

The liquidity management of the Eurosystem during the period of financial turmoil

In the past few months, euro area money markets have been exposed to intense tensions. On 8 August, overnight interest rates rose to very high levels which required interventions of the Eurosystem in order to stabilise short-term money market interest rates around the target level, i.e. the minimum bid rate on the main refinancing operations. The article explains how the Eurosystem steers very short-term money market interest rates by adjusting its supply of liquidity on the money market. It is shown how the Eurosystem’s liquidity management stabilised short-term money market interest rates around the minimum bid rate on the main refinancing operations in the first half of 2007. Although short-term money market interest rates were more volatile during the period of financial turmoil, the Eurosystem nevertheless managed to safeguard the signalling function of the short-term money market interest rates by applying its operational framework in a flexible way. More specifically, the Eurosystem decided to allot more liquidity than the benchmark amount in the main refinancing operations early within the maintenance period. It was also decided to conduct fine-tuning operations on a more frequent basis in order to stabilise short-term rates. Finally, the Eurosystem also decided to increase the share of longer-term refinancing operations in the total amount of outstanding open market operations. Despite the relative success in stabilising very short-term money market interest rates, longer maturity unsecured interest rates – for instance the 3-month Euribor – increased significantly during the period of financial turmoil. These movements cannot be controlled directly by central banks as they are determined predominantly by private sector behaviour. However, when assessing the appropriate monetary policy stance, the Governing Council of the ECB takes these possibly changing financing conditions into account.monetary policy implementation, Eurosystem, open market operations

Stomatal behavior of cowpea genotypes grown under varying moisture levels

Drought is a major limitation to crop productivity worldwide. Plants lose most of their water through stomata, thus making stomata an important organ in the control of transpiration and photosynthesis. This study assessed the stomatal behavior of four cowpea genotypes grown under four moisture levels under hot semi-arid conditions. Stomatal conductance (gs) was measured at 47, 54, 70 and 77 days after planting (DAP). Biomass and carbon isotope composition (C-13) were also determined at flowering. Genotype and moisture level significantly influenced gs. Genotypes varied in gs at vegetative stages (47 and 54 DAP) only. TVu4607 had higher gs under severe drought conditions at both 47 and 54 DAP. On the other hand, moisture level influenced gs at 54 and 70 DAP only. Stomatal conductance was severely restricted in cowpea under both moderate and severe drought conditions as gs was mostly below the threshold 0.10 mol m(-2) s(-1). Relationships between: biomass and gs, and C-13 and gs were positive under severe drought only. The findings revealed that cowpea genotypes vary in gs under dry conditions and that the variation is more prominent at vegetative stage, suggesting that cowpea productivity in dry areas could be improved through selection of genotypes that maintain higher gs under dry conditions