Academic literature on the topic 'Money growth shock'

PurposeThis paper aims to uncover the nexus between budget deficits, money growth and inflation in Vietnam in the period 1995–2012.Design/methodology/approachThe paper uses a structural vector auto-regressive model of five endogenous variables including inflation, real GDP growth, budget deficit growth, money growth and the interest rate.FindingsIt is found that inflation rose in response to positive shocks to money growth and that budget deficits had no significant impact on money growth and therefore inflation. This empirical evidence supports the hypothesis that fiscal and monetary policies were relatively independent. Money growth significantly decreased in response to a positive shock to inflation; interest rates had no significant effect on inflation but considerably increased in response to positive inflation shocks. This implies that the monetary base was more effective than interest rates in fighting inflation.Originality/valueThis paper sheds light into understanding the link between budget deficits, money growth and inflation in Vietnam during the high-inflation period 1995–2012. The finding supports the hypothesis that fiscal and monetary policies were relatively independent over the period.

This study attempts to contribute towards the prevalent understanding and the extant literatures on the effect of changes in money supply as an important monetary policy shock on the stock prices of India by using a time-varying parameter models with vector autoregressive specification during the period 1996 to 2016. The result of Johansen’s cointegration test suggests a significantly positive long-run co-movement between the growth of money supply and stock prices in India but the result of vector error correction model (VECM) does not exhibit any significant relationship in short run. Further, the error correction term of the VECM reveals a long-run unidirectional causality from money supply to stock prices. However, the Granger causality test confirms that the growth rate of money supply does not cause the stock market movement in India in short run. Finally, the variance decomposition analysis reveals that both the Indian stock markets are strongly exogenous in the sense that shocks to money supply explain only a small portion of the forecast variance error of the market indices. Again, the impulse response function analysis indicates that a positive shock in money supply has a small but persistently positive effect on stock prices in India.

This paper presents a critical evaluation of a St-Louis type monetarist reduced-form model for Canada. The model centres on two equations estimated over the 1957-1977 sample period. An expenditure equation relates the growth of nominal GNE to the rate of monetary expansion and to changes in autonomous expenditure. The split between real growth and inflation is modelled through a simple Phillips curve with adaptive expectations. The dynamic properties of the model are discussed, and illustrated with simulations of alternative monetary growth paths. The analysis reveals some disturbing characteristics of this type of model. For instance, the responses of GNE to money supply changes or to price shocks are not symmetrical though both represent the same shock to real money supply. The price response to a monetary shock, while more plausible than in most large macroeconomic models, remains inadequate since increased monetary expansion results in higher real money supply accompanying higher inflation. The author nevertheless leaves the impression that reduced form models are a useful starting point for econometric research; their limitations are only an invitation to further refinements.

This paper investigates the drivers of hot money in China. It develops a model based on expectation-variance utility theory in the theoretical analysis section. The model considers a foreign investor who faces the question of how to distribute his wealth between foreign and domestic assets. The model’s analysis suggests that economic variations, such as expected domestic currency appreciation, rise in domestic asset return, drop in foreign asset return, domestic economic growth, decrease in domestic inflation, and rise in foreign asset risk will cause foreign investors to distribute more wealth in domestic assets. Therefore, hot money flows in, and vice versa. In the empirical analysis section, the paper estimates structural VAR models using data from 2000 to 2019 in China. The impulse response functions are consistent with the theoretical predictions: when there is a positive domestic inflation shock, hot money outflows increase (inflows decline) in the current period, but the response is not significant. When there is a positive domestic growth rate shock or positive domestic asset return rate shock, hot money inflows increase (outflows decline) in the current period, and the response reaches its peak in the next period. Furthermore, when there is a positive expected exchange rate shock, hot money outflows increase (inflows decline) in the current period. Of these drivers, the expected exchange rate has the largest impact on hot money, and the domestic growth rate has the most enduring effect.

Superneutrality of money and the Fisher Effect are well-known theoretical propositions. Empirical tests of long-run versions of these hypotheses have sometimes been done by estimating how a variable responds to a permanent shock to inflation. Substituting inflation for money growth in a test for superneutrality is motivated by the widely-accepted Monetarist precept that “inflation is everywhere and always a monetary phenomenon.” Use of permanent shocks to inflation and money growth for testing such hypotheses has declined, in part because permanent movements in these variables have an endogenous component and so estimates are biased. But the sign of the bias may be determined using credible qualitative assumptions about the effects of structural shocks on variables. These results are used to re-examine multi-country findings from two di˙erent structural VAR models that estimate the effects of permanent inflation shocks. One finding is rejection of superneutrality for output in favor of a long-run positive output effect from permanently higher money growth. The second is rejection of the Fisher Effect in favor of nominal rates moving less than one-for-one in the long run with inflation. Both rejections are shown to be robust to endogenous money growth bias under a wide range of plausible structural assumptions. These results for real interest rates and output provide evidence in support of structural models which give rise to a Mundell-Tobin effect.

The objective of this paper is to evaluate the impact of oil shocks on the growth rate of Growth Domestic Product (GDP) in CEMAC countries. We use a panel VAR model approach to the variation of the real GDP growth rate, oil price inflation rate and money supply between 2000 and 2015. Our main results show that CEMAC countries mostly depend on oil pension. Consequently, the analysis of impulsion response functions and the decomposition of variance show that, the shock on oil price negatively affects the growth rate of the GDP. We then suggest CEMAC countries to diversify their production, the destination of their exports and the sources of budgetary income or takings.

The objective of this study was to investigate the relationship between real exchange rate and economic growth in South Africa. Using time series data, the period from 1980 to 2015 was covered in the study. Data was collected from the South African Reserve Bank, the International Monetary Fund and International Financial Statistics. The Johansen cointegration and the Vector Error Correction Model estimation techniques were employed in the study, followed by VEC Granger causality test, variance decomposition and impulse response function. The long-run results revealed a negative and significant relationship between real exchange rate with export and economic growth. On the other hand, money supply and foreign direct investment have a positive and significant relationship with real exchange rate. Only export was significant and positively related to real exchange rate in the short-run. Results of granger causality showed that only export granger causes real exchange rate thus, a unidirectional causality exists between export and real exchange rate. Results of variance decomposition revealed that the real exchange rate is highly affected by shocks from economic growth. The impulse response functions showed that real exchange rate responds positively to shocks from real exchange rate and money supply. On the contrary, real exchange rate responds negatively to a shock from economic growth. There is, therefore, a need to increase exports, money supply, foreign direct investment and economic growth as these would lead to an increase in the Rand and consequently, appreciation of the Rand.

The objective of this study was to investigate the relationship between real exchange rate and economic growth in South Africa. Using time series data, the period from 1980 to 2015 was covered in the study. Data was collected from the South African Reserve Bank, the International Monetary Fund and International Financial Statistics. The Johansen cointegration and the Vector Error Correction Model estimation techniques were employed in the study, followed by VEC Granger causality test, variance decomposition and impulse response function. The long-run results revealed a negative and significant relationship between real exchange rate with export and economic growth. On the other hand, money supply and foreign direct investment have a positive and significant relationship with real exchange rate. Only export was significant and positively related to real exchange rate in the short-run. Results of granger causality showed that only export granger causes real exchange rate thus, a unidirectional causality exists between export and real exchange rate. Results of variance decomposition revealed that the real exchange rate is highly affected by shocks from economic growth. The impulse response functions showed that real exchange rate responds positively to shocks from real exchange rate and money supply. On the contrary, real exchange rate responds negatively to a shock from economic growth. There is, therefore, a need to increase exports, money supply, foreign direct investment and economic growth as these would lead to an increase in the Rand and consequently, appreciation of the Rand.

This paper analyzes the role of financial development on economic output in Indonesia. Using vector autoregressive method, the results confirm the positive impact of financial development on output growth. The interaction between the financial development and the shock either in financial or real sector shows that the financial development has a positive role to dampen the negative impact of the shock on the output growth, while strengthen the positive one. Another variable on the model, which significantly affect the output growth are excess money, term of trade, and the price. Compare to these variables, the marginal effect of financial development on output is smaller.JEL Classification : E44, O16Keywords : Financial development, shock, output volatility, VAR

This paper analyzes the role of financial development on economic output in Indonesia. Using vector autoregressive method, the results confirm the positive impact of financial development on output growth. The interaction between the financial development and the shock either in financial or real sector shows that the financial development has a positive role to dampen the negative impact of the shock on the output growth, while strengthen the positive one. Another variable on the model, which significantly affect the output growth are excess money, term of trade, and the price. Compare to these variables, the marginal effect of financial development on output is smaller. JEL Classification : E44, O16Keywords : Financial development, shock, output volatility, VAR

This item is only available electronically.
ABSTRACT The purpose of this study is to illustrate how the basic Real Business Cycle (RBC) model can be modified to incorporate money in an attempt to construct monetary business cycle models of the U.S. economy. This is done for one case where money enters the model as direct lump-sum transfers to households and for the other case where money injections enter the economy through the financial system. Interestingly, the two channels generate very different responses to a money growth shock. In the first case, a positive money growth shock increases nominal interest rates and depresses economic activity, which is called the anticipated inflation effect. However, the popular consensus among economists is that nominal interest rates fall after a positive monetary shock. This motivates the construction of our second model where it is conjectured that the banking sector plays an important role in the monetary transmission mechanism and money is injected into the model through financial intermediaries. It is observed in this model that a positive monetary shock reduces interest rates and stimulates economic activity, which is called the liquidity effect. Furthermore, the statistics generated by the models show that monetary shocks have no effect on real variables when money enters as direct lump-sum transfers to households. On the contrary, such shocks have significant real impact when money enters through the financial system. Taken together, this implies that how money enters into the model significantly matters for the impact of monetary shocks and such shocks entering through financial intermediaries may be important in determining the cyclical fluctuations of the U.S. economy.
Thesis (B.Ec.(Hons)) -- University of Adelaide, School of Economics, 2017

The framework in Chapter 15 is extended to incorporate an explicit role for money aggregates, with an application to Kenya. The chapter provides a general specification that can nest various types of money targeting (ranging from targets based on optimal money demand forecasts to those derived from simple money growth rules), interest-rate based frameworks, and intermediate cases. A novel interpretation of target misses in terms of structural shocks (aggregate demand, policy, shocks to money demand, etc.) is presented. In the case of Kenya, the authors find that: (i) the setting of money targets is consistent with money demand forecasting, (ii) targets have not played a systematic role in monetary policy, and (iii) target misses mainly reflect shocks to money demand. Simulations of the model under alternative policy specifications show that the stronger the ex post target adherence, the greater the macroeconomic volatility.

Almost every country throughout the globe has been affected by the Covid-19 pandemic. The virus's propagation has a disastrous effect on both human health and the economy as a whole. The COVID-19 global recession is the worst since World War II ended. According to the IMF's April 2021 World Economic Outlook Report, the global economy declined by 3.5 percent in 2020, 7 percent drop from the 3.4 percent growth predicted in October 2019. While almost every IMF-covered nation saw negative growth in 2020, the decline was more extreme in the world's poorest regions. The global supply system and international trade of all countries, including India, were affected by the nationwide lockdown in India and around the world to stop the pandemic from spreading. Since the beginning of 2020, the Covid-19 pandemic has had a negative impact on the global business climate. The COVID-19 pandemic has resulted in significant public health and economic problems in South Asian countries and the worst impacted being India, Bangladesh and Pakistan in recent years. The nationwide lockdown adopted by the countries was effective in slowing down the spread of the coronavirus in South Asia, but it came at a substantial financial and social cost to society. Manufacturing activities in Japan, South Korea, Indonesia, Vietnam, and the Philippines have shrunk sharply. Tourism, trade and remittances, and all major sources of foreign money for South Asian countries, have been substantially impacted. The COVID-19 spread has had a significant influence on global financial markets. The international financial and energy markets substantially dropped as the number of cases began to rise globally, primarily in the United States, Italy, Spain, Germany, France, Iran, and South Korea along with South Asian countries. Reduced travel has had a substantial impact on service businesses such as tourism, hospitality, and transportation. According to IMF, (space required after,) 2020 South Asian economies are likely to shrink for the first time in 4 decades. The pandemic has pushed millions into poverty and widened income and wealth disparities because of premature deaths, workplace absenteeism and productivity losses. A negative supply shock has occurred with manufacturing and productive activity decreasing due to global supply chain disruptions and factory closures. This resulted in a severe short-term challenge for policymakers, especially when food and commodity prices rise, exacerbating economic insecurity. Failure to achieve equitable recovery might result in social and political unrest, as well as harsh responses from governments that have been less tolerant of dissident voices in recent years. Almost every area of the Indian economy is being ravaged by the pandemic. But the scope and degree of the damage vary from sector to sector within each area. One of the worst-affected areas in India is the Micro, Small, and Medium Enterprises (MSMEs) sector. Apart from MSMEs, Agriculture and Agro-based industries, Banking companies and NBFCs and Social Sectors are also in jeopardy. The pandemic creates turmoil in the Capital Market and Mutual Funds industry. India's auto manufacturing and its ancillary sectors were badly hit during the initial stages of the pandemic when lockdown measures were adopted and the situation continued to remain subdued for many quarters. It is still uncertain whether this recession will have long-term structural ramifications for the global economy or will have only short-term financial and economic consequences. Additionally, the speed and the strength of the healing may be crucially dependent on the capability of the governments to accumulate and roll out the COVID-19 vaccines. In the context of the pandemic and its devastating impact on the Indian economy, an edited volume is proposed which intends to identify and analyse the footfalls of the pandemic on various sectors and industries in India. The proposed edited volume endeavours to understand the status, impact, problems, policies and prospects of the agricultural and agro-based industries, Banking and NBFCs, MSMEs, Social Sector, Capital Market and Mutual Funds during the pandemic and beyond. The proposed volume will contain research papers/articles covering the overall impact of the pandemic on various sectors, measures to be adopted to combat the situation and suggestions for overcoming the hurdles. For this, research papers and articles will be called from academicians, research scholars and industrialists having common research interests to share their insights relating to this area. It is anticipated that the volume will include twenty to twenty-five chapters. An editorial committee will be constituted with three chief editors and another external editor to review the articles following a double-blind review process to assure the quality of the papers according to the global standards and publisher's guidelines. The expected time to complete the entire review process is one month, and the publication process will start thereafter. The proposed volume is believed to be having significant socio-economic implications and is intended to cater to a large audience which includes academicians, researchers, students, corporates, policymakers, investors and general readers at large.

AbstractThe Organization for Security and Co-operation in Europe (OSCE), while primarily a security organisation, has always included economic and human baskets or dimensions. Currently, the Office of the Co-ordinator of OSCE Economic and Environmental Activities operates in four main areas: (1) good governance and anti-corruption, (2) money laundering and financing of terrorism, (3) transport, trade and border-crossing facilitation, and (4) labour migration. This chapter addresses developments in Central Asia since the dissolution of the Soviet Union that are relevant to the third area of OSCE operations. The chapter’s focus is on the potential for the landlocked Central Asian countries to become land-linked, using improved transport connections between East Asia and Europe to promote economic development through export diversification and growth. Rail services across Central Asia improved considerably during the 2010s. They have been resilient, despite strained political relations between Russia and the EU since 2014, and rail traffic between Europe and China continued to increase in 2020 despite the shock of COVID-19. Further infrastructure improvements are promised under China’s Belt and Road Initiative. However, the expanded network has been little used by Central Asian producers to create new international trade, and the improved infrastructure represents a potential opportunity rather than a past benefit. If the Central Asian economies are successful in taking advantage of the opportunity, it will stimulate their trade across the Eurasian region and help economic diversification. The main determinant of success will be national policies and national economic development. The chapter concludes with a discussion of the role of multilateral institutions and, in particular, the prospects for OSCE collaboration with existing fora to promote cooperation and economic development in Central Asia.

Abstract Between 1945 and the 1970s, the advanced economies underwent a long period of debt consolidation, facilitated by economic growth, fiscal restraint, and financial repression. Rapid productivity gains in the United States and catch-up growth elsewhere resulted in “thirty glorious years” of growth. Capital controls, credit regulation, and accommodating central banks created a captive market for government debt. Since interest rates remained below growth rates, governments could reconcile social spending with budget balance. Overall, debt-to-GDP ratios fell by more than two-thirds from their postwar highs. The oil shocks of the 1970s then inaugurated a period of slower growth, larger budget deficits, and rising debts. Developing countries, in contrast, started out with lower debt ratios and borrowed more modestly, until the oil shocks reversed these trends. From this point, developing nations borrowed heavily abroad, from money-center banks that recycled petrodollars. This debt cycle ended in tears, with a Latin America debt crisis, painful deleveraging, and poor growth for a decade.

This chapter discusses deflation, monetary policy responses against deflation, and the Bank of Japan's (BOJ) reluctance to try bolder measures to reflate the economy. Deflation, when the price of goods and services declines, is attributable to a number of causes. It can result from supply-side improvements such as enhanced productivity and thus can coincide with economic growth. However, deflation can also occur through demand-side shocks. These shocks can be the result of policy mistakes. Under such circumstances, deflation can have potentially damaging economic consequences. Some of the monetary policy responses against deflation include forward guidance, quantitative easing (QE), interest rate targeting, negative interest rates, and helicopter money. There are several possible explanations for the BOJ Policy Board's resistance to adopting unconventional monetary policies. It could be that central bankers at the BOJ did not believe that they would be effective. Another explanation is that the BOJ was more hesitant to use QE because of the country's fiscal position.

A few years ago I came down a backcountry road in Wisconsin looking for a place where a man had given his life. The road had once been the route of pioneers moving west, then a farm road running through dry, sandy, marginal fields. In the days of Prohibition it had carried illegal whiskey distilled hereabouts, some of the last trees having been cut down to cook the bootlegger’s brew. Then in 1935 another sort of settler came along. It was the time of the Great Depression, and he could buy a lot of land, 120 acres in all, land abandoned by its owners, for a little money in back taxes. The land had no economic value left in it. The man, whose name was Aldo Leopold, knew that but did not mind; he was not after gain or even subsistence. He began coming out regularly from the city of Madison, where he taught at the university, to plant trees. For thirteen years he planted and nurtured. Then, in 1948, he died fighting a forest fire on a neighbor’s land. Knowing those few details, I came wanting to know what manner of man he was and what he had died for. There was no publicity, no tour guide provided, but the dense forest of pines was a sufficient announcement that here was Leopold’s place, now all grown up again to natural splendor. I walked through an open field rich in wild grasses and forbs to a small, gray, weathered shack where he had stayed on those weekends, regaled by the smell of his new pines coming up and the sound of birdsong and wind in their branches. From the shack, I found my way down a short path to the Wisconsin River, rolling silently between its pungent banks, the warm summer sun glinting on its ripples. One August years ago Leopold, as recalled in a sketch he wrote and collected in A Sand County Almanac, found the river “in a painting mood,” laying down a brief carpet of moss on its silty edges, spangling it with blue and white and pink flowers, attracting deer and meadow mice, then abruptly scouring its palette down to austere sand.

It is conventional wisdom that: Continued fast growth in the BRICS will result in a rapid catch-up to match and even surpass Western income levels in the next few decades The crisis in Europe will soon be over and normal growth will then resume as if nothing had happened The tax competition resulting from globalization means a race to the bottom in which corporate tax rates fall dramatically everywhere The best way to escape the poverty trap is to give the poor more money Losers from globalization can be ignored by politicians in western democracies because they do not matter for electoral outcomes The adjustment problems for developing countries arising from the crisis are quite minor and easy to deal with Actually, as Reversals of Fortune shows, all of these beliefs are highly questionable. The research findings reported here provide economic analysis and evidence that challenge these claims. In the report, Nicholas Crafts asks: "What Difference does the Crisis make to Long-term West European Growth?" Vera Troeger considers "The Impact of Globalisation and Global Economic Crises on Social Cohesion and Attitudes towards Welfare State Policies in Developed Western Democracies." Stephen Broadberry looks at "The BRICs: What does Economic History say about their Growth Prospects?" Sharun Mukand takes "The View from the Developing World: Institutions, Global Shocks and Economic Adjustment." Finally, Sayantan Ghosal has a new perspective on "The Design of Pro-poor Policies."

In the second quarter, annual inflation (9.67%), the technical staff’s projections and its expectations continued to increase, remaining above the target. International cost shocks, accentuated by Russia's invasion of Ukraine, have been more persistent than projected, thus contributing to higher inflation. The effects of indexation, higher than estimated excess demand, a tighter labor market, inflation expectations that continue to rise and currently exceed 3%, and the exchange rate pressures add to those described above. High core inflation measures as well as in the producer price index (PPI) across all baskets confirm a significant spread in price increases. Compared to estimates presented in April, the new forecast trajectory for headline and core inflation increased. This was partly the result of greater exchange rate pressure on prices, and a larger output gap, which is expected to remain positive for the remainder of 2022 and which is estimated to close towards yearend 2023. In addition, these trends take into account higher inflation rate indexation, more persistent above-target inflation expectations, a quickening of domestic fuel price increases due to the correction of lags versus the parity price and higher international oil price forecasts. The forecast supposes a good domestic supply of perishable foods, although it also considers that international prices of processed foods will remain high. In terms of the goods sub-basket, the end of the national health emergency implies a reversal of the value-added tax (VAT) refund applied to health and personal hygiene products, resulting in increases in the prices of these goods. Alternatively, the monetary policy adjustment process and the moderation of external shocks would help inflation and its expectations to begin to decrease over time and resume their alignment with the target. Thus, the new projection suggests that inflation could remain high for the second half of 2022, closing at 9.7%. However, it would begin to fall during 2023, closing the year at 5.7%. These forecasts are subject to significant uncertainty, especially regarding the future behavior of external cost shocks, the degree of indexation of nominal contracts and decisions made regarding the domestic price of fuels. Economic activity continues to outperform expectations, and the technical staff’s growth projections for 2022 have been revised upwards from 5% to 6.9%. The new forecasts suggest higher output levels that would continue to exceed the economy’s productive capacity for the remainder of 2022. Economic growth during the first quarter was above that estimated in April, while economic activity indicators for the second quarter suggest that the GDP could be expected to remain high, potentially above that of the first quarter. Domestic demand is expected to maintain a positive dynamic, in particular, due to the household consumption quarterly growth, as suggested by vehicle registrations, retail sales, credit card purchases and consumer loan disbursement figures. A slowdown in the machinery and equipment imports from the levels observed in March contrasts with the positive performance of sales and housing construction licenses, which indicates an investment level similar to that registered for the first three months of the year. International trade data suggests the trade deficit would be reduced as a consequence of import levels that would be lesser than those observed in the first quarter, and stable export levels. For the remainder of the year and 2023, a deceleration in consumption is expected from the high levels seen during the first half of the year, partially as a result of lower repressed demand, tighter domestic financial conditions and household available income deterioration due to increased inflation. Investment is expected to continue its slow recovery while remaining below pre-pandemic levels. The trade deficit is expected to tighten due to projected lower domestic demand dynamics, and high prices of oil and other basic goods exported by the country. Given the above, economic growth in the second quarter of 2022 would be 11.5%, and for 2022 and 2023 an annual growth of 6.9% and 1.1% is expected, respectively. Currently, and for the remainder of 2022, the output gap would be positive and greater than that estimated in April, and prices would be affected by demand pressures. These projections continue to be affected by significant uncertainty associated with global political tensions, the expected adjustment of monetary policy in developed countries, external demand behavior, changes in country risk outlook, and the future developments in domestic fiscal policy, among others. The high inflation levels and respective expectations, which exceed the target of the world's main central banks, largely explain the observed and anticipated increase in their monetary policy interest rates. This environment has tempered the growth forecast for external demand. Disruptions in value chains, rising international food and energy prices, and expansionary monetary and fiscal policies have contributed to the rise in inflation and above-target expectations seen by several of Colombia’s main trading partners. These cost and price shocks, heightened by the effects of Russia's invasion of Ukraine, have been more prevalent than expected and have taken place within a set of output and employment recovery, variables that in some countries currently equal or exceed their projected long-term levels. In response, the U.S. Federal Reserve accelerated the pace of the benchmark interest rate increase and rapidly reduced liquidity levels in the money market. Financial market actors expect this behavior to continue and, consequently, significantly increase their expectations of the average path of the Fed's benchmark interest rate. In this setting, the U.S. dollar appreciated versus the peso in the second quarter and emerging market risk measures increased, a behavior that intensified for Colombia. Given the aforementioned, for the remainder of 2022 and 2023, the Bank's technical staff increased the forecast trajectory for the Fed's interest rate and reduced the country's external demand growth forecast. The projected oil price was revised upward over the forecast horizon, specifically due to greater supply restrictions and the interruption of hydrocarbon trade between the European Union and Russia. Global geopolitical tensions, a tightening of monetary policy in developed economies, the increase in risk perception for emerging markets and the macroeconomic imbalances in the country explain the increase in the projected trajectory of the risk premium, its trend level and the neutral real interest rate1. Uncertainty about external forecasts and their consequent impact on the country's macroeconomic scenario remains high, given the unpredictable evolution of the conflict between Russia and Ukraine, geopolitical tensions, the degree of the global economic slowdown and the effect the response to recent outbreaks of the pandemic in some Asian countries may have on the world economy. This macroeconomic scenario that includes high inflation, inflation forecasts, and expectations above 3% and a positive output gap suggests the need for a contractionary monetary policy that mitigates the risk of the persistent unanchoring of inflation expectations. In contrast to the forecasts of the April report, the increase in the risk premium trend implies a higher neutral real interest rate and a greater prevailing monetary stimulus than previously estimated. For its part, domestic demand has been more dynamic, with a higher observed and expected output level that exceeds the economy’s productive capacity. The surprising accelerations in the headline and core inflation reflect stronger and more persistent external shocks, which, in combination with the strength of aggregate demand, indexation, higher inflation expectations and exchange rate pressures, explain the upward projected inflation trajectory at levels that exceed the target over the next two years. This is corroborated by the inflation expectations of economic analysts and those derived from the public debt market, which continued to climb and currently exceed 3%. All of the above increase the risk of unanchoring inflation expectations and could generate widespread indexation processes that may push inflation away from the target for longer. This new macroeconomic scenario suggests that the interest rate adjustment should continue towards a contractionary monetary policy landscape. 1.2. Monetary policy decision Banco de la República’s Board of Directors (BDBR), at its meetings in June and July 2022, decided to continue adjusting its monetary policy. At its June meeting, the BDBR decided to increase the monetary policy rate by 150 basis points (b.p.) and its July meeting by majority vote, on a 150 b.p. increase thereof at its July meeting. Consequently, the monetary policy interest rate currently stands at 9.0% . 1 The neutral real interest rate refers to the real interest rate level that is neither stimulative nor contractionary for aggregate demand and, therefore, does not generate pressures that lead to the close of the output gap. In a small, open economy like Colombia, this rate depends on the external neutral real interest rate, medium-term components of the country risk premium, and expected depreciation. Box 1: A Weekly Indicator of Economic Activity for Colombia Juan Pablo Cote Carlos Daniel Rojas Nicol Rodriguez Box 2: Common Inflationary Trends in Colombia Carlos D. Rojas-Martínez Nicolás Martínez-Cortés Franky Juliano Galeano-Ramírez Box 3: Shock Decomposition of 2021 Forecast Errors Nicolás Moreno Arias