Monetary Policy Transmission Channels Research Articles

Asymmetric Effects in the Risk-Taking Channel of Monetary Policy Transmission in Iraq

Asymmetric Effects in the Risk-Taking Channel of Monetary Policy Transmission in Iraq

Inflation targeting and monetary policy response in India

India adopted the Flexible Inflation Targeting (FIT) regime in 2016 under the mentorship of the Monetary Policy Committee (MPC). With FIT’s introduction, the effectiveness of monetary policy transmission channels required a re-visit and this paper is a valuable contribution in this direction. Using the multivariate model with an augmented Bayesian set- up, we find that FIT-MPC has strengthened the credit and interest rate channels while their impact on output has weakened. The impact of Operation Twist – a set of unconventional measures pursued during the pandemic is visible. Overall, the findings highlight the overhauling effect of monetary policy transmission in the Indian context.

Does local government debt management affect cross-border M&As? Evidence from China

The rapid expansion of government debt exacerbates systemic risks and tightens the credit transmission channels of monetary policy, posing a severe threat to the healthy development of firms. Existing literature mainly examines the impact of government debt on corporate financing behavior, innovation, and total output. Using data from a sample of Chinese A-share listed firms covering the period from 2001 to 2022, we investigate the impact of local government debt management on corporate cross-border mergers and acquisitions (M&As). Our analysis reveals that effective local government debt management promotes cross-border M&As by alleviating corporate financing constraints, intensifying market competition, and enhancing corporate risk-taking capacity. The findings offer fresh insights into achieving the dual objectives of risk prevention and stable growth through local government debt management and provide significant implications for boosting the high-quality development of the real economy.

Monetary Policy Transmission in Canada – A High Frequency Identification Approach

Abstract I study the effects of monetary policy shocks in Canada on economic and financial variables. With a narrow window around a policy announcement, I create a new set of intraday level, high-frequency monetary policy surprises using the three-month Canadian Bankers’ acceptance rate futures. I use this measure to identify monetary policy shocks as an external instrument in a monthly VAR. Following a 25 basis point contractionary policy shock, I find that the decline in output is more powerful and peaks earlier than previous empirical works show, with a peak decline of 0.5 % points after 18 months. Price level declines are similarly more powerful and earlier, reaching a decline of 0.3 % points after 24 months. In addition, increases in the credit and mortgage spreads indicate the presence of a domestic credit channel of monetary policy transmission for Canada. Finally, I show that the surprise measure is robust to information effects.

Stock Market Participation, Inequality, and Monetary Policy

Abstract Recent literature has shown that the fraction of liquidity-constrained households in the population critically determines the mix of transmission channels of monetary policy. In this article, we bring a different but important dimension of heterogeneity to the forefront: stock market participation. We show that the stock market participation rate not only shapes the mix of policy channels but also heavily affects the aggregate responses. This happens as direct rebalancing effects and indirect equilibrium effects into investment are both increasing in the number of stock market participants, reinforcing each other. We show this in a quantitative New Keynesian model designed to account for the population share of stock market participants, their position in the income and wealth distribution, and their saving rates. The model implies that, as stock market participation has increased since the 1980s, the power of monetary policy on the real economy has strengthened considerably.

China's A-share Crash in 2015- -Based on the Perspective of the Liquidity Barrier Lake Caused by the "Targeted Easing" Policy

This paper is based on the theory of liquidity effect, that the 2015 crash is formed by directional easing liquidity of the lake, namely the central bank directional loose monetary policy derived monetary is not through monetary policy transmission channel to the entity neighborhood, but deposited in the financial system, pushing up the rising asset prices, and cause industrial "real to virtual", further boost the financial asset prices and the real economy fundamentals mismatch. Small and medium-sized enterprises and state-owned enterprises local government "hidden guarantee" of real estate, city investment companies in financing credit discrimination, and commercial Banks to lend behavior, also led to the liquidity of the formation of the lake finally, this paper summarizes a series of Suggestions, such as accelerating the marketization of interest rate reform, improve the monetary policy management, improve the macro-prudential monetary policy framework, establish and improve the multi-level capital market measures, to prevent such problems from happening again, make the central bank's monetary policy can more powerful through the financial system to the real economy, promote the development of our country economy with high quality.

Monetary policy and risk of commercial banks in Vietnam

This study investigates the bank risk-taking channel of monetary policy transmission by comprehensively analyzing multiple bank risk measurements amid monetary policy shocks in Vietnam. Using banking data for 2008–2021, a dynamic panel model is estimated to examine the risk exposure of 30 Vietnamese commercial banks. The paper employs the annual M2 money supply growth as a monetary policy variable, besides two policy interest rates established by the central bank. We find that an expansion of monetary policy benefits the quality of loan portfolios; however, reduced interest rates or an extended money supply increase insolvency risk. We also document that heightened economic growth corresponds to a reduced likelihood of credit and insolvency risks, while a surge in the inflation rate leads to an escalation in insolvency risk, manifested by a decline in the Z-score index. Overall, the findings on different risk dimensions in this paper are expected to draw a comprehensive picture of banks’ risk appetite and behavior in response to monetary changes.

Credit channel of monetary policy transmission: Evidence from India

The present study explores the effectiveness of the credit channel of monetary policy transmission in India from the perspective of magnitude, timing, and composition puzzles. To validate, further investigation of the effectiveness of the balance sheet channel and bank lending channel using the corporate cash flows and interest rate spreads, respectively, has been done. The study employs the structural vector autoregression model using the long-time quarterly series sample period from June 1998 to June 2022. The findings show that the anomalies concerning magnitude, timing, and composition effect do not exhibit a strong presence in the Indian context. The analysis of the weighted average call money rate and coverage ratio suggests a weak presence of the balance sheet channel in India with a weak negative correlation of 0.2943 (p < 0.05). The overall behavior of spread analysis also shows a weak presence of the bank lending channel in India. Although some presence of the bank lending channel is seen on banks’ managed liability side, the effect of external finance premium is not reflected in the lending rates with a correlation of 0.0577 (p > 0.05) between prime lending rate spread and weighted average call money rate spread. From the evidence, the study concludes the weak presence of the credit channel in India. Therefore, the monetary authorities might have to rely on other channels or may devise other unconventional mechanisms like Operation Twist and Long-Term Repo Operations observed during the COVID-19 pandemic to steer the real economy.

Euro area banks' asset‐liability dependency and unconventional monetary policy over the years 2013–2021: Does size matter?

AbstractFocusing on a sample of euro area commercial banks, we investigate the evolution of the asset‐liability dependency over the years 2013–2021, characterized by the introduction of monetary, supervisory and institutional policy measures that shaped a business environment never experienced before. We find that large banks show a stronger asset‐liability dependency than small banks, and that the linkages between the two sides of the balance sheet experience a general upward trend over time for both groups of intermediaries. We report evidence of the presence of two transmission channels of the unconventional monetary policy, namely, the direct pass‐through and the portfolio rebalancing.

Impact of Off-Balance-Sheet Activities on the Effectiveness of Monetary Policy

Off-balance-sheet (OBS) activities are special means of credit expansion of commercial banks, which can affect banks’ assets allocation decisions, loans supplies, and the bank lending channel of monetary policy transmission. This paper analyses the impact of OBS activities on banks’ asset allocation and on the effectiveness of monetary policy. Our findings show that increases in OBS activities weaken the effectiveness of price-based monetary policy through the bank lending channel, and this dampening effect is stronger in periods of market liquidity shortage.

Determining nexus between monetary policy transmission channels and GDP of Pakistan

The purpose of this research is to analyze long run and short run relationship of monetary policy transmission channels with GDP of Pakistan and research contains four channels that are mentioned in SBP and variables representing those channels are. Exchange rate, imports, interest rate, SBP advances and KSE 100 index which are independent variables and the GDP is taken for output as dependent variable and annual data from 1991-2017 is used. The results shows that there is co-integration among variables and therefore VECM was applied which shows significant long run relationship of independent variables with GDP as well as there is short run relationship with GDP, also exchange rate is very volatile with GDP. Further model specification is also used and results are meeting with assumptions of econometrics

Challenges and Response Strategies of Digital Currency to Traditional Monetary Policy

The advent of digital currencies has presented both opportunities and challenges to the traditional monetary policy frameworks that have governed economies for decades. This paper explores the key challenges posed by digital currencies to traditional monetary policy and examines potential response strategies. With the rapid evolution of financial technologies, understanding and adapting to these challenges is crucial for central banks and policymakers to maintain monetary stability and financial system integrity. The accelerated growth of digital currencies has ushered in a new era, challenging the conventional paradigms of monetary policy. This paper delves into the intricate web of challenges presented by digital currencies and delineates responsive strategies crucial for navigating this uncharted territory. Emphasizing the dichotomy between decentralization and control, the analysis sheds light on the potential disruptions to monetary policy transmission channels, financial stability, and the implications for cross-border transactions. Recognizing the need for a nuanced approach, the paper advocates for the development of Central Bank Digital Currencies (CBDCs), robust regulatory frameworks, international collaboration, and fortified cybersecurity measures. As economies stand at the precipice of a digital revolution, understanding and proactively addressing these challenges are imperative for policymakers to usher in a harmonious coexistence of traditional and digital monetary systems.

An Empirical Analysis of the Monetary Policy Transmission Channels in Sierra Leone

This empirical study investigates Sierra Leone's monetary policy transmission channels using a VAR model from 2011Q1 to 2021Q4, emphasising the interest rate, exchange rate, and credit channels. Rigorous pre-estimation tests and variable transformations were applied to enhance result robustness and credibility. The research evaluates the impact of recent monetary policy and financial sector reforms in Sierra Leone and unveils insights into the dynamics of each of the three transmission channels. Notably, the interest rate channel revealed a delayed and transitory impact of policy rate changes on inflation and economic activity. The exchange rate channel underscored the importance of exchange rate stability in managing inflation, particularly in an import-dependent economy. Furthermore, the credit channel highlighted the challenges of private sector credit expansion amidst substantial government borrowing, urging a balanced approach. Overall, the study contributes to a better understanding of Sierra Leone's monetary policy transmission channels, emphasizing the positive influence of recent institutional, operational, and legal reforms adopted by the Bank of Sierra Leone. More precisely, it presents the need to strengthen the interest rate, credit and exchange rate channels for more effective policy transmission. A key policy recommendation is for the Bank of Sierra Leone to continue its reform agenda, with a focus on enhancing these channels to better achieve its policy objectives.

China’s shadow banking in 2020–2022: an empirical study

Despite renewed regulatory attention, shadow banking across the globe is still a nonnegligible part of economic life. This paper researches China’s shadow banking during 2020–2022, a stage marked by COVID-19 and strengthened global regulation on Non-Bank Financial Intermediation (NBFI). Its business model surprisingly resembles its Western peers, funding underserved sectors and having similar exposure to balance sheet mismatch. Uninsured interbank funds and wealth management products support massive holding of bond investment (36.6% of the total assets), making risk contagion easier. This paper re-summarizes growth dynamics in a “Pull-Push” framework and proposes the concept of reintermediation corresponding to disintermediation. Consecutive regulation on NBFI and the real estate sector kept dragging on growth, rendering it in liquidity surplus. We provide empirical evidence on the relationship of China’s shadow banking with macro-finance and note several breakdowns of pre-pandemic relations among economic and financial indicators. The most remarkable breakdown is the weakened functionality of the monetary policy transmission channel. Besides, it continued to twist financial regulatory indicators to a lesser extent.

Foreign Price Shocks and Inflation Targeting: Effects on Income and Inflation Inequality

ABSTRACT Foreign price shocks have significant effects on functional income distribution and on inflation inequality. By increasing prices in domestic currency that are linked to foreign prices, they increase the profit share in some sectors and reduce real wages, in particular of workers whose consumption basket is more sensitive to the price of certain goods (e.g., food prices for low-wage workers). We propose a new extension to the conflicting-claims inflation model by incorporating workers heterogeneity (in terms of nominal income and consumption patterns) in an open economy model following an inflation-targeting regime. Then, we investigate the impacts of foreign price shocks on income and inflation inequality by increasing the foreign inflation rate and analyze how monetary policy influences these outcomes. Our simulation results indicate that a positive foreign price shock increases the profit share and the within-workers inequality (in real terms), since low-wage workers are more affected by these shocks. Yet, such effects are mediated by the strength of the monetary policy's transmission channels (domestic economic activity or nominal exchange rate), indicating that the monetary authority response may exacerbate or attenuate these distributive effects.

ANALYSIS OF THE EFFECTIVENESS OF THE MONETARY POLICY TRANSMISSION CHANNEL IN INDONESIA WITH A SINGLE TARGET OF INFLATION FOR THE PERIOD 2016:08 - 2022:12

The purpose of this study is to determine The Monetary Policy Transmission Channel In Indonesia With A Single Target of Inflation For The Period 2016:08 - 2022:12. The research method used the Vector Error Correction Model (VECM) for the period August 2016 until December 2022. This study uses secondary data from the Indonesian Central Statistics Agency (BPS) and CEIC (a company providing financial and macroeconomic indicator data). The results of this study show that inflation responses to the shock of variables in the Monetary Channel, Interest Rate Channel, and Inflation Expectation Channel is not very much. Viewed from the result of the Impulse Response Test and Variance Decomposition, the three channels for monetary policy transmission (monetary channel, interest rate channel, and expectation channel) must be more effectively implemented in Monetary Policy decision-making in Indonesia. The interest rate channel is the most effective channel among the three channels. The results of the Impulse Response test and Variance Decomposition prove that inflation responses to the shock of variables in the Interest Rate channel are the strongest and have the least time lag and variance of those variables. The most suitable variable used for an operational target in an interest rate channel is BI-7-Days-Repo-Rate (BI7DR). Based on comparation of the other two variables (deposit rate and interbank money market rate), the results of the Impulse Response test and Variance Decomposition show that BI7DR shock obtains strong and quick inflation responses.

Revisiting the monetary transmission mechanism via banking from the perspective of credit creation

<abstract> <p>Many transmission channels of monetary policy have been proposed to enrich and deepen the understanding of its mechanisms. However, some channels have not been clarified, particularly for those unconventional quantitative policies implemented after 2008 financial crisis. In this paper, we develop a unified model of a credit economy where bank regulations and decisions and loanable funds market are placed at a central position, while stocks and flows are incorporated with each other to formulate banks' credit creation and circulation. We find that bank regulations can induce some new channels of monetary transmission by imposing credit constraints, including the new bank capital channel, the credit supply channel, the new bank balance sheet channel, and the new bank risk-taking channel. Comparing these channels with the traditional ones, we underscore the impact of bank regulations on monetary transmission. As aggregate demand can be decomposed into two monetary flows generated by money circulation and bank lending respectively, the direct channels of monetary transmission to aggregate demand can be renewed as follows: the money channel, the narrow money circulation channel, the new bank lending channel, and the repayment channel. In addition, based on the relevant data from the United States, we have conducted vector autoregressive (VAR) impulse response analysis to confirm the effectiveness of some direct channels. Our work not only aids in revisiting the monetary transmission from a credit view but also facilitates the assessment of efficiency of monetary policy.</p> </abstract>

Technological Innovation and the Bank Lending Channel of Monetary Policy Transmission

Technological Innovation and the Bank Lending Channel of Monetary Policy Transmission

Revisiting the effect of financial crisis and banking reforms on the effectiveness of monetary policy transmission mechanism in Nigeria

Understanding the effect of the extent of financial intermediation on the performance of monetary policy transmission channels is crucial to the formulation of monetary policy. To this end, the paper tested the validity of the above statement in the Nigerian context using quarterly data between 2005Q1 and 2019Q4. The data was analysed using a dynamic stochastic general equilibrium approach. Results of the estimation showed that the financial crisis experienced in the country led to the depression of the Nigerian capital market and a decrease in the amount of credit provided by banks for trading in the capital market, exchange rate risk tightening of liquidity, and greater loan-loss provisioning. It was revealed that recent changes and reforms in the industry have positive impacts on all the monetary policy transmission channels (exchange rate, interest rate, expectation, and credit) considered in the study. However, the credit channel appeared to be the most active as it transmits the largest impact of shocks to the financial sector (88.06 per cent on average) to the real economy. This demonstrates that the private sector depended on the financial sector for ?nancing their expenditures, which later induced an increase in the level of investment and increased output.

Monetary policy surprises and corporate investment growth in China

This paper analyzes the impact of unexpected changes in Chinese monetary policy on the investment growth of public firms. Previous research on the Chinese economy has not effectively linked firm-level investment determination in corporate finance with monetary policy transmission in macroeconomics, thus limiting our understanding of the characteristics and mechanisms of this effect. We proxy the unexpected monetary policy changes by the M2 growth shocks identified from monetary policy rules. Our results indicate that the change in money growth significantly affects investment growth at the firm level. Positive shocks increase corporate investment growth, whereas negative ones do the opposite. However, the extent of this effect varies over time and gets more substantial under restrictive shocks. Such an effect also differs in magnitude across firms due to firm-level heterogeneous characteristics, highlighting the importance of corporate financial constraints and credit channels of monetary policy transmission.