Monetary Policy Transmission Channels Research Articles

Credit channel of monetary policy transmission: Evidence from India

Credit channel of monetary policy transmission: Evidence from India

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

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

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

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.

The monetary policy pass-through mechanism: Is the search-for-yield incentive at work?

The paper investigates the possible mechanism behind the link between monetary policy and bank lending/risk-taking behaviors. Using a sample of Vietnamese commercial banks during 2007–2019, we find that the impact on bank output associated with monetary policy shocks is attributable to banks’ incentives to search for yield. Concretely, if interest rates remain lower amid monetary expansions, banks are likely to expand their lending activities more aggressively and take more risks to offset their reduced revenues. Moreover, this crucial supply-side effect is also at work for the bank liquidity creation channel of monetary policy transmission. Accordingly, we document that demotivated banks appear to undermine the impact of monetary policy on the core function of banks in creating liquidity to the real economy. Our finding is robust against a series of alternative monetary policy indicators, different bank output measures, multiple search-for-yield proxies, and substitute econometric methodologies. In sum, as the monetary policy pass-through transmission through the key banking channels is found due to banks’ own decisions, monetary authorities need to take this underlying mechanism into account when setting their monetary policy.

Monetary policy transmission channels and the performance of the real sectors in selected sub-Saharan African countries: a system-GMM approach

This study investigated the impact of monetary policy channels on the real sector performance in selected sub-Saharan African countries. This study covers the period 1990 to 2020. The broad objective of the study was to examine the impact of monetary policy transmission channels on the real sectors of selected sub-Saharan African countries within the period, 1990–2020. Using the system generalized method of moments (sys-GMMs) amidst other pre-estimation and post-estimation tests, it was discovered that credit and exchange rate channels positively drove agricultural productivity, while interest rate channel exerted a negatively significant influence. Conversely, credit and exchange rate channels were found to negatively affect manufacturing, while interest rate channels had no significant impact on the manufacturing sector. Given the overwhelming impact of monetary policy channels on both the agricultural and manufacturing sectors of the SSA economies, it is recommended that effective monetary policy framework be put in place to continually create positive transmission effect on the real and productive sectors of the economy.

An examiner of China commercial banks loans through credit channel prior COVID-19

Purpose- China's economy has greatly developed in the last few decades, catapulting the nation to the second-biggest economy in the world. Financial growth took off over the last couple of decades because of the nation's expansion into the world economy and support for monetary policy. The purpose of this study is to analyse commercial bank-level data to examine a credit channel of the monetary policy transmission mechanism in emerging economies, such as China, from BRICS countries. Among the important questions that central banks, economists, and policymakers have raised in this area are: Does the impact of bank characteristics and macroeconomic variables affect the amount of loans in China? Do interacting bank characteristics and macroeconomic elements affect the amount of a loan in China? Methodology- Data analysis is achieved using static panel data with a random-effect model. 216 commercial banks in China were used as a sample, and the study was conducted from 2009 to 2018. The statistical software Stata is utilised for data analysis. Findings- According to findings from China's statistics, the capital ratio, GDP, inflation, and ROA interactions have a statistically significant but negative impact on the loan amount. The hypothesis is that capital ratio, total assets, and return on assets have a statistically significant and positive effect on the amount of the loan. The robust standard error coefficient showing a probable causal relationship between the variables was positive. Also,the results demonstrate that macroeconomic factors like interest rates, GDP, and inflation have a statistically insignificant positive impact on loan amounts. Hence, this study found enough evidence to accept the hypothesis that the loan amount had an insignificant effect. Conclusion- The authors contribute to the existing literature by identifying the key determinants of monetary policy transmission channels through credit in China and, furthermore, through a country-level data analysis and disaggregation at the commercial bank level, as well as economic conditions. Keywords: Panel Data, Banks, Monetary Policy Transmission Mechanism, Credit Channel, China economy. JEL Codes: C23; E51; E52

Monetary Policy Transmission Channels on the Performance of Nigerian Stock Market

This study examined the effect of monetary policy transmission channels on the performance of Nigeria stock market. The objective is to study the extent to which monetary policy transmission channels effect performance of Nigeria stock market. Time series data were sourced from Central Bank of Nigeria Statistical Bulletin. Stock market performance measured by liquidity of the market was modeled as the function of interest rate channel, exchange rate channel, assets pricing channel and exchange rate channel. The study adopted ordinary least square as data analysis methods. The study found that 57.7% and 41.5% variation or changes in liquidity of Nigeria stock market can be traced to monetary policy transmission channels as modeled in the regression model while the remaining 42.3% and 58.5% can be explained by variables not captured in the regression model. The F-statistics which measures the model significant proved that the model is statistically significant and good to predict variation on the dependent variable. The Durbin Watson statistics of 1.543 is less than 2.00 but greater than 1.5. It proved that there is presence of negative serial autocorrelation among the variables. The beta coefficient shows that the variables have positive effect except credit channel. From the findings the study concludes that monetary policy transmission channels have moderate effect on performance of the stock market. The study recommends that Nigeria exchange rate per US dollar should be well structured and defined. Policies to leverage the depreciation naira exchange rate should be formulated and there is need to strengthen Nigeria bilateral, unilateral and multilateral trade and investment relationship for better naira exchange rate that will enhance Nigeria stock market performance and Nigeria asset prices such as a treasury bill rate should be properly factored into the monetary policy objective to encourage cross boarder flow of financial asset and investment

Monetary Policy Transmission Channels on the Performance of Nigerian Stock Market

This study examined the effect of electronic payment instruments and inflation rate in Nigeria. The objective was to study the effect of different electronic payment instruments on Nigeria inflation rate. Time series data were sourced from Central Bank of Nigeria Statistical Bulletin from 2012 to 2021. Nigeria inflation rate was model as the function of automated teller machine, point of sales, web payment, mobile payment, Nigeria interbank payment and cheque payment. Ordinary least square was used as data analysis methods. The study found that 77.4 and 62 percent variation in inflation rate in Nigeria was explained by variation in electronic payment instruments. From the findings, the study concludes that automated teller machine has positive and significant effect on inflation rate in Nigeria, point of sales has positive and significant effect on inflation rate in Nigeria, web payment has positive but no significant effect on inflation rate in Nigeria, mobile payment has positive but no significant effect on inflation rate in Nigeria, Nigeria inter-bank payment has positive and significant effect on inflation rate in Nigeria while cheque payment has positive but no significant effect on Nigeria inflation rate. the study therefore recommend that, the regulatory authorities should ensure that the application of electronic payment instruments such as Automated Teller machine and point of sales regulated to achieve price stability and low inflation and that the application of electronic payment statistics should be harmonized with the monetary policy objectives of achieving low inflation and policies should be guided to reduce the amount of electronic payment transactions.

Research on the Influence of Monetary Policy on Stock Market Return

These changes in China's stock market are influenced by factors such as the share-trading reform and the international financial crisis. During this period, a series of monetary policies implemented in China also had some profound effects on China's stock market. Capital market has always been the main transmission channel of monetary policy. In recent years, China's interest rate system, share-trading system and other reforms have been gradually implemented, and the reform of interest rate marketization has achieved certain results, but it has also brought more uncertainty to the transmission of stock market and monetary policy. With the continuous expansion of the stock market, it has played an important role in the transmission process of monetary policy. At the same time, monetary policy can affect the price of financial assets, thus changing people's behavioral decisions and achieving monetary policy goals. When the actual monetary policy changes beyond or below expectations, it will cause the change of stock price. The existence of expectation effect makes the relationship between monetary policy and stock price change more complicated: taking loose monetary policy as an example, when the actual degree of easing is greater than investors' expectations, stock prices will be positively stimulated by easing; When the degree of easing is less than investors' expectations, the stock price will turn downward. Therefore, it is worth studying to analyze the influence mechanism among monetary policy, stock market and real economy.

Monetary Transmission through Bank Securities Portfolios

We study the transmission of monetary policy through bank securities portfolios for the United States using granular supervisory data on bank securities, hedging positions, and corporate credit. We find that banks that experienced larger market value losses on their securities during the monetary tightening cycle in 2022 extended relatively less credit to firms. Such a spillover effect was stronger for (i) available-for sale securities, (ii) unhedged securities, (iii) low-capitalized banks, and (iv) banks that have to include unrealized gains and losses on their available-for-sale securities in their regulatory capital. Our findings provide evidence for a forceful transmission channel of monetary policy that is shaped by the regulatory framework of the banking system.

Threshold Effect in the Bank Lending Channel of Monetary Policy Transmission and the Role of Bank Portfolio Deterioration: A PSTR Specification in the WAEMU Zone

The objective of this paper is to analyse the influence of monetary policy on credit supply in the WAEMU zone over the period 1996-2017. The study focuses on the WAEMU countries, except for Guinea-Bissau, due to the unavailability of sufficient data. We apply the Panel Smooth Transition Regression (PSTR) model of Gonzalez et al. (2005). The results reveal the non-linearity of the link between monetary policy and credit supply. There is a threshold of credit risk exposure of 8.726% above which monetary policy loses its effectiveness. Indeed, monetary policy has a positive effect on the supply of credit when the value of the gross bank portfolio deterioration rate is less than or equal to the threshold of 8.726% and an insignificant effect above this threshold. Above this threshold, the link between monetary policy and bank credit supply is distended. In this case, it is the level of economic activity that stimulates the supply of bank credit in this area. These results indicate that the effectiveness of the monetary policy conducted by the Central Bank of West African States (BCEAO), through the bank credit channel, should take into account the level of credit risk attained by banks. Thus, the study recommends that the authorities further strengthen prudential supervision within the WAEMU.