Monetary Policy Transmission Channels Research Articles

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.

Review on Monetary Policy after the Great Recession: The role of interest rates, by Arkadiusz Sieron, London: Routledge 2021

In his worth-reading book, Monetary Policy after the Great Recession: the role of interest rates, Arkadiusz Sieron looks at the limits of monetary policy and, in particular, the effectiveness of unconventional monetary policy. Sieron takes a close look at the unconventional monetary policy measures used after the Great Recession. He begins his book with an analysis of the so-called transmission channels of monetary policy. In the mainstream, there are several theories of how monetary policy affects or transmits to real variables such as employment and economic growth.

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.

Transmission Mechanism of Monetary Policy Through Asset Price and Exchange Rate Channel in Indonesia

Many studies have been related to monetary policy transmission toward economic growth targets. However, research on monetary policy transmission by including bond yields as a channel has never been done in Indonesia. Therefore, this study will analyze the effectiveness of monetary policy transmission through bond yields compared to monetary policy transmission through asset price and exchange rate channels. This study uses secondary data obtained from the Central Bureau of Statistics (BPS), the Indonesia Stock Exchange (IDX), the Indonesian Economic and Financial Statistics (SEKI) of Bank Indonesia, and the website investing.com. The analysis technique used in this study is Vector Autoregression (VARs). Based on research results, a relatively effective monetary policy transmission channel is the stock asset price channel. It is because the variables in the channel of stock asset prices only take one month to respond permanently to monetary policy, but the contribution between variables is still low. In the bond yield and exchange rate channel, the response shown is only temporary, and the contribution between variables is still weak, so the two channels are ineffective in transmitting monetary policy with the target of economic growth in Indonesia.

International capital flows, liquidity risk, and monetary policy

In recent years, there has been a large amount of lending coming from the public sector of many developing countries. At the same time, the financial sectors in many advanced countries have issued a large share of portfolio debt to other countries. What are the implications of these events for the global financial system and overall economic activity? Do they have an impact on the transmission channels of monetary policy across countries at different stages of economic development? We investigate these important issues using a micro-founded model of money and banking so that the effects of monetary policy across countries can be meaningfully studied. Notably, the increase in capital outflows to the advanced economy renders monetary policy in developing countries to be less effective, while the effects of monetary policy in advanced economies are more pronounced. Yet, our results indicate that it can indeed be optimal for lower income countries to lend to the advanced world. Importantly, we find that the optimal amount of lending to advanced countries critically depends on the degree of liquidity risk — if it is sufficiently high, then public sector lending to advanced economies is not warranted. Consequently, our results indicate that governments in developing countries should carefully consider how much capital they send abroad to foreign countries.

Equity market and the transmission channels of monetary policy: Before and after the zero lower bound

AbstractWe examine the effectiveness of the interest rate channel and the credit channel of monetary policy before and after the zero lower bound (ZLB), using intraday stock returns. We construct a number of industry‐specific and firm‐specific indicators to capture the sensitivity of firms' demand to interest rates (interest rate channel) and firms' financial constraints (credit channel). We find that the transmission of monetary policy has shifted across both periods. Conventional monetary policy works through both the neoclassical interest rate channel and the credit channel, while unconventional policy is propagated primarily via the credit channel which became even more effective at the ZLB. Before the ZLB the transmission channels operate primarily through target rate shocks rather than forward guidance announcements, whereas both forward guidance and large scale asset purchases were equally important for the credit channel at the ZLB. We also find strong evidence that transmission channels are asymmetric depending on the state of the stock market (bull/bear, tighter/easier credit conditions, high/low volatility), and the type of policy surprises (positive/negative). Our findings are robust with respect to a number of model extensions and alternative specifications.

Monetary policy as market stabilizer in the COVID-19 pandemic

We categorize expansionary monetary policies based on interest rates, monetary easing, and liquidity decisions. We find that the stock market reacts positively to liquidity policy announcements by a more significant margin during and after the COVID-19 at market and industry levels compared with reactions to interest rate or monetary easing policy announcements. The economic consequences are large and persistent. Using firm characteristics as proxies for monetary policy transmission channels, we find that at firm level, the positive responses to liquidity policy announcements during the crisis are more pronounced for small and medium-sized businesses and non-state-owned enterprises relative to other enterprises.

Working of Expectations Channel of Monetary Policy Transmission in India

In this paper, we examine the working of the expectations channel of monetary policy transmission for India, first by investigating the role of inflation expectations in an aggregate supply-demand (AS-AD) adapted to the Indian economy. Second, formulating an inflation function determining convergence of core inflation to its expected value in a fixed point arising through interactions between central bank (CB) expected inflation and expectations of different agents. Finally, we estimate SVARs with variables derived from the above exercises. We first estimate how expectations shocks affect macroeconomic aggregates. Second, we identify the shocks affecting expectations of households and professional forecasters (PFs). In addition, we estimate shocks influencing core inflation. Results suggest the expectation channel worked through interactions between PF forecasts and CB projections, with causality from CB projections to core and from core to household expectations. Supply shocks had short-run effects but core inflation dominated in the longer run. Expectations converged. The expectations channel of transmission to inflation was more effective through communication than through the policy rate, since the rate had low and sometimes even perverse effects. The relatively low impact of demand variables on inflation supports the hypothesized AS-AD structure.

Liquidity creation channel of monetary policy transmission in India: Do bank characteristics matter?1

AbstractIn this paper, we examine the effect of monetary policy on liquidity creation (LC) by banks in India. We also study the role of bank characteristics in the transmission of monetary policy to LC. We apply static and dynamic panel regressions to bank‐level data from India, spanning the period 1999–2020. We find a negative impact of monetary policy tightening on total as well as on‐balance sheet LC. We also find that the capital, size and profit of banks support the monetary policy transmission to LC. Finally, the LC channel seems to operate for both public sector and private sector banks. Our findings suggest that the monetary policy authority must closely monitor bank‐level characteristics to improve the efficacy of the LC channel of monetary policy.

The bank lending channel of monetary policy transmission in Vietnam: Impacts of the COVID-19 pandemic and the financial crisis

This paper aims to analyze changes in the transmission of monetary policy via bank lending when considering the impact of the COVID-19 pandemic and the financial crisis. Using bank-level data of 31 commercial banks in Vietnam from 2007 to 2021, we provide consistent evidence that the impact of monetary policy on bank lending tends to be more pronounced in the period of the COVID-19 pandemic. Besides, we document that the bank’s loan supply is more sensitive to monetary policy adjustments during the global financial crisis. Thus, a general pattern can be detected, i.e. the monetary policy transmission through the bank lending channel is stronger under unfavorable macro contexts in Vietnam. Accordingly, it can be suggested that adjustments in the monetary policy of the central bank have still been effective in periods of macro difficulty and the implementation of unconventional monetary policy in Vietnam is not necessary yet. Regression results when using the sample-splitting technique are consistent with those using interactive variables, providing evidence to confirm the robustness of the findings obtained in the study.

Hiệu quả truyền tải chính sách tiền tệ qua kênh tín dụng thương mại ở Việt Nam

Existing research in Vietnam mainly focuses on the traditional transmission channels of monetary policy. This article investigates the effectiveness of monetary policy transmission through an alternative funding channel for bank credit, which is the trade credit channel. Panel data regression was conducted with datasets from 501 Vietnamese enterprises in the period of the second quarter of 2010 to the second quarter of 2020. The results show that most enterprises in Vietnam do not have the ability to use trade credit as an alternative fund for bank credit in the context of monetary tightening, thereby helping to maintain or even increase the transmission efficiency of monetary policy. The transmission of monetary policy through the trade credit channel is most effective for enterprises with low credit ratings and is partly weakened for large enterprises, which can use trade credit as complementary short-term financing in the situation of credit supply shortage.

Pengaruh Jalur Transmisi Kebijakan Moneter terhadap Inflasi di Indonesia

Historically, actual inflation could not reach the inflation target, resulting in a deviation between the actual inflation and the inflation target. To overcome this problem, Bank Indonesia implemented a monetary policy transmission channel for inflation in Indonesia through the loan interest rate channel, the exchange rate channel, and the consumption credit channel. This article aims to determine the effect of the monetary policy transmission channel on inflation in Indonesia, as seen from the interest rate, exchange rate, and consumption credit channels. The research method of this article is quantitative with VAR/VECM analysis techniques. The results of the study state that (1) in the short term, interest rates on loans and consumption credit have a significant effect on the inflation rate; (2) in the long run, loan interest rates and the rupiah exchange rate have a significant effect on the inflation rate; (3) when shocks occur in loan interest rates, the rupiah exchange rate, and consumer credit, the inflation rate will respond differently; and (4) changes in interest rates on loans and consumption credit are effective in explaining variations in changes in the inflation rate. The results of this study imply that the determination of lending rates by each bank must still refer to the reference interest rate (BI7DRR), public sentiment and the volatility of the rupiah exchange rate in the short term must be the focus of consideration in the exchange rate channel, and consumption must consider the feasibility of the 5C aspect. Keywords: Inflation, Loan Interest Rates, Rupiah Exchange Rates, Consumption Credit

Business cycles, stock returns and the transmission channels of conventional and unconventional monetary policy

ABSTRACT The zero-lower bound (ZLB) may constrain the ability of Federal Reserve (Fed) to influence financial markets and the economy. This note examines the effectiveness of the interest rate channel and the credit channel of conventional and unconventional monetary policy while accounting for business cycle fluctuations. We use intraday industry returns and a number of industry-specific and firm-specific indicators to capture the sensitivity of firms’ demand to interest rates (interest rate channel) and firms’ financial constraints (credit channel). Our results indicate a dramatic change in the effectiveness of the transmission channels across business cycles and across periods. We find that the interest rate channel operates equally well during recessions and expansions pre-ZLB, but that this channel has ceased to function during the ZLB regardless of the stage of the business cycle. In contrast, the credit channel operates only during recessions in the conventional period, while it has been remarkably effective during both recessions and expansions in the ZLB era. 1 1 We thank Stefania D’Amico, Emmanuel Lartey, Lin Yan, and conference participants of the Econometric Society Asia Meeting 2021, WEAI 2021, World Finance Conference 2022, and International Finance and Banking Society 2018 for helpful comments and suggestions. We gratefully acknowledge the support of the Faculty Research Grant of the College of Business and Economics, California State University, Fullerton.

Asymmetric effects of monetary policy and financial accelerator: Evidence from India

This paper analyzes the asymmetric effects of monetary policy shocks during low and high financial stress regimes in India. We explore the asymmetric effects through various monetary policy transmission channels, namely, interest rate, credit, asset prices, exchange rate, and expectations channels, using threshold vector autoregression (TVAR) models. Financial Stress Index (FSI) is used in the TVAR estimations as the threshold variable that endogenizes the regime-switching. We use a compressive FSI based on the dynamic conditional correlation-generalized autoregressive conditional heteroscedasticity (DCC-GARCH) method. The empirical findings indicate that a contractionary monetary policy shock through various channels has a stronger and more persistent effect on macroeconomic goal variables, output, and inflation during high financial stress than in a low financial stress regime. An expansionary monetary policy shock also shows a more significant effect on output during a high financial stress regime. Also, we found a stronger financial accelerator effect during high financial stress. This finding supports the literature that argues for the emergence of a stronger financial accelerator effect during financial stress. Finally, using nonlinear historical decompositions, we find that interest rate shocks contribute significantly to macroeconomic fluctuations in India.