Effectiveness Of Monetary Policy Transmission Research Articles

Interest Rate Pass-Through in Euro Area Mortgage Markets: The Long Shadow of the Great Financial Crisis

Abstract The tightening of monetary policy in response to the recently observed surge in inflation has focussed attention on the potential impact of changes in policy rates on European mortgage holders. Central to this question is the pass-through of policy rates to the mortgage rate charged in residential markets across the Euro Area as housing costs have contributed significantly to recent inflationary pressures. In particular, how much and how quickly does the change in the Euro Area policy rate pass-through to the mortgage rate in a particular member country’s market? The effectiveness of the monetary policy transmission mechanism has been impaired in a number of ways by the continuing effects of the great financial crisis (GFC). In this article, we seek to examine the manner in which the pass-through relationship between Euro Area policy rates and representative mortgage market rates has been impacted by financial sector considerations such as the degree of concentration in the sector, banks’ holdings of impaired loans, and the overall level of financial stress in the economy. Overall, our empirical findings indicate the level of financial stress experienced during the GFC has had a major impact on the effectiveness of monetary policy transmission in the Euro area. This article suggests that the GFC still has implications for the efficacy of current monetary policy in the Euro Area through several different but related channels. (JEL codes: E52, F45, and G21)

Financial technologies and the effectiveness of monetary policy transmission

This study investigates whether and how financial technologies (FinTech) influence the effectiveness of monetary policy transmission. We use an interacted panel vector autoregression model to explore how the effects of monetary policy shocks change with regional-level FinTech adoption. Results indicate that FinTech adoption generally mitigates the transmission of monetary policy to real GDP, consumer prices, bank loans, and housing prices, with the most significant impact observed in the weakened transmission to bank loan growth. The relaxed financial constraints, regulatory arbitrage, and intensified competition are the possible mechanisms underlying the mitigated transmission.

Bank Lending Channel Effectiveness – Potential Lessons For Monetary Policy

The article supplements the research on the effectiveness of monetary policy transmission – especially through the bank lending channel. The current study focuses on assessing the transmission of monetary impulses through commercial and cooperative banks as well as through individual loan portfolios, while distinguishing between the fact that they were granted by commercial and cooperative banks. How a change in the central bank’s interest rates may determine a change in the volume of loans in the economy remains the core question of the research.

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.

The impact of the monetary policy transmission mechanism-the money supply channel on the economy

This study aims to assess the effectiveness of the monetary policy transmission mechanism on the money supply channel to the economy with the goal of prices (inflation) and income (Real GDP) from the first quarter of 2010 to the fourth quarter of 2021. The variables in this study include the BI Rate or Bank Indonesia reference interest rate, the money supply M0, the money supply M1, the money supply M2, inflation, and real GDP. The data processing phases begin with verifying data stationarity, optimum lag processing, and the Johansen co-integration test. Then this research employs an analytical method, namely the vector error correction model (VECM). The effectiveness of monetary policy transmission was analyzed using the optimal lag test. Then the impulse response and variance decomposition function to see the magnitude of the response of each variable. This study shows that the transmission of monetary policy to inflation through the money supply channel is more effective than the money supply channel to real GDP. 

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.

Financial Technologies and the Effectiveness of Monetary Policy Transmission

Financial Technologies and the Effectiveness of Monetary Policy Transmission

Uticaj digitalnog novca na monetarnu i fiskalnu politiku

Digital money era is in full swing. It has already changed the structure of the global monetary system. Like industrial revolutions of the past few centuries, the digital money revolution is based on: (i) new IT and accounting technology (crypto algorithms, distributed ledger technology, internet, and deep penetration of smart phones), and (ii) demand for greater financial inclusion, and for more efficient financial services. The advent of unregulated private mobile money with more than 4 billion users and trillions of dollars in financial transaction has awakened fears of monetary system instability and dwindling traction of the old monetary and fiscal policy. The response has been a relentless effort by more than 100 central banks around the world to develop a public digital currency. Retail CBDCs issued by central banks will be available to everybody to provide stability and liquidity to the financial system in times of need. There will be uncertainties and challenges regarding the conduct of monetary and fiscal policy. Many expected improvements will come with inevitable tradeoffs in the speed and effectiveness of monetary policy transmission, and in achieving greater fiscal transparency without violating individual rights and privacy. Serbia will benefit greatly from improved fiscal transparency and reduced shadow economy associated with digital money revolution. At the same time it will be vulnerable to currency substitution pressures from future digital Euro and reduced traction of monetary policy in the presence of multiple e-money flows. Timely legal preparations for bank-led mobile money and Central Bank digital cash, and applied research of complex future policy risks is strongly advised.

Does bank efficiency affect the bank lending channel in China?

This work examines the impact of bank efficiency on the bank lending channel in China. Using a sample of 148 Chinese banks over the period 2006–2017, we investigate how the reaction of the loan supply to monetary policy actions depends on a bank's efficiency. We find limited evidence that bank efficiency hampers the effectiveness of monetary policy transmission. In addition, bank efficiency does favor the transmission of monetary policy for banks with low loan-to-deposit ratios. These results suggest that bank efficiency may influence the bank lending channel in certain cases.

COVID-19 UNCERTAINTY AND MONETARY POLICY RESPONSES: EVIDENCE FROM EMERGING MARKET ECONOMIES

This paper examines the effectiveness of monetary policy transmission in emerging economies during the COVID-19 outbreak. Using data from 14 emerging economies severely affected by the pandemic and the autoregressive distributed lag approach to cointegration, the study examines the effectiveness of monetary policy in affecting output, inflation, and credit. The study finds that: (1) In most economies, the monetary policy transmission to inflation is weakened due to the uncertainty created by the COVID-19 pandemic; (2) in a few economies, the transmission is found to be effective in stabilizing credit and output; and (3) the outbreak of the COVID-19 pandemic induced economic agents to follow a “cautionary” or “wait and see” approach.

Bank competition, interest rate pass-through and the impact of the global financial crisis: evidence from Hong Kong and Macao

PurposeThe authors examine the interest rate pass-through in Hong Kong (HK) and Macao both in the long term and short term.Design/methodology/approachThe authors use time series methodology, i.e. unit root, cointegration and error correction models.FindingsThe results show that in the post-global financial crisis (GFC) period, both the long-run and short-run interest rate pass-through from policy rates to prime rates have disappeared in Macao and are weakened significantly in Hong Kong. The long-term relationship between deposit rates and policy rates no longer exists in either market while the short-term relationship has been reduced significantly.Research limitations/implicationsThe results indicate that the effectiveness of monetary policy in HK and Macao has been seriously undermined in the post-GFC period. New tools are needed in both regions.Practical implicationsMonetary policy transmission via bank interest rates in both HK and Macao are no longer effective after the outbreak of the GFC.Social implicationsEffort to stimulate the economy and/or control inflation will be hampered.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine the impact of the GFC on the effectiveness of monetary policy transmission in HK and Macao.

Monetary policies and bank lending in developing countries: evidence from Sub-Sahara Africa

PurposeThe purpose of this paper is to examine monetary policies and bank lending in the emerging economies of Sub-Sahara Africa.Design/methodology/approachThe dynamic system-generalized method of moments (GMM) that overcomes issues of unobserved period and country-specific effects, as well as potential endogeneity of explanatory variables, is applied in the estimation exercise. The study uses the data for 80 banks across 20 Sub-Saharan African countries from 2010 to 2019.FindingsThe findings show that expansionary monetary policy such as an increase in money supply stimulates bank lending, while contractionary monetary policies like increase in the monetary policy rates by the central banks lead to credit contraction, albeit a weak effect due to possible underdevelopment of financial markets, institutional constraints, bank concentration and other rigidities in the system characteristic of developing countries that undermine the effectiveness of monetary policy transmission. Capital adequacy ratio and size of economic activities are other variables that significantly influence bank lending channels.Practical ImplicationSub-Sahara Africa countries can enhance the effectiveness of monetary policy transmission on bank lending through the effective use of the transmission mechanism of changes in money supply and monetary policy rate.Originality/valueWhile greater empirical attention has been devoted to the nexus between monetary policies and macroeconomic variables in country-specific studies, the connection between monetary policies and bank lending at an extensive regional or cross-country level is still scanty. For Sub-Saharan Africa, there is a palpable lack of empirical evidence on this. This study, therefore, seeks to fill this gap in a region where the impact of monetary policies on credit intermediation is crucial to the economic diversification efforts of the governments of Sub-Sahara Africa.

Monetary policy effectiveness in Africa: the role of financial development and institutional quality

PurposeThis study aims to provide empirical evidence of the pass-through effect of monetary policy on bank lending rates vis-à-vis the potential moderating effects of financial sector development and institutional quality in Africa.Design/methodology/approachThe study uses robust fixed effects panel data estimation techniques and data from 1990 to 2017 across 37 countries in Africa.FindingsThe results show that financial development aids in the effectiveness of monetary policy transmission. A decomposition of financial development into financial institution development and financial market development shows that financial institutional development is more influential with regard to effectiveness of the interest rate pass-through compared to financial market development. This study again shows that improvements in the quality of institutions reduced lending rates in African economies.Practical implicationsThe findings present relevant policy implications regarding effective transmission of monetary policy, by linking the pursuit of institutional quality, characterized by the control of corruption, political stability, regulatory quality, rule of law and the voice of accountability and development of financial institutions with lending rates and ultimately the demand for growth capital.Originality/valueThis study contributes to the literature on the factors influencing the effectiveness of monetary policy. This study considers financial sector development and institutional quality as conduits to monetary policy effectiveness in developing African countries.

Financial Technologies and the Effectiveness of Monetary Policy Transmission

This study investigates whether and how financial technologies (FinTech) influence the effectiveness of monetary policy transmission. We use an interacted panel vector autoregression model to explore how the effects of monetary policy shocks change with regional-level FinTech adoption. Results indicate that FinTech adoption generally mitigates monetary policy transmission to real GDP, consumer prices, bank loans, and housing prices. A subcategorical analysis shows that the muted transmission is the most pronounced in the adoption of FinTech payment and credit, compared to that of insurance. The regulatory arbitrage and competition between FinTech and banks are the possible mechanisms leading a mitigated monetary policy transmission.

Analysis of the Effectiveness of Monetary Policy Transmission through a Line of Credit and Inflation Expectations in Indonesia

This study aims to determine the effectiveness of the transmission mechanism of monetary policy by reviewing the amount of the deadline that required the transmission mechanism of monetary policy in achieving the goals of the final form of the output gap and inflation by using the channel of credit and inflation expectations. In addition, this study also aims to determine the relationship long-term and short against the target output gap and inflation. This study uses a regression model Vector Error Correction Model (VECM) to estimate the influence of the transmission mechanism of monetary policy to the output gap and inflation through the channel of credit and the regression model of Vector Autoregression (VAR) to estimate the influence of the transmission mechanism of monetary policy to the output gap and inflation through the channel of inflation expectations. The Data used in this research is the data series time quarter from 2008 to 2018. Data peneliltian used to estimate the influence of the transmission mechanism of monetary policy to the output gap and inflation through the channel of credit in the form of secondary data consisting of the benchmark interest rate of Bank Indonesia, the interest rates on the interbank money market 1 month, loan interest rates, money supply (M2) and the amount of working capital loans disbursed. While the data used to estimate the influence of the transmission mechanism of monetary policy to the output gap and inflation through the channel of inflation expectations in the form of secondary data consisting of the benchmark interest rate of Bank Indonesia, inflation expectations. The secondary Data used is sourced from the annual reports that are published from the official website of the Bank of Indonesia, the data of the Central Bureau of Statistics and the International Monetary Fund. The results of this study showed that the effectiveness of the transmission mechanism of monetary policy through the credit channels require the deadline each of the 8 (eight) of the quarter and 10 (ten) quarter in achieving the goals of the end of the output gap and inflation. While the effectiveness of the transmission mechanism of monetary policy through the channel of inflation expectations require the deadline each of the 4 (four) quarter and 6 (six) quarter in achieving the goals of the end of the output gap and inflation. The results also showed only policy transmission mechanism built rmelalui credit lines that have long-term relationships against inflation while the transmission mechanism of monetary policy through the channel of inflation expectations have short-term relationship strong. Keywords: The Transmission Mechanism Of Monetary Policy, Output Gap, Inflation.

Dynamics of Money Market Interest Rates in Ghana: Time‐Frequency Analysis of Volatility Spillovers

AbstractAs the second longest practicing inflation targeting economy in Africa, it is of interest to investigate the degree to which policy interest rate influences other money market rates so as to gauge the overall effectiveness of monetary policy transmission in Ghana. This study evaluates the degree of connectedness among money market rates and also determines the most dominant money market rate(s) in Ghana. The basic finding is that the monetary policy rate has a low‐to‐moderate influence on volatility dynamics of other money market rates in Ghana across historical time‐interval and time‐frequency domains. This is a reflection of a generally weak capability of policy interest rate to drive other market rates in Ghana. Both monetary policy rate and Treasury bill rate are net transmitters of shocks, while interbank, lending and saving rates are net receivers of shocks in the money market. However, the Treasury bill emerges as the largest shock transmitter in the money market, across all forecast horizons and analytical domains. The lending rate is the largest shock recipient in the money market, largely from the Treasury bill rate which suggests ample evidence of fiscal dominance in Ghana. The study accentuates the exigency for monetary and fiscal policies to expeditiously address the domestic structural bottlenecks, especially in the financial sector and the fragile fiscal profile, in order to strengthen policy transmission in Ghana.

Rational Attention Allocation in the Mortgage Market

We propose a structural mortgage prepayment model, where mortgage holders have to allocate costly attention to implement prepayment decisions, and apply the model to US prime mortgages. Our empirical results suggest that commonly observed refinancing mistakes, such as choosing a financially suboptimal refinancing rate by waiting for too long, can be optimal responses of borrowers who allocate their attention rationally. We find that financial sophistication and experience in refinancing reduce costs for attention, while additional financial obligations cause the opposite. Compared to a situation without costs for attention, we estimate that the rational allocation of costly attention increases the value of liabilities by $4,214 for a median mortgage. We find that after the Great Financial Crisis, both the costs for attention as well as the impact of financial sophistication, experience in refinancing and additional financial obligations on the costs for attention increase. The increase of the costs for attention leads to an additional increase of the value of liabilities of 15% after the Great Financial Crisis. Our results have implications for the effectiveness of monetary policy transmission, especially, following an economic crisis.

Does Bank Efficiency Affect the Bank Lending Channel in China?

This work examines the impact of bank efficiency on the bank lending channel in China. Using a sample of 175 Chinese banks over the period 2006–2017, we investigate how the reaction of the loan supply to monetary policy actions depends on a bank’s efficiency. While bank efficiency does not exert an impact on the effectiveness of monetary policy transmission overall, it does favor the transmission of monetary policy for banks with low loan-to-deposit ratios. In addition, the expansion of shadow banking activities has been associated with a positive impact of bank efficiency on monetary policy transmission. These results suggest that bank efficiency may influence the bank lending channel in certain cases.

Bank diversification and the effectiveness of monetary policy transmission: Evidence from the bank lending channel in Vietnam

The study empirically examines the impact of bank diversification on monetary policy transmission through the bank lending channel. Based on monetary and bank-level data from 2008 to 2018 in Vietna...

Interest rate pass‐through and exogenous factors: Evidence from Vietnam

AbstractThis article examines the efficiency of the monetary policy transmission mechanism in Vietnam by investigating a two‐stage linkage between policy rates and retail bank rates in consideration of exogenous drivers including the asymmetric pass‐through behaviour and the State Bank of Vietnam's significant change on the operational target. The month‐end dataset, and asymmetric error correction model, autoregressive distributed lag regression and vector autoregressive regression are utilized to measure the degree of ultimate pass‐through, adjustment speed, and short‐run pass‐through of the two‐stage interest rate pass‐through process. Our results indicate quick responses in market rates to changes in policy rates; and incomplete long‐run pass‐through coupled with delayed impact and slow adjustment from market rates to retail rates; while the responses appear to be symmetric with respect to the direction of change of rates. Moreover, the positive impact of the State Bank's regime shift on the effectiveness of the interest rate transmission is another important finding of this study. These findings eventually lead to some suggestions on the possible measures to enhance the effectiveness of monetary policy transmission.