Monetary Policy Indicators Research Articles

The bank lending channel of monetary policy in EU countries during the global financial crisis

The study examines the existence of the bank lending channel of monetary policy in European Union (EU) countries. The paper advances current research on the monetary transmission mechanism in the following ways: Firstly, we analyze the differences between ‘old’ Economic Monetary Union (EMU) and ‘new’ EU countries. Secondly, we examine the key bank characteristics and monetary policy indicators that may have an impact on the bank lending channel. We assume that short-term market interest rates and monetary aggregate M2 affect banks' activities. We apply the generalized method of moments (GMM) with pooled data from 1999 to 2012. We show that in the pre-crisis period the effect of changing the short-term market interest rates on the bank lending channel of monetary policy is more pronounced among ‘old’ EMU countries, whereas the effect of M2 is significant during the period of the global financial crisis (GFC) among ‘old’ EMU countries. Last but not least the important finding is that banks in ‘new’ EU countries react differently to monetary shocks.

An SVAR Approach to Evaluation of Monetary Policy in India: Solution to the Exchange Rate Puzzles in an Open Economy

Following the exchange-rate paper by Kim and Roubini (J Monet Econ 45(3):561–586, 2000), we revisit the questions on monetary policy, exchange rate delayed overshooting, the inflationary puzzle, and the weak monetary transmission mechanism; but we do so for the open Indian economy. We further incorporate a superior monetary measure, the aggregation-theoretic Divisia monetary aggregate. Our paper confirms the efficacy of the Kim and Roubini (J Monet Econ 45(3):561–586, 2000) contemporaneous restriction, customized for the Indian economy, especially when compared with recursive structure, which is damaged by the price puzzle and the exchange rate puzzle. The importance of incorporating correctly measured money into the exchange rate model is illustrated, when we compare models with no-money, simple-sum monetary measures, and Divisia monetary measures. Our results are confirmed in terms of impulse response, variance decomposition analysis, and out-of-sample forecasting. In addition, we do a flip-flop variance decomposition analysis, finding two important phenomena in the Indian economy: (i) the existence of a weak link between the nominal-policy variable and real-economic activity, and (ii) the use of inflation-targeting as a primary goal of the Indian monetary authority. These two main results are robust, holding across different time period, dissimilar monetary aggregates, and diverse exogenous model designs.

Flights from Stocks

This paper establishes a strong link between the profitability of the momentum strategy and market instability, as gauged by flight-to-quality episodes. Momentum gains are shown to be roughly ten times larger during flight episodes. Further, flights are significantly associated with larger momentum profits even after controlling for indicators of asset performance, volatility, illiquidity, market state, and monetary policy. This paper's results also show that illiquidity shocks appear to diversely affect different types of flights, as predicted in Vayanos (2004). Finally, monetary policy announcements, past and contemporaneous, are shown to decrease the incidence of market instability.

Inflation uncertainty, disagreement and monetary policy: Evidence from the ECB Survey of Professional Forecasters

Abstract We analyze the determinants of average individual inflation uncertainty and the cross-sectional variance of point forecasts (“disagreement”) based on data from the European Central Bank's Survey of Professional Forecasters. We empirically confirm the implication from a theoretical variance decomposition that disagreement is an incomplete approximation to overall uncertainty. Both measures are associated with macroeconomic conditions and indicators of monetary policy, but the relations differ qualitatively. In particular, average individual inflation uncertainty is higher during periods of expansionary monetary policy, whereas disagreement rises during contractionary periods. This implies that conclusions based on disagreement as a single indicator of ex ante uncertainty are incomplete and potentially misleading.

Indicators of monetary policy: an evaluation of five

The paper is concerned with the question of the appropriate variable that the central bank should use to measure its influence on aggregate demand. More specifically, in the pursuit of its goal to stabilise the economy, what should be the indicator of monetary policy - a price variable such as a market interest rate or a quantity variable such as the growth in the money supply? This question is of interest as the monetary indicators or “guide” variables frequently appear to give conflicting signs with respect to the direction of influence of the monetary policy actions on the economy. The author evaluates the performance of five monetary indicators: a short term market rate of interest, a monetary full employment rate of interest, the money supply, the neutralised money supply and the monetary base. The current popular monetary policy indicators are first statistically reexamined, before he criteria used to evaluate the indicators are defined. The estimation procedure employed is then indicated and the statistical results presented. The results suggest that the market rate of interest is the poorest indicator, while the observed money stock and the monetary base are the most reliable. JEL: E52, E58, E51

Monetary Transmission in Developing Countries: Evidence from India

There are strong a priori reasons to believe that monetary transmission may be weaker and less reliable in low- than in high-income countries. This is as true in India as it is elsewhere. While its floating exchange rate gives the RBI monetary autonomy, the country's limited degree of integration with world financial markets and RBI's interventions in the foreign exchange markets limit the strength of the exchange rate channel of monetary transmission. The country lacks large and liquid secondary markets for debt instruments, as well as a well-functioning stock market. This means that monetary policy effects on aggregate demand would tend to operate primarily through the bank-lending channel. Yet the formal banking sector is small, and does not intermediate for a large share of the economy. Moreover, there is evidence both that the costs of financial intermediation are high and that the banking system may not be very competitive. The presence of all of these factors should tend to weaken the process of monetary transmission in India. This paper examines what the empirical evidence has to say about the strength of monetary transmission in India, using the structural vector autoregression (SVAR) methods that have been applied broadly to investigate this issue in many countries, including high-,middle-, and low-income ones. We estimate a monthly VAR with data from April 2001 to December 2014. Applying a variety of methods to identify exogenous movements in the policy rate in the data, we find consistently that positive shocks to the policy rate result in statistically significant effects (at least at confidence levels typically used in such applications) on the bank-lending rate in the direction predicted by theory. Specifically, a tightening of monetary policy is associated with an increase in bank lending rates, consistent with evidence for the first stage of transmission in the bank-lending channel. While passthrough from the policy rate to bank lending rates is in the right (theoretically-expected) direction, the passthrough is incomplete. When the monetary policy variable is ordered first, effects on the real effective exchange rate are also in the theoretically expected direction on impact, but are extremely weak and not statistically significant, even at the 90 percent confidence level, for any of the four monetary policy variants that we investigate. Finally, we are unable to uncover evidence for any effect of monetary policy shocks on aggregate demand, as recorded either in the industrial production (IIP) gap or the inflation rate. None of these effects is estimated with strong precision, which may reflect either instability in monetary transmission or the limitations of the empirical methodology. Overall, the empirical tests yield a mixed message on the effectiveness of monetary policy in India, but perhaps one that is more favourable than is typical of many countries at similar income levels.

Estimating Taylor Type Rule for India's Monetary Policy using ARDL Approach to Co-integration

In an open economic environment, economies generally experienced economic instability emerging out of internal and external factors. Like other central banks ’apparently following discretionary policy rule corresponding to fluctuations in the economy, Reserve Bank of India has also been not less than anyone in responding frequently to different economic situations by changing key interest rates those it has under its privilege. Using Autoregressive Distributed Lag (ARDL) model of co-integration, this paper decisively estimates exchange rate augmented Taylor Type rule for India's monetary policy and examined its short-run and long-run behaviour with respect to the output gap, inflation gap and exchange rate over the period from 2001Q1 to 2012Q4. Estimation results revealed that output gap, inflation gap and exchange rate are the important determinants of monetary policy in India. Amongst these three, inflation and output gap found to be matter more for RBI than exchange rate in short-run, but the situation is vice-versa in long-run. The study also asserts that Exchange Rate Augmented Taylor Type rule sufficiently explains the behaviour of RBI's monetary policy.

What measures Chinese monetary policy?

This paper models the PBC's operating procedures in a two-stage vector autoregression framework. We decompose changes in policy variables into exogenous and endogenous components in order to find a “clean” monetary policy indicator whose changes are mainly policy induced. Our main findings are twofold. First, the PBC's operating procedures have evolved over time; since about 2006, they have developed to a relatively stable regime. Second, its operating procedures are neither pure interest rate targeting nor pure reserves targeting, but a mixture. A set of indicators all contain information about the policy stance. Finally, we construct a new composite indicator of the overall policy stance.

What Measures Chinese Monetary Policy?

This paper models the PBC’s operating procedures in a two-stage vector autoregression framework. We decompose changes in policy variables into exogenous and endogenous components in order to find a “clean” monetary policy indicator whose changes are mainly policy induced. Our main findings are twofold. First, the PBC’s procedures appear to have changed over time. Second, its operating procedures are neither pure interest rate targeting nor pure reserves targeting, but a mixture of the two. There are a variety of indicators that appear to contain information about the monetary policy stance. It is therefore preferable to use a composite measure to gauge the stance of Chinese monetary policy. We construct a new composite indicator of the overall policy stance, consistent with our model. A comparison with existing indicators suggests that the composite indices, rather than individual indicators, perform better in measuring the stance of Chinese monetary policy.

The Monetary Policy in the System of State Regulation of the Indian Economy

The main task of this research is the analysis of India's monetary policy and its place in the system of state regulation of the economy. The article highlights the main directions of the Indian monetary policy in 1990-2000s aiming to raise competitiveness of the Indian goods on the foreign markets as well as stimulating the inflow of foreign capital in necessary volumes into the national economy. The author focuses on the main instruments of the modern Indian monetary policy, pursued in line with providing the undervalued rupee, which include the manipulating of the bank rate and currency interventions, directed mainly at sterilization of excessive inflow of foreign currency to the country. The article also underlines all the advantages and costs of the monetary policy. One of its main advantages is stimulation of national production's exports and among costs there are difficulties of importing machines and equipment into the country, increase of inflation rate as a result of massive inflow of export revenue, difficulties at external debt's service. The author notes the gradual nature of introduction of current account rupee convertibility and reasons for delay in achieving its full convertibility. Among them there are rather high level of fiscal deficit of the consolidated budget, essential average annual level of inflation, problems of non-performed assets in the economy, high liquidity ratio for commercial banks. The article also presents statistical data on the present state of the Indian foreign exchange reserves as well as dynamics in nominal and real effective exchange rate of rupee in 2005/06 - 2013/14 fiscal year.

RISK TAKING BEHAVIOR AND MACROECONOMIC INDICATORS OF ISLAMIC BANKS PROFITABILITY IN MALAYSIA

Purpose: The purpose of the study is to examine the profitability indicators of full-fledged Malaysia Islamic explored in 1994-2013.
 Design/methodology/approach:The return on assets (ROA) is used asprofitability measures to determine the effect of Risk Taking Behavior, transmission of monetary policy and macroeconomic conditions indicators on profitability.The descriptive, correlation and panel regression analysis results are derived with the help of Limdep 9.0 software.
 Findings:The retained profit, return on equity, money supply and economic growth establish positive and significant relation with profitability models. Otherwise, the highest credit risk taking and loan loss provision lead tolower profitability measured by return on assets (ROA).
 Originality/value:The main objective of the study is providing empirical evidence on indicators of profitability in case of seventeen full-fledged Malaysia Islamic Bank to fill a demanding gap in the literature.

Fiscal and monetary policy effects in three South Eastern European economies

This paper investigates the macroeconomic effects of monetary and fiscal policies in three South Eastern European economies: Bulgaria, Croatia and Macedonia. We employ recursive vector autoregressions in order to study the linkages among fiscal policy, monetary policy and economic activity based on quarterly data on primary cyclically adjusted balance, monetary policy indicators, inflation rate and output gap. We obtain the following main results: first, domestic economic activity exerts significant effects on inflation, provoking a strong reaction of monetary policy, especially in case of procyclical or erratic behavior of fiscal policy; second, we find evidence for the expansionary effects of fiscal consolidation since fiscal tightening leads to an increase in economic activity; third, the effects of monetary policy on output and inflation are generally as expected; fourth, monetary policy acts as a strategic substitute to tight fiscal policy, while in case of monetary tightening, fiscal authorities behave in a countercyclical manner.

Monetary Policy in India: Transmission to Bank Interest Rates

This paper provides new evidence on the credit channel of monetary policy transmission in India. Using stepwise estimation of vector error correction models, the analysis finds significant, albeit slow, pass-through of policy rate changes to bank interest rates in India. There is evidence of asymmetric adjustment to monetary policy: the lending rate adjusts more quickly to monetary tightening than to loosening. In addition, the speed of adjustment of deposit and lending rates to changes in the policy rate has increased in recent years.

Monetary Policy in India: Transmission to Bank Interest Rates

This paper provides new evidence on the credit channel of monetary policy transmission in India. Using stepwise estimation of vector error correction models, the analysis finds significant, albeit slow, pass-through of policy rate changes to bank interest rates in India. There is evidence of asymmetric adjustment to monetary policy: the lending rate adjusts more quickly to monetary tightening than to loosening. In addition, the speed of adjustment of deposit and lending rates to changes in the policy rate has increased in recent years.

Consumer Price Indices in the UK

Since the British government started using the Prices Index (CPI) for some uprating purposes in 2011, there has been a proliferation of consumer price indices in the UK – nine at the last count with some claim to apply to the population at large. Leaving to one side their possible use as monetary policy indicators, this paper provides a review of the available consumer price indices and assesses their suitability as uprating indices, in the light of recent theoretical and empirical research.The main focus is on the CPI and the Retail Prices Index (RPI), since the other indices all derive from one or other of these two. The conclusion of the paper is that, taking account of both coverage and formula effect differences and within the limitations of how price data is collected within the UK, the RPI is as good a consumer price index as one can get for uprating purposes. The systemic differences between the RPI and the CPI are the result of under-estimation by the CPI.There are implications for other countries as well. The flurry of recent research in the UK has led to a consensus that the Economic Approach, which had been thought to provide at least weak support for the use of the Geometric Mean for elementary aggregation, in fact does not do so. There is, therefore, a need for a revision to the ILO's Consumer Price Index Manual: Theory and Practice, and countries which have adopted the Geometric Mean for elementary aggregation on the basis that this is allowing for consumer price substitution should revisit their decisions.

The Impact of Monetary Policy on Financial Performance: Evidence from Banking Sector of Pakistan

Interest rate an important indicator of monetary policy always has major impact on financial sector performance. The purpose of this paper is to enlightened the monetary policy effect on banking sector stability and performance by investigating the casual relationship between interest rate imposed by state bank of Pakistan and bank financial performance taken as ROA and ROE. Highlighting the importance of monetary policy in banking sector, this study shall focus in depth over its impact on performance of banking industry of Pakistan by studying monetary transmission over the past five year (2007-2011), using interest rate as its measure. Using correlation analysis followed by ordinary Least Square regression carries the empirical analysis of the study. Firm size is taken as control variables for the study as firm size have significant impact on financial performance of banks. The finding of study reveal that interest rate taken as measure for monetary policy has significant inverse relationship on firm financial performance measured, which is measured by ROA and ROE.

Empirical Investigation of Risk Tacking Channel of Monetary Policy in Iran

This study deals with investigation of existence of monetary policy risk channel in the economy of Iran. For the same purpose, the seasonal data of macroeconomic variables are used in such a manner that changes in interest rate as an indicator of monetary policy and bank leverage ratio as an indicator of risk are considered. Using VAR approach and Impulse response functions, the experimental test of channel of monetary policy risk in the economy of Iran was examined. The results showed that an expansionary monetary policy which occurs by decrease in interest rates causes that risk of bank system to be increased. In addition, it should be stated that inflation had positive impacts and economic growth had negative impacts on the risk of bank system.

Sectoral Effects of Monetary Policy in India

Every economy comprises of different sectors with divergent characteristics. These different sectors respond heterogeneously to identical unanticipated macroeconomic stimuli. Using a Vector Autoregression model this study finds that the impact of a monetary policy shock at the sectoral level is heterogeneous with manufacturing being the most responsive. The sectors such as Manufacturing, Mining and Quarrying, Construction and Trade are the fastest to respond. The differential sectoral effects depend upon factors such as capital intensity, interest sensitivity, export-orientation, production planning strategies among others. The sectors also differ in terms of the most effective channel of monetary transmission. The interest rate channel has emerged as the most efficient channel of the monetary policy transmission in most of the sectors followed by the credit channel. Therefore, the heterogeneous sectoral responses indicate the need for a more sector-specific monetary policy. JEL Classification: E50, E52, E58, O53

Solving the price puzzle with an alternative indicator of monetary policy

We identify the effects of monetary policy shocks on macroeconomic variables in VARs using the Divisia M4 measure of money as the policy indicator variable. We obtain theoretically sensible responses—whether or not a commodity price index is included. Thus, we eliminate the well-known empirical puzzles from the VAR by a novel choice in a policy variable, rather than the usual attachment of an ad hoc variable.

An Empirical Analysis of the Austrian Business Cycle Theory

The Austrian economists Ludwig von Mises and Friedrich A. Hayek developed a unique theory of the business cycle. In their view, an unsustainable boom ensues when the rate of interest prevailing in the market falls below the natural rate. The boom is characterized not only by an increase in aggregate production but also by a distortion of the structure of production. Similarly, the recession that follows is characterized by a decline in aggregate production as the structure of production is repaired. Hence, the Austrian account of macroeconomic fluctuation stresses the misallocation and reallocation of resources in addition to the overproduction and underproduction of more conventional business cycle theories. In a recent article, Lester and Wolff (Review of Austrian Economics 26(4):433–461, 2013) attempt to consider the empirical relevance of the Austrian view. We argue that the authors’ use of the federal funds rate as an indicator of monetary policy is inappropriate in that it fails to distinguish a low market interest rate from a market interest rate that is low relative to the natural rate. Using an estimate of the natural rate provided by Selgin et al. (2011), we attempt to improve upon their analysis.