Tight Monetary Policy Research Articles

The EURIBOR surge and bank deposit costs: an investigation of interest rate pass-through and deposit portfolio rebalancing

Against the backdrop of sharp monetary policy tightening, this article studies the links between bank deposit costs and the EURIBOR. In doing so the authors employ an SVAR multivariate model that jointly includes deposit rates and volumes, fitted on monthly data covering the period 2003-2019. Increases in the EURIBOR are found to pass through to bank deposit rates in Spain, pushing up interest rates on term deposits in particular. In turn, increases in the EURIBOR triggered shifts from sight to term deposits. Through both mechanisms, bank deposit costs increased. The article documents that in 2022 the pass-through from the EURIBOR to deposit rates is falling short, relative to what would be expected according to the historical pattern captured by model results; as a result, the increase in bank deposit costs has been weaker than expected. To draw insights into the reasons behind this pattern, the authors analyse several euro area economies. Correlation analyses suggest that the impact of the EURIBOR on deposit rates and costs was weaker in banking sectors with greater excess liquidity and higher market concentration.

The role of liquidity in monetary policy transmission: Evidence from Indian banks1

AbstractThe role of bank liquidity in monetary policy transmission has received insufficient attention in the literature. Faced with monetary tightening, banks with more liquidity can sell off securities and protect their loan portfolios. We test this proposition using panel data for Indian banks during 2005–2020. Employing dynamic threshold panel regressions with liquid assets as the threshold variable, we show that bank lending declines with monetary policy tightening in low liquidity regimes, but not in high liquidity regimes. We also find evidence for different portfolio reallocation behaviour by banks in high versus low liquidity regimes in response to monetary policy changes.

The Effect of Higher Financing Costs on Job Openings and Online Job Postings

In this Economic Commentary, we consider whether the declines in vacancies seen in the second half of 2022 could have been driven by monetary policy tightening. We look at whether the variation in this decline across industries and states was consistent with increases in the federal funds rate. Our first strategy focuses on variation at the industry level in exposure to higher borrowing costs. Our second leverages geographic differences in the effect of monetary policy tightening on financing costs. Both strategies suggest that monetary policy is, at least in part, responsible for the recent decline in vacancies.

Monetary policy, macroeconomic uncertainty and corporate liquid asset demand: a firm-level analysis for India

PurposeThe study examines how the liquid assets holdings among non-financial Indian firms vary due to tightening monetary policy and increasing macroeconomic uncertainty.Design/methodology/approachThe authors analyze 5,640 firms for the period 2011–2021. The authors first estimate India’s monetary policy shocks by decomposing the exogenous shocks from the systematic component of monetary policy changes. The authors then examine the effects of the estimated monetary policy shocks and a range of macroeconomic and policy uncertainty indicators on companies’ cash and bank balances to asset ratios using two-step system generalized method of moments (GMM) estimators.FindingsThe authors find that monetary policy shocks cause the cross-sectional variances for the firms’ liquidity holdings to increase. In anticipation of macroeconomic volatility, companies respond to these shocks after taking into account all the firm-level information to minimize the opportunity costs of holding extra cash or too few cash balances that can hamper firms’ operations. Furthermore, compared to other shocks, the contribution of inflation-induced shocks is predicted to be the largest in the cross-sectional deviation of the firm’s cash holdings. The authors also find that low-growth, older and financially constrained firms observe lesser heterogeneity in their cash holdings as they tend to hold cash as a precautionary buffer.Originality/valueThe authors’ approach to the analysis is unique in many ways. To address potential transmission bias, the authors use nowcasts and forecasts of real gross domestic product (GDP) growth and inflation to generate a series of exogenous monetary policy shocks for identifying unanticipated changes in short-term interest rates. Subsequently, the authors estimate how these shocks affect the cross-sectional deviation of liquid assets. For estimating the effects of macroeconomic uncertainty on corporate cash demand, the authors utilize a range of proxies for uncertainty. Unlike previous attempts, the authors offer evidence for a developing and fast-emerging economy.

More than Words: Twitter Chatter and Financial Market Sentiment

We build a new measure of credit and financial market sentiment using Natural Language Processing on Twitter data. We find that the Twitter Financial Sentiment Index (TFSI) correlates highly with corporate bond spreads and other price- and survey-based measures of financial conditions. We document that overnight Twitter financial sentiment helps predict next day stock market returns. Most notably, we show that the index contains information that helps forecast changes in the U.S. monetary policy stance: a deterioration in Twitter financial sentiment the day ahead of an FOMC statement release predicts the size of restrictive monetary policy shocks. Finally, we document that sentiment worsens in response to an unexpected tightening of monetary policy.

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.

Impact of Oil and Agricultural Shocks on the Financial Markets of Emerging Market Economies

We assess oil and agricultural price shocks in the financial markets of six EMEs (Brazil, Chile, Mexico, India, South Africa, and Turkey) using the GVAR. Positive oil price shocks provoke falls in all stock markets, devaluations in four domestic currencies, and tight monetary policies in two economies. The variance decomposition indicated that this shock is more influential in the stock markets, followed by the exchange rates. Compared to the oil price, shocks in agricultural prices caused appreciations in all domestic currencies. This shock is pervasive in all exchange markets in the first months, losing importance over time. The distinct responses to different commodities shocks point out that the kind of shock is relevant to comprehend its influence on EMEs. We detected relevant heterogeneities concerning the spreading of commodities shocks on domestic financial markets, especially in South Africa.

How monetary policy affects industrial activity in Malawi: Evidence from ARDL and VAR models

In this paper, the impact of monetary policy on industrial production is investigated for Malawi. Using the ARDL bounds testing approach, and VAR models, it is shown that tight monetary conditions negatively affect industrial production both in the short run and in the long run. This is the case whether the central bank’s policy rate or reserve money is used as the policy tool. The study further establishes the interest rate channel, and money supply channel as the main mechanisms through which this effect of monetary policy is transmitted to industrial production. Given these results, a recommendation is made that the Reserve Bank of Malawi should refrain from prolonged use of tight monetary policy in their quest to achieve stability of prices as this stifles growth of the industrial sector. Rather monetary policy should be used as a temporary stabilization tool when faced with temporary shocks to the bank’s policy objectives.

Understanding Monetary Spillovers in Highly Integrated Regions: The Case of Europe*

AbstractWe analyse why conventional monetary policy tightening in the euro area leads to a deterioration of output in Central‐, East and Southeastern Europe (CESEE). Our findings show that negative spillovers mainly arise through a decline in CESEE imports and exports, induced by a decrease in euro area demand. Negative spillovers are amplified through knock‐on effects through third‐countries and cannot be cushioned by favourable exchange rate movements. We also find evidence for a broad‐based retrenchment of cross‐border bank flows to the region. For the CESEE policymaker, our results indicate a limited power of exchange rate policies to buffer foreign, adverse monetary policy shocks.

Impact of cash reserve ratio on banks profitability: A study on conventional commercial banks in Bangladesh

This paper analyzes how banks profitability responds to fluctuations in cash reserve ratio in Bangladesh. Basically, it’s purpose is to examine the effects of Bangladesh Bank practices of employing cash reserve ratio on banking intermediation activities and as a result its profitability, particularly in conventional commercial banking sector. Coefficient of Correlation is used to find out the relation between cash reserve ratio and banks profitability while t-test is utilized for testing hypothesis. Quantitative time series data for 5 years’ time period of 2017-2021 was collected for the study. The researcher selects ten leading conventional commercial Bank as sample. This study highlights the consequences of movement in CRR on banks profitability by using secondary data. The finding of the study is that CRR has negative relation with banks profitability where Return on Assets (ROA) and Return on Equity (ROE) is studied as profitability indicator. It can be concluded that movement in CRR keep inverse impact on conventional commercial banks profitability in the long run by influencing the banks intermediary work. This paper helps the banks to stand strongly and strategically at the time of tight monetary policy when CRR rate increases by informing the inverse impact of this monetary tool.

Impact of monetary policy on the macroeconomy under dollarization: evidence from the Lao PDR

PurposeThis study empirically aims to analyze the transmission of monetary policy in consideration of asymmetry based on the Bank of the Lao PDR (BOL)'s monetary policy tools and real and financial variables in the domestic market.Design/methodology/approachThis study adopts two approaches, conventional vector autoregression (VAR) and asymmetric VAR, to investigate the impact of monetary policy on macroeconomic variables including inflation and real GDP growth in the Lao PDR.FindingsUnder a highly dollarized monetary regime, the policy rate change plays a weaker role compared with M0, which exerts significantly positive effects on real GDP growth and inflation. The results of the asymmetric VAR model further substantiate that the real economy responds to a positive M0 shock (easing monetary policy) rather than a negative shock (tightening monetary policy).Practical implicationsOverall estimation results suggest that the effectiveness of monetary policy is limited in Laos, which would take priority over efforts to strengthen the development of the short-term financial market and de-dollarization.Originality/valueThis study can fill the gap in the literature in which the discussions on the transmission mechanism of monetary policy in the BOL's monetary policy are still little known.

Global spillover impact of US monetary shocks on China–based on empirical test of GVAR model

This paper builds an open country theoretical model to analyse the spillover impact of the US monetary policy tightening shock on China’s economy. GVAR empirical model is employed combined with 22 countries and obtain three main results. First, the US monetary tightening shock causes the rise of the international risk index and the bilateral real exchange rate (the appreciation of the US dollar and the depreciation of the RMB). Second, both China’s current account and China’s capital outflow show the increased trends combined with the weighted role of foreign economies. Third, as the negative effect of China’s capital outflow is higher than the positive effect of China’s current account, China’s real output declines caused by the US monetary tightening shock.

Global Financial Crisis: Cause, Impact and Response

The subprime crisis is a financial calamity brought on by subprime mortgage companies going bankrupt, investment funds being forced to close, and major stock market shocks. At the start of this century, the US stock market, real estate market, and other asset markets experienced a number of asset bubbles due to excess liquidity, house purchase policy stimulus, financial innovation, and other factors. Along with the tightening of monetary policy, the weakening of the US housing market, and particularly the rise in short-term interest rates, the interest rate for repaying subprime mortgages surged considerably. At the same time, buyers find it challenging to sell their homes or refinance utilising mortgage housing because to the ongoing cooling of the housing market. Due to the failure of many subprime borrowers to make scheduled loan repayments and the failure of banks to sell their properties at high prices, which resulted in significant losses, the subprime crisis was directly caused by these events. Most people agree that the absence of a mechanism for financial monitoring was a major factor in the crisis. The United States has accelerated the adoption of neo liberal economic policies during the past three decades, which is one of the primary causes. However, more than ten years after the United States stabilised the financial system through monetary, fiscal, financial, and other measures, the global economy has been hit considerably more severely and has not yet fully emerged from the shadow of the crisis.

Challenges to Disinflation: The Brazilian Experience

ABSTRACT: We review two previous bouts of high inflation and disinflation since Brazil adopted inflation targeting. In both episodes, fiscal sustainability concerns were present and inflation expectations became unanchored despite substantial monetary policy tightening. Disinflation and the reanchoring of expectations took time and proved costly, as both episodes entailed a recession. They required tight monetary policy combined with critical shifts toward structural economic reforms and sound fiscal policy. The ongoing episode features the same fiscal concerns and unanchored inflation expectations. This suggests the path ahead for disinflation will be challenging, unless policies change direction. We also speculate whether the Brazilian experience can provide insights for other countries.

Run Effects of the Short-Run Stabilization Policies in Ukraine

Based on of the quarterly data for the period of 2002-2021 and with the application of ARDL estimates it has been established that in the case of recession there are short-run expansionary effects of government expenditures and exchange rate appreciation. However, government expenditures become contractionary in the long run, along with monetary policy tightening. Liberalisation of economic environment, as indicated by the Index of Economic Freedom from the Heritage Foundation, is expansionary in the long run. Finally, about 80% of deviation from the long-run relationship is corrected in the short run. Key words: stabilization policy, fiscal-monetary mix, exchange rate, Ukraine, error-correction model (ARDL)

Monetary policy, funding cost and banks’ risk-taking: evidence from the USA

How much deposits and equity a bank has influences how a banks’ lending responds to monetary policy. While the responsiveness for the bank lending channel has been well established, this is not the case for the risk-taking channel (RTC). We show in a value-at-risk RTC model that the lending for banks with relatively more equity and non-interest-bearing deposits should respond less to monetary policy tightening. This suggests that non-interest-bearing deposits act as “pseudo capital.” In a panel of US banks, we find strong evidence in support of our model for various risk measures.

Landings, Soft and Hard: The Federal Reserve, 1965–2022

“Soft landings,” that is, cases in which the central bank tightens monetary policy to fight inflation but does not cause a recession (which would be a “hard landing”, are thought to be difficult to achieve and extremely rare. According to the conventional wisdom, the Federal Reserve has managed to achieve only one soft landing in the past 60 years—in 1994–1995. This paper studies the eleven episodes of monetary policy tightening by the Fed since 1965, and concludes that the central bank has a better record than that—that as long as the criteria for softness are not too stringent, and Fed was actually trying to land the economy softly, the Fed has succeeded several times. Achieving a soft landing, however, requires both skill in managing monetary policy and the absence of adverse external shocks.

Understanding the current global regime shift and the standing of the macro-financial system resilience

Understanding the current global regime shift and the standing of the macro-financial system resilience

Monetary policy transmission in Sri Lanka

ABSTRACT Sri Lanka’s monetary policy has evolved differently during and after a three-decade-long ethnic conflict. This paper empirically investigates effects of monetary policy shocks on Sri Lankan economy with particular focus on the strength of credit and exchange rate channels using a VAR model for 2003–2019 period. We find that: (i) monetary policy shocks have a significant and persistent impact on key macroeconomic variables even though several puzzling results emerge; (ii) the effects of monetary policy shocks are significant and more persistent in the post-conflict period than in the conflict period; (iii) a tight monetary policy effectively contains inflation in the post-conflict period; and (iv) interest rate and exchange rate channels play a dominant role while the credit channel responds with some lags in the post-conflict period.

New Energy Enterprises in the Post-epidemic Era of Investment Considerations

Based on the thinking that the Federal Reserve interest rate hike is coming to an end and the risk-free interest rate of the US dollar is getting higher and higher, the investment opportunities of US stocks in the post-epidemic era are in the new energy field. Coal and natural gas have been the top spot for the U. S. energy market for more than 20 years. Now, the energy battlefield is shifting, and in the next decade, renewable energy, especially solar and wind energy, will dominate in the future. In 2022, the capital market ushered in the Federal Reserve's tight monetary policy, and the market value of new energy stocks plunged. However, some scholars believe that if there is no large-scale war in the next decade, the general direction of the capital market investment is new energy, such as the photovoltaic industry, wind power industry and so on. This paper calculates the statistics of 20 listed 20 new energy companies from 2015 to 2021, and analyzes the multiple financial ratios of each company, compare good companies and general performance of the financial ratio of variance and average, using Mahalanobis Distance analysis of investors choose which financial ratio about the choice of good future investment value about the company is of great significance.