Monetary Policy Transmission Channels Research Articles

Effectiveness of alternative channels of monetary policy transmission: some evidence for India

In this article, we have employed ‘shutdown’ methodology, not used before in the Indian context, to study the relative importance of alternative channels of monetary policy transmission. We have, for the first time, studied the impact of monetary policy on consumer price index (CPI) inflation. In response to a shock to the operating target, the maximum decline in gross domestic product growth occurs with a lag of two to three quarters, while the impact on inflation (both CPI and wholesale price index) is felt with a lag of three to four quarters. The interest rate channel is found to be the most dominant channel of monetary policy transmission in India.

Optimal monetary policy under learning and structural uncertainty in a New Keynesian model with a cost channel and inflation inertia

We investigate whether expectations-based optimal monetary policy rules under discretion and under commitment can enforce a determinate and least squares learnable rational expectations equilibrium (REE) in a New Keynesian model with inflation inertia and a cost channel of monetary policy transmission. Our numerical results show that commitment rules can enforce a determinate and learnable REE for all parameter constellations considered, whereas discretionary rules are not always able to enforce the same desirable outcome in the economy. We also examine different types of misapprehensions in policy-making and find that an incorrect assessment of the economy׳s true structure by the central bank greatly affects its capability to enforce a determinate and learnable, although suboptimal, REE. Thus, our numerical results highlight the relevance of this type of analysis for the design and conduct of monetary policy.

The housing market channel of monetary policy transmission in the Euro area

PurposeThe purpose of this paper is to explore the role of the housing market in the monetary policy transmission to consumption among euro area member states. It has been argued that the housing market in one country is then important when its mortgage market is well developed. The countries in the euro area follow unitary monetary policy; however, their housing and mortgage markets show some heterogeneity, which may lead to different policy effects on aggregate consumption through the housing market.Design/methodology/approachThe housing market can act as a channel of monetary policy shocks to household consumption through changes in house prices and residential investment – the housing market channel. The authors estimate vector autoregressive models for each country and conduct a counterfactual analysis to disentangle the housing market channel and assess its importance across the euro area member states.FindingsThe authors find little evidence for heterogeneity of the monetary policy transmission through house prices across the euro area countries. Housing market variations in the euro area seem to be better captured by changes in residential investment rather than by changes in house prices. As a result, the authors do not find significantly large house price channels. For some of the countries however, they observe a monetary policy channel through residential investment. The existence of a housing channel may depend on institutional features of both the labour market or with institutional factors capturing the degree of household debt as is the loan-to-value ratio.Originality/valueThe study contributes to the existing literature by assessing whether a unitary monetary policy has a different impact on consumption across the euro area countries through their housing and mortgage markets. The authors disentangle monetary-policy-induced effects on consumption associated with variations on the housing markets due to either house price variations or residential investment changes. The authors show that the housing market can play a role in the monetary transmission mechanism even in countries with less developed mortgage markets through variations in residential investment.

Measuring the Channels of Monetary Policy Transmission: A Factor-Augmented Vector Autoregressive (Favar) Approach

Abstract There is more consensus on the effects of monetary policy than its transmission mechanism. Two channels of transmission mechanisms are the conventional interest rate channel and the credit channel. I investigate the channels of monetary policy transmission in the U.S. using the factor-augmented vector autoregressive (FAVAR) models developed by Bernanke, Boivin & Eliasz (2005). The newly developed FAVAR approach allows the researcher to include all relevant macroeconomic variables in the model and analyze them. Therefore, the FAVAR models span a larger information set and generate better estimates of impulse response functions than the commonly used vector autoregressive (VAR) models that utilize only 4–8 variables. I include 154 monthly U.S. time series variables for the period 1970–2014. The findings support the existence of the credit channel in the U.S. The conclusion remains the same when the non-borrowed reserve operating regime (October 1979–October 1982) is removed from the sample period.

The Effectiveness of Monetary Policy: Evidence from China

The purpose of this paper is to provide China’s empirical evidence on the real effectsof monetary policy from 1998:12 to 2012:08 by means of structural change analysis.The study shows that the structural changes of money supply at 2003:05, the end of 2008 and early of 2009 impact real output and prices efficiently, but the situations are opposite at 2000:12, 2001:06 and 2003:12. After investigating the interestrate transmission channel of monetary policy, this article draw a conclusion that the conflicting interest rate policy contrary to the overall objective of China’s central bank often makes easy or tight monetary policy work inefficiently.Therefore, it matters profoundly to ensure that the interest rate policy matches the main objectives of monetary policy

Lender of Last Resort Versus Buyer of Last Resort The Impact of the European Central Bank Actions on the Bank-Sovereign Nexus

We document channels of monetary policy transmission to banks following two interventions of the European Central Bank (ECB). As a lender of last resort via the long-term refinancing operations (LTROs), the ECB improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire-sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire-sale risk in the sovereign bond market.

MONETARY POLICY AND DEBT DEFLATION: SOME COMPUTATIONAL EXPERIMENTS

The paper presents an agent-based model to study the possible effects of different fiscal and monetary policies in the context of debt deflation. We introduce a modified Taylor rule that includes the financial position of firms as a target. Monte Carlo simulations provide a representation of the complex feedback effects generated by the interaction among the different transmission channels of monetary policy. The model also reproduces the evidence of low inflation during stock market booms and shows how it can lead to overinvestment and destabilize the system. The paper also investigates the possible reasons behind this stylized fact by testing different behavioral rules for the central bank. We find that, in a context of sticky prices and volatile expectations, endogenous credit creation can be identified as the main source of the divergent dynamics of prices in the real and financial sectors.

Money Market Reform in Korea and Its Effects on the Overnight Call–Repurchase Agreement Rate

ABSTRACTThe Korean government implemented money market reform after the global financial crisis, aiming to develop the repurchase agreement (RP, repo) market. In this article, I analyze the reform and its effects on money markets. Results show that the reform strengthened the functionality of the RP market and the monetary policy transmission channel to it. The error correction model indicates that although the adjustments to the equilibrium occurred through the call rate during the global financial crisis, they were processed through the RP rate in later periods. The ability of the RP rate to inform market liquidity conditions has improved.

Bayesian estimation of a new Keynesian policy model for a small open economy

The estimation of dynamic stochastic general equilibrium (DSGE) models has gained momentum during the last decade. In this paper, we estimate a small scale new Keynesian model for an emerging economy, Tunisia. We study the transmission channels of monetary policy on the fluctuations of domestic output and inflation over the short and long run in open and closed economy settings. We find that domestic shocks have higher impact on monetary policy calibration and the dynamic of the internal demand. The inclusion of the working capital channel for a country like Tunisia exhibiting high level of indebtedness of local firms helps better describe the behaviour of macroeconomic variables in response to shocks emanating from the policy side. We show that the policy reaction parameters of the Central Bank confirm our hypothesis that the latter has been following closely the Taylor rule. This finding explains the recent inflation trend in the country.

The Bank Lending Channel with Endogenous Money - A Simple Macro Model

Abstract The growth and deepening of financial markets entailed the expectation that the bank lending channel of monetary policy transmission would lose its importance. The paper explains why, on the contrary, the banking sector has become a major locus of origination and amplification of macro-financial shocks. Mutual feedback mechanisms between the financial and the real sector are analysed and simulated by using a simple standard macro model with an integrated banking system. A comparison of the efficiency of various Taylor Rule extensions explores whether monetary stabilisation can be improved by additional interest rate reactions to asset prices, bank lending, bank leverage or the spread between the loan and the policy rate. Der Bankkreditkanal bei endogener Geldmenge − Ein einfaches Makromodel Zusammenfassung Wachstum und Vertiefung der Finanzmarkte liesen vermuten, dass der Bank-kreditkanal der geldpolitischen Transmission an Bedeutung verlieren wurde. Der Beitrag erklart, aus welchen Grunden jedoc...

Monetary Policy Transmission Mechanism in Nigeria: A Comparative Analysis

Empirical evidence has shown that the result of the exact channel of monetary policy transmission in Nigeria is mixed. This paper compared the Factor-augmented vector–auto regression (FAVAR) framework which exploits large data set of 53 with the traditional VAR model that estimates 6 variables to ascertain the exact channel of transmission. Findings from the two models conclude that although both methods generate qualitatively related results, but the FAVAR model is a superior alternative over VAR on grounds that monetary policy shocks are better identified using the FAVAR model. Also the FAVAR model does not exhibit the prize puzzle problem found in the VAR but allows for the computation of impulse responses of a large number of variables. Results from both models show that interest rate and credit channels are dominant and strongest channels of monetary policy transmission in Nigeria. Exchange rate and money channels were not significant and pronounced.

Understanding the Influence of Interest Rate Liberalization on Economic Structure and Monetary Policy

In this paper, a dynamic stochastic general equilibrium model with price stickiness is constructed to analyze quantitatively the effect of interest rate liberalization on economic structure and monetary policy. Using parameter calibration and Bayes estimation, we analyze the impulse responses and numerical simulation of the external shocks of technology shocks and monetary policy shock. The empirical results find the following conclusion: Firstly, the interest rate liberalization is conducive to economic restructuring as the investment ratio and capital growth is suppressed and the household and government consumption ratio is promoted. Secondly, the interest rate liberalization can lower economic fluctuation, and enhance the defense ability against external shocks such as technological shocks and monetary policy shocks. Moreover, the interest rate liberalization is help to dredge the monetary policy transmission channels as the interest rate shocks on the real economy is gradually increased.

Sources of Inaction in Household Finance: Evidence from the Danish Mortgage Market

We build an empirical model to attribute delays in mortgage refinancing to psychological costs inhibiting refinancing until incentives are sufficiently strong; and behavior, potentially attributable to information-gathering costs, lowering the probability of household refinancing per unit time at any incentive. We estimate the model on administrative panel data from Denmark, where mortgage refinancing without cash-out is unconstrained. Middle-aged and wealthy households act as if they have high psychological refinancing costs; but older, poorer, and less-educated households refinance with lower probability irrespective of incentives, thereby achieving lower savings. We use the model to understand frictions in the mortgage channel of monetary policy transmission. (JEL E52, G21, G51, R31)

Prices and Output Response to Monetary Policy Variation in Nigeria

Successful policy implementation often requires an accurate assessment of the magnitude at which the effect aof monetary policy change propagates to other sectors of the economy. For this reason, a thorough understanding of the mechanism through which monetary policy affects targeted economic variables is necessary. This study used innovation accounting in a SVAR model to establish that monetary authorities in Nigeria employed a hybrid of operating procedures and also pursued price stability and growth objectives. Employing Impulse Response Functions (IRFs) and Variance Decompositions (VDs) to examine the dynastic responses of the variables to various shocks within the S’VAR system 0n monetary data from 2000:1M03 to 2012:M12, bank interest rate and reserve money were identified as the two operating targets of the Central Bank of Nigeria (CBN). The study established that reserve money was a more effective measure of monetary policy that bank rate and also that bank lending was the monetary policy transmission channel in Nigeria, We therefore recommended that CBN should focus primarily 0n price level stability rather than combine it with output growth since achieving the former has the tendency fastering growth in output.

Monetary policy and dynamic adjustment of corporate investment: A policy transmission channel perspective

We investigate monetary policy effects on corporate investment adjustment, using a sample of China’s A-share listed firms (2005–2012), under an asymmetic framework and from a monetary policy transmission channel perspective. We find that corporate investment adjustment is faster in expansionary than contractionary monetary policy periods. Monetary policy has a significant effect on adjustment speed through monetary and credit channels. An increase in the growth rate of money supply or credit accelerates adjustment. Both effects are significantly greater during tightening than expansionary periods. The monetary channel has significant asymmetry, whereas the credit channel has none. Leverage moderates the relationship between monetary policy and adjustment, with a greater effect in expansionary periods. This study enriches the corporate investment behavior literature and can help governments develop and optimize macro-control policies.

English

The main objective of this study was to analyze Cape Verdean monetary policy, the rules chosen by the decision makers, its changes and its transmission to the economy. Primarily, we analyzed the dynamics of the most important Cape Verdean macroeconomic time series. By using the Vector Autoregression (VAR) and the Markov Switching Vector Autoregression (MS-VAR) models, we also analyzed and compared how those dynamics were connected to the monetary policy regime adopted during the period of 1991 to 2011. We tried two models, in the second of which was included the effective exchange rate index in order to capture transmissions of the exchange rate channel.. Through the MS-VAR, we also estimated two regimes which were statistically identified. The second regime seems to be more persistent and characterized the entire period from 1993 to 2006, which matches with important changes in Cape Verde's economy. We compare the impulse-response functions estimated by using the VAR model and the impulse-response regime-dependent functions estimated by MS-VAR models. The latter indicated that only in the second regime does a positive shock in the residuals of interest rate have the expected effects, decreasing the output level and the price index. Key words: Monetary policy transmission channels, Cape Verde, MS-VAR.

The bank lending channel of monetary policy transmission: evidence from an emerging market, India

In this paper, we analyses bank lending channel (BLC) of monetary policy transmission in India. We test for loan supply shifts, emanating as a direct effect of changes in the prime policy rate used by the Reserve Bank of India. Using yearly bank balance sheet data from 1996 to 2007, the paper provides evidence of an operational bank lending channel (BLC) in India. Further, segregating banks by asset size and liquidity, we find that small, illiquid banks are more affected by policy changes, and the effect is more pronounced in areas of non-priority sector lending. Finally, the domestically owned banks are more sensitive to policy rate changes vis-a-vis foreign banks.

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.

What Has Driven Inflation Dynamics in the Euro Area, the United Kingdom and the United States

This paper studies factors behind inflation dynamics in the euro area, the UK and the US. It introduces a factor-augmented vector autoregression (FAVAR) framework with sign restrictions to study the effects of fundamental macroeconomic shocks on inflation in the three economies. The FAVAR model framework is also applied to study the effects on inflation subcomponents in the more recent past. The FAVAR models suggest that headline inflation in the three economies has reacted in a relatively similar fashion to macroeconomic shocks over the last four decades, with demand shocks causing the most persistent effects on inflation. According to the subcomponent FAVAR models, the responses of inflation subcomponents to macroeconomic shocks have also been relatively similar in the three economies. However, there is evidence of a stronger foreign exchange channel of monetary policy transmission as well as supply shocks in the responses of non-energy tradable goods prices in the UK than the other two economies, while the reaction of services inflation has been more muted to all types of shocks in the euro area than the other two economies. JEL Classification: C22, C32, E31, E52