Monetary Policy Transmission Channels Research Articles

Credibility and monetary transmission channels under inflation targeting: An econometric analysis from a developing country

After more than two decades of inflation targeting in the world, it is important to evaluate if the adoption of this regime in a relevant developing country contributed to the creation of a better environment for the process of entrepreneurs' expectations formation. Brazil is part of an important group of developing countries (BRIC — Brazil, Russia, India and China) and represents a potential laboratory experiment in which the effects of an adoption of inflation targeting after more than a decade can be evaluated. Not enough is known about the consequences of inflation targeting credibility on both monetary policy and monetary policy transmission channels in developing countries that adopted inflation targeting. Hence, the paper analyzes the effects of credibility on the conduct of monetary policy, and the transmission channels through which monetary policy affect the economy. The study found that inflation targeting has represented an important strategy for the achievement of a more stable macroeconomic environment, which has been of great importance to investments and employment creation. Besides, the study found the following novelties: inflation targeting credibility positively affects entrepreneurs' expectations, expectations of entrepreneurs affect investment decisions and employment creation and the expectations of entrepreneurs are affected by the traditional transmission channels.

Monetary Policy, Bank Lending and Inflation in Nigerian; 1993-2009

This paper investigates whether bank-lending behaviour can provide a convincing explanation for the effects of monetary policy on inflation over the period 1993-2009. This period was selected on account that it marks the beginning of indirect monetary policy regime in Nigeria. Applying the ADF and PP-test to determine the stationary state of our data, the result shows that the variables are not stationary at their level except the prime lending rate. Therefore, a cointegration test was carried out to test the existence of a long run relationship in our data. However, we were not able to determine this. As such we apply the Vector Auto Regression (VAR) technique to determine the effects of monetary policy on inflation through the bank lending channel. More also, in order to consolidate our findings; we applied the impulse response function and forecast error variance. Our findings from this paper do not support the existence of bank lending channel of monetary policy transmission in Nigeria. This is so since monetary policy done through the setting of interest rate does not have the intended effects on bank lending behaviour. More also, bank lending has no significant effects on inflation. Therefore, the conclusion from our study is that bank lending cannot provide convincing explanation effects of monetary policy on inflation in Nigerian economy.

Asset prices and monetary policy in Kenya

Purpose – The purpose of this paper is to investigate the effectiveness of asset price channel in monetary policy transmission and the effect of stock market volatility on monetary policy in Kenya.Design/methodology/approach – Empirical analysis is based on quantitative analysis which incorporates both descriptive analysis and empirical approach. The study specifically uses the VAR approach which is most appropriate for this kind of study involving analysis of policy shocks on macroeconomic variables.Findings – The main findings of this paper are as follows: first, the evidence of the existence of the asset price channel of monetary policy transmission is mixed in Kenya. Second, while the effect of monetary policy on stock price volatility is not significant, stock market volatility creates instability in monetary policy variables, implying that information from the stock market may be important in predicting the business cycle.Originality/value – The paper provides useful policy insights to academicians,...

The effectiveness of monetary policy in steering money market rates during the financial crisis

The financial crisis has deeply affected money markets and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area money market rates by looking at (i) the predictability of money market rates on the basis of monetary policy expectations and (ii) the impact of extraordinary central bank measures on money market rates. We find that during the crisis money market rates up to 12 months still respond to revisions in the expected path of future rates, even though to a lesser extent than before August 2007. We attribute part of the loss in monetary policy effectiveness to money market rates being driven by higher liquidity premia and increased uncertainty about future interest rates. Our results also indicate that the ECB’s non-standard monetary policy measures as of October 2008 were effective in addressing the disruptions in the euro area money market. In fact, our estimates suggest that non-standard monetary policy measures helped to lower Euribor rates by more than 80 basis points. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises.

The Effectiveness of Monetary Policy in Steering Money Market Rates During the Financial Crisis

The financial crisis has deeply affected money markets and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area money market rates looking at, first, the predictability of money market rates on the basis of monetary policy expectations, and second the impact of extraordinary central bank measures on money market rates. We find that during the crisis money market rates up to 12 months still respond to revisions in the expected path of future rates, even though to a lesser extent than before August 2007. We attribute part of the loss in monetary policy effectiveness to money market rates being driven by higher liquidity premia and increased uncertainty about future interest rates. Our results also indicate that the ECB's non-standard monetary policy measures as of October 2008 were effective in addressing the disruptions in the euro area money market. In fact, our estimates suggest that non-standard monetary policy measures helped to lower Euribor rates by more than 80 basis points. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises.

A Global Perspective on Inflation and Propagation Channels

This paper revisits the evidence on the monetary policy transmission channels. It extends the existing literature along three lines: i) it takes a global perspective with aggregate series based on a broader set of countries (ca 70% per cent of the global economy) and a longer time (1960-2010) than previous studies. It, thereby, internalises potential international transmission channels (i.e. via global commodity prices); ii) it examines the interaction between monetary variables, asset prices (notably residential property) and inflation; and iii) it looks at the role of public debt for consumer price developments. On the basis of a VAR analysis, the study finds that i) global money demand shocks affect global inflation and also global commodity prices, which in turn impact on inflation; ii) global asset/property price dynamics appear to respond to financing cost shocks, but not to shocks to global money demand. Moreover, positive house price shocks exert a significant influence on inflation. From a global perspective, the study suggests recognition of global externalities of commodities and asset values as well as the close monitoring of real estate price developments. JEL Classification: E31, E51, E62, C32, F42

Lost in Transmission? The Effectiveness of Monetary Policy Transmission Channels in the GCC Countries

This paper empirically investigates the effectiveness of monetary policy transmission in the Gulf Cooperation Council (GCC) countries using a structural vector autoregressive model. The results indicate that the interest rate and bank lending channels are relatively effective in influencing non-hydrocarbon output and consumer prices, while the exchange rate channel does not appear to play an important role as a monetary transmission mechanism because of the pegged exchange rate regimes. The empirical analysis suggests that policy measures and structural reforms - strengthening financial intermediation and facilitating the development of liquid domestic capital markets - would advance the effectiveness of monetary transmission mechanisms in the GCC countries.

Lost in Transmission? The Effectiveness of Monetary Policy Transmission Channels in the GCC Countries

This paper empirically investigates the effectiveness of monetary policy transmission in the Gulf Cooperation Council (GCC) countries using a structural vector autoregressive model. The results indicate that the interest rate and bank lending channels are relatively effective in influencing non-hydrocarbon output and consumer prices, while the exchange rate channel does not appear to play an important role as a monetary transmission mechanism because of the pegged exchange rate regimes. The empirical analysis suggests that policy measures and structural reforms - strengthening financial intermediation and facilitating the development of liquid domestic capital markets - would advance the effectiveness of monetary transmission mechanisms in the GCC countries.

Studying on the monetary transmission mechanism in China in the presence of structural changes

PurposeThis paper aims to study the monetary transmission mechanism of China from January 1996 to December 2009 under endogenous structural breaks.Design/methodology/approachThe study constructs a benchmark VAR model and then adds the proxy variables for four channels of monetary policy transmission as endogenous or exogenous variables in the model to study the transmission mechanism in China. Considering a number of reforms carried out in the economic and financial field in the past two decades and the possibility of structural changes in the monetary transmission mechanism, the methodology proposed by Qu and Perron is employed to allow for endogenous structural changes in the model.FindingsBy conducting a comparative analysis, conclusions can be drawn from this paper that bank lending is always the dominating channel for monetary policy to influence economy in China and the roles of the interest rate channel and the exchange rate channel have been improved in recent years. However, the role of the asset price channel in monetary policy transmission has weakened since late 2001.Originality/valueThis paper combines the quasi‐maximum likelihood procedure proposed by Qu and Perron in 2007 with a benchmark VAR model, thus providing a new approach to study monetary transmission mechanism and the conclusions can be more sensible.

Foreign bank penetration and the lending channel in emerging economies: Evidence from bank-level panel data

This paper examines the main implications of recently increasing foreign bank penetration on bank lending as a channel of monetary policy transmission in emerging economies. Using a dynamic panel model of loan growth, we investigate the loan granting behavior of 1273 banks in the emerging economies of Asia, Latin America, and Central and Eastern Europe during the period from 1996 to 2003. Applying the pooled OLS, system GMM, and panel VAR estimators, we find consistent evidence that foreign banks are less responsive to monetary shocks in host countries, as they adjust their outstanding loan portfolios and interest rates to a lesser extent than domestic private banks, independent of their liquidity, capitalization, size, efficiency, and credit risk, and although there exists a bank lending channel in the emerging economies, it is declining in strength due to the increased level of foreign bank penetration. We also explore possible driving factors for the different responses of foreign and domestic banks to monetary policy shocks by investigating foreign banks’ different behavior during banking crises and tranquil periods, the effects of mode of entry to host countries, the home-country effects, and the response of foreign banks from OECD countries vs. all foreign countries including non-OECD countries. We suggest the access of foreign banks to funding from parent banks through internal capital markets as the most convincing explanation.

Implications of bank ownership for the credit channel of monetary policy transmission: Evidence from India

Using bank-level data from India, we examine the impact of ownership on the reaction of banks to monetary policy, and also test whether the reaction of different types of banks to monetary policy changes is different in easy and tight policy regimes. Our results suggest that there are considerable differences in the reactions of different types of banks to monetary policy initiatives of the central bank, and that the bank lending channel of monetary policy is likely to be much more effective in a tight money period than in an easy money period. We also find differences in impact of monetary policy changes on less risky short-term and more risky medium-term lending. We discuss the policy implications of the findings.

Monetary Policy and the Credit Channel, Broad and Narrow

Two variants of the credit channel of monetary policy transmission can be distinguished: a narrow bank lending channel, measured in terms of the supply of bank loans, and a broad credit channel focusing on the external finance premium in credit markets. In this paper, both variants of the credit channel are identified by applying Markov-switching models on US bank lending and interest rate data. We find the credit channel to be particularly potent during periods of financial distress, such as during 1980s Savings and Loan debacle, the period following the bursting of the internet bubble in the early 2000s, or the financial crisis that started in the sub-prime segment of the US real estate market in 2007. Eastern Economic Journal (2011) 37, 403–416. doi:10.1057/eej.2009.51; published online 31 January 2011

The scope for inflation targeting in Tunisia: Analytical and empirical approach

The aim of our work is to identify the necessary conditions for successful transition to the regime of inflation targeting in the case of Tunisia. In this context, we analyze, first, the theoretical foundations of the policy of inflation targeting. Then, we outline the prerequisites for adopting this strategy in a country like Tunisia. Finally, based on SVAR models, we try to evaluate the transmission channels of monetary policy and identify the conditions for successful adoption of the regime of inflation targeting.

The Effectiveness of Monetary Policy in Steering Money Market Rates during the Recent Financial Crisis

The recent financial crisis deeply affected the money market yield curve and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area moneymarket rates using two measures: first, the predictability of money market rates on the basis of monetary policy expectations, and second the impact of extraordinary central bank measures on money market rates. We find that market expectations about monetary policy are less relevant for money market rates up to 12 months after August 2007 compared to the pre-crisis period. At the same time, our results indicate that the ECB’s net increase in outstanding open market operations as of October 2008 accounts for at least a 100 basis point decline in Euribor rates. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises.

Monetary policy and credit cards: Evidence from a small open economy

This paper uses a unique monthly data set that covers the overall credit card usage in a small-open economy, Turkey, to investigate a possible credit channel of monetary policy transmission through credit cards. A reduced-form vector autoregression analysis is employed, where the forecast error variance decompositions are calculated for three-year windows over the period 2002–2009. It is shown that, during the recent financial crisis that has started in 2007, the monetary policy of Turkey has shifted toward focusing on output volatility and interest rate smoothing through setting short-term interest rates, while the inflation rate has been mostly affected by exchange rate movements and inflation inertia. Credit card usage has an increasing effect on inflation rates through time, requiring more policy emphasis on the credit channel through credit cards. When the effects of the credit view and the money view are compared, the former seems to be more effective on the real side of the economy, independent of the level of inflation.

Is Monetary Condition Index an Important Indicator for Malaysia?

This paper estimates the augmented real monetary conditions index (MCI) for Malaysia and evaluates its significance over 1980:1-2004:4 using ARDL cointegration analysis as proposed by Pesaran et al. (2001). The relative strength of the four monetary policy transmission channels, namely the exchange rate, interest rate, asset price and credit channels are studied. Results reveal evidence of long-run cointegration between the real GDP and its determinants (i.e., the exchange rate, short- and long-term interest rate, and claims on private sector), which implies that exchange rate, interest rate and credit channels are three key transmission mechanisms in the conduct of monetary policy in Malaysia, while asset price channel is the least relevant. Sequentially, what seem to drive changes in the real GDP is the credit channel, followed by the exchange rate channel, and interest rate channels, with short rate relatively potency than the long rate at the margin. Results demonstrate that the policy stance that implemented by the Central Bank of Malaysia are corresponding reasonably well with the movement in MCIs. Specifically, MCI confines to the changes of interest rate constructively.

Bank lending channel of monetary policy transmission: India and the global financial crisis

This paper examines the role of bank lending channel of monetary policy in India during the global financial crisis, especially following the collapse of Lehman Brothers in late 2008. Contrary to popular perceptions, and in contrast to the USA, this paper shows that following the Reserve Bank of India's aggressive monetary easing measures, bank credit growth in India maintained robust growth even in the midst of severe global financial crisis. However, there is a clear distinction between the private and public sector bank's lending behaviour. The crisis has clearly shown that banks will remain an important channel of monetary transmission in India.

The Bank Lending Channel of Monetary Policy Transmission: India and the Global Financial Crisis

This paper examines the role of the bank lending channel of monetary policy in India during the global financial crisis, especially since the collapse of Lehman Brothers in late 2008. Contrary to popular perceptions and in contrast to the United States, the paper shows that, following the Reserve Bank of India’s aggressive monetary easing measures, bank credit growth in India has maintained a robust growth even in the midst of the severe global financial crisis. However, there is a clear distinction between the private and public sector banks’ lending behaviour. The crisis has clearly shown that banks will remain an important channel of monetary transmission in India.

Türkiye de Banka Kredileri Kanalının İşleyişi Üzerine Ampirik Bir Analiz

The effect of a change in monetary policy on output operates through monetary transmission channels. The transmission channels of monetary policy may be gathered in five main titles: interest rates channel, asset prices channel, exchange rate channel, credit channel (bank lending channel, balance sheet channel) and expectation channel. Findings obtained from the analysis of the transmission channels can be used in policy determination. This paper empirically analyzes the bank lending channel, one of the transmission mechanisms of monetary policy in Turkey. In this paper, data between 1996:06-2006:09 are examined using VAR methodology. According to the findings, the credit channel in Turkey operates partially.

Implications of Bank Ownership for the Credit Channel of Monetary Policy Transmission: Evidence from India

Many developing and emerging markets have high degrees of state bank ownership. In addition, the recent global financial crisis has led to significant state ownership of banking assets in developed countries such as the United Kingdom. These observations beg the question of whether the effectiveness of monetary policy through a lending channel differs across banks with different ownerships. In this paper, using bank-level data from India, we examine this issue and also test whether the reaction of different types of banks (i.e., private, state and foreign) to monetary policy changes is different in easy and tight policy regimes. Our results suggest that there are considerable differences in the reactions of different types of banks to monetary policy initiatives of the central bank and the bank lending channel of monetary policy might be much more effective in a tight money period than in an easy money period. We also find differences in impact of monetary policy changes on less risky short term and more risky medium term lending We discuss the policy implications of the findings. Our results from India are preliminary and further studies are needed to see whether our findings can be generalized to emerging economies or developing countries in general.