Monetary Policy Transmission Mechanism Research Articles

Using LASSO-family models to estimate the impact of monetary policy on corporate investments

In this paper, I use LASSO-family models to select the relevant explanatory variables for the transmission of monetary policy shocks on investments and discuss the implications for the transmission mechanism of monetary policy. The results here point to the effect that Lasso techniques help select the relevant regressors. When the covariates are selected using this procedure, the impact of monetary policy shocks on corporate investments is about 20% lower than that for a baseline approach.

The Significance of Monetary Policy Transmission Mechanism in the Sustainable Development of the SAARC Economic Community

The purpose of this study is to examine the monetary policy transmission mechanisms in seven South Asian Association for Regional Cooperation (SAARC) countries to discover the viability of the convergence of the SAARC into a monetary and economic union based on common monetary channels. By employing optimal currency area theory, we used the restricted VAR analysis on the annual data from 1978 to 2017. We find that the money channel response provides proof for the presence of an exchange rate and credit channels. Furthermore, the real sector also responds to changes in fiscal and monetary shocks through the exchange rate and credit channels over short-run to long-run time horizons. This implies that the SAARC is a good candidate due to common exchange rate and credit channels. The function of the variance decomposition and the impulse for forming a monetary and economic union is that they share a coincidental pattern of dynamic reactions of inflation and growth to exogenous shocks. If the SAARC monetary and economic union is created, it will reap overall economic benefits inside and outside of Asia just like the European Union (EU).

Transmission mechanism of monetary policy

Transmission mechanism of monetary policy

Monetary Policy Convergence within the EAC: A Focus on Interest Rate and Exchange Rate

This study was conducted to establish whether the key variables in monetary policy transmission mechanisms are converging within the East African Community. This region is eyeing having an economic union and subsequently a monetary union hence the significance of investing developments in the monetary sector. The analysis used panel data from the year 2005 to 2020 for five EACs. To test for convergence of interest rates and exchange rates, the analysis employed; unit-root test, sigma convergence, co-integration tests, and finally used the panel fixed effect model to establish the impact of the two variables on the GDP. The analysis shows that in the short run, there is no convergence in interest rates but there is convergence in exchange rates. However, in the long run, the two monetary policy variables are co-integrated indicating that the region is doing well in terms of integration in the financial sector in their preparation to form a common trade area and monetary union. The analysis of the impact of the two variables on economic growth shows that only the exchange rate is significant, therefore, the region should strive to foster a stable exchange rate regime to realize increased economic growth.

Monetary Policy Uncertainty and Economic Fluctuations at the Zero Lower Bound

We propose a TVP-VAR with stochastic volatility for the unemployment rate, core inflation and the federal funds rate augmented with survey-based interest rate expectations and uncertainty and a FAVAR with a wider set of observable variables and alternative monetary policy measures in order to explore U.S. monetary policy, accounting for the zero lower bound. We find that a rise in monetary policy uncertainty increases unemployment and lowers core inflation; the effects on unemployment in particular are robust (a gradual 0.4 percentage point increase), lasting more than two years after the initial shock. Interest rate uncertainty shocks explain a significant portion of macro fluctuations, particularly after the 2007-09 global financial crisis contributing to push the unemployment rate one percentage point higher during the early phase of the subsequent recovery. Furthermore, we find that higher interest rate uncertainty makes forward guidance shocks (but also federal funds rate shocks) less effective at moving unemployment and core inflation. We also posit a theoretical model to provide the structural backbone for our empirical results, via an “option value” channel. Theory yields sizeable real effects and a muted monetary policy transmission mechanism as firms choose to postpone investment decisions in response to heightened interest rate uncertainty.

Japanese monetary policy and household saving

ABSTRACT This article analyzes the impact of monetary policy on household saving in Japan between 1993 and 2017. Using annual data from the Japan Panel Survey of Consumers it is shown that monetary expansion has contributed to a widening gap in households’ net saving through an adverse effect on the volume of saving of non-academic households. In contrast, households with at least one academic tend to be able to compensate these adverse effects of monetary expansion or can even benefit from it. The article documents how inequality in terms of the ability to build up wealth has increased in Japan over the past decades. The statistical analysis controls for household size as well as potential spatial effects in the transmission mechanism of monetary policy on household saving.

Impact of Credit Channel of Monetary Policy Transmission Mechanism on the Nigerian Economy

This study is predicated on the long age debate among scholars and Theorists with respect to monetary policy transmission mechanism. Some schools of thought believe that money does not matter and monetary policy is ineffective in influencing real economic variables such as employment and real output. While other schools claim that money matters and monetary policy can influence real economic activities at least in the short run. The last school of thought is those in between these two opponents who believe that the link between money and output is actually reverse causation not the other way round. These controversies revolve on the issue of ascertaining the channel of transmitting monetary policy actions into the economy. Therefore, using the Vector Autoregressive (VAR) Model, this study sought to empirically analyze credit channel of monetary policy transmission mechanism in Nigeria. Applying the time series data spanning the periods of 56 years 1960-2016, the empirical analysis found four interesting results as follows: firstly, all the credit channels variables were non stationary at levels but appears stationary at first difference. Secondly, there is a short run link between credit channel and Nigeria economic growth. Thirdly, there exists a long run equilibrium relationship between credit channel and economic growth in Nigeria. Fourthly, there is evidence of causality running from credit channel to economic growth in Nigeria. Thus, the study came out with one stylized fact about monetary policy transmission mechanism in Nigeria as follows: that the credit channel of monetary policy transmission mechanism are fully effective, operational and promote economic activities in Nigeria and that the effective propagation of monetary policy in Nigeria are done through the credit channel. Based on the findings above, the study recommends that the policy approach of encouraging, emphasizing and arousing the good management of credit channel of the transmission mechanism in Nigeria should be vigorously pursued. This has the ability to trigger up growth in various sectors of the Nigerian economy.

Monetary policy expectations and sovereign risk dynamics in the Eurozone

Abstract We empirically assess the dynamic linkages among sovereign bond yield spreads (both short- and long-term) and monetary policy rates/spreads during the Eurozone’s sovereign and banking crises in the post-2008 period when unconventional monetary policy replaced conventional policy. Our focus is on two subperiods, the crisis period (30 November 2009 to 25 July 2012) and the tranquil period (26 July 2012 to 30 April 2014). For the first subperiod, we noted significant spillovers from the overnight interest spreads spread to almost all sovereign bond yield spreads, at both the mean and volatility levels. Thus, during that period expectations on monetary surprises led bond spreads and their corresponding volatilities compared to the tranquil period, regardless of the bond yields maturities. Overall, we infer that monetary policy and sovereign risk were highly linked during the crisis period and thus, the interest-rate monetary policy transmission mechanism was effective in reducing these yield spreads.

Monetary policy and credit flows

The paper assesses the impact of monetary policy shocks on credit reallocation and evaluates the importance of theoretical monetary policy transmission mechanisms. Compustat data covering 1974 through 2017 is used to compute quarterly measures of credit flows of borrowing firms. I find that expansionary monetary policy is associated with positive long-term credit creation and credit destruction (i.e. credit reallocation). This impact is larger for financially constrained firms and those that are perceived as relatively risky to the lender. This is predicted by the balance sheet channel of monetary policy and mechanisms that reduce lenders’ risk perceptions and increase the tendency to search for yield.

The Relationship Between Monetary Policy and Banking Policy to Manage Macro-Financial Flows of the Russian Banking Sector

Subject. This article analyzes the current state of the relationship between monetary policy and banking policy to manage macro-financial flows of the banking sector of Russia. Objectives. The article aims to assess how closely monetary policy and banking policy are linked in order to manage the macro-financial flows of the Russian banking sector. Methods. For the study, I used normative and integrated approaches, and general scientific and special methods of scientific knowledge. Results. The article assesses the relationship between monetary policy and banking policy to manage macro-financial flows of the banking sector of Russia. Conclusions. The Bank of Russia's monetary policy transmission mechanism needs to be developed and improved. Developing a new channel of influence, i.e. the digital channel of the transmission mechanism, is a promising area to improve it.

Sukuk and monetary policy transmission in Indonesia: the role of asset price and exchange rate channels

PurposeThe purpose of this study is to empirically analyze the role of sukuk in the monetary policy transmission mechanism through the asset price and exchange rate channels in the Indonesian economy.Design/methodology/approachUsing the monthly data from January 2003 to November 2017, this study uses a multivariate vector error correction model causality framework. To examine the role of sukuk in the monetary policy transmission mechanism through the asset price channel, this study uses the variables of consumption, inflation, interest rates, economic growth and the composite stock price index. Meanwhile, to examine the role of sukuk in the monetary policy transmission mechanism through the exchange rate channel, this study used variables of inflation, interest rates, economic growth, foreign investment and exchange rate.FindingsThis study documented that sukuk has no causal relationship with inflation through asset price and exchange rate channels. Nevertheless, sukuk has a bidirectional causal relationship with economic growth through asset price and exchange rate channels. Sukuk is also documented to have a causal relationship with monetary policy variables of interest rate and stock prices through asset price and exchange rate channels. Finally, a unidirectional causality is recorded running from the exchange rate to sukuk in the exchange rate channel.Research limitations/implicationsThe finding of independence of the sukuk market from interest rates provides evidence that the trading of the sukuk in Indonesia has been in harmony with the Islamic tenets.Practical implicationsThe relevant Indonesian authorities need to enhance both domestic and global sukuk markets as part of efforts to promote the sustainability of Islamic capital market development in Indonesia.Originality/valueTo the best of the authors’ knowledge, this study is among the first attempts to empirically investigate the role of sukuk in monetary policy transmission through asset price and exchange rate channels in the context of the Indonesian economy.

Monetary policy and market interest rates: literature review using text analysis

PurposeThis paper aims to examine the relationship between monetary policy and market interest rates. This paper examines the efficiency of interest rate channel used in monetary regulation as well as implementation of monetary policy under low interest rates. This paper examines and reviews the scientific literature published over the past 30 years to determine primary research areas, to summarize their results and to identify appropriate measures of monetary policy to be used in practice in changing economic environment.Design/methodology/approachThis paper reviews 94 studies focused on the relationship between monetary policy and market interest rates in terms of meeting the goals of macroeconomic regulation. The articles are selected on the basis of Scopus citation and bibliometric analysis. A major feature of this paper is the use of text analysis (data preparation, frequency of terms and collocations use, examination of relationships between terms, use of principal component analysis to determine research thematic areas). Using the method of principal component analysis while studying abstracts this paper reveals thematic areas of the research. Thus, the conducted text analysis provides unbiased results.FindingsFirst, this paper examines the whole complex of relationships between monetary policy of central banks and market interest rates. Second, this research reviews a wide range of literature including recent studies focused on specific features of monetary policy under low and negative rates. Third, this study identifies and summarizes the thematic areas of all the researches using text analysis (transmission mechanism of monetary policy, efficiency of zero interest rate policy, monetary policy and term structure of interest rates, monetary policy and interest rate risk of banks, monetary policy of central banks and financial stability). Finally, this paper presents the most important findings of the studied articles related to the current situation and trends on the financial market as well as further research opportunities. This paper finds the principal results of studies on significant issues of monetary policy in terms of its efficiency under low interest rates, influence of its instruments on term structure of interest rates and role of banking sector in implementation of transmission mechanism of monetary policy.Research limitations/implicationsThe limitation of the review is examining articles for the study period of 30 years.Practical implicationsCentral banks of emerging economies should apply the instruments and results of the countries' monetary policies reviewed in this paper. Using text analysis this paper reveals the main thematic areas and summarizes findings of the articles under study. The analysis allows presenting the main ideas related to current economic situation.Social implicationsThe findings are of great value for adjusting the monetary policy of central banks. Also, these are important for people because these show the significant role of monetary policy for the economic growth.Originality/valueUsing text analysis this paper reveals the main thematic areas (transmission mechanism of monetary policy, efficiency of zero interest rate policy, monetary policy and term structure of interest rates, monetary policy and interest rate risk of banks, monetary policy of central banks and financial stability) and summarizes findings of the articles under study. The analysis allows defining the current ideas relevant to the monetary policy of developing countries. It is important for central banks because it examines the monetary policy problems and proposes optimal solutions.

Bank credit and transmission mechanisms of monetary policy in Uganda

Abstract. This paper examines the effect of monetary policy on bank credit in Uganda during the January 2008 to December 2017 period. By using macro level monthly data, it tests for the existence of monetary policy transmission channels, in particular the presence of bank credit channel in the economy of Uganda. This is done by showing that bank credit growth in Uganda is affected by monetary policy shocks. Before conducting data analysis, tight bank credit models were built with the view of making the analysis mimic the actual behavior of bank credit and the monetary policy transmission mechanism. Data used in the empirical analysis are from Bank of Uganda. Empirical analysis is conducted by using the generalized least squares (GLS) technique. The advantage with the GLS method is that it is generally more efficient because it eliminates both serial correlation and variance values that are not constant. The empirical results establish presence of the bank credit channel of the monetary policy transmission mechanism in Uganda. Secondly, the empirical tests conducted establish that the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Similarly, the relationship between bank deposits and bank deposits is found in principle to operate only during the current month in the reverse way to that described in some economics textbooks. Thirdly, empirical tests conducted indicate that 1 percent increase in money supply (M2) is responsible for causing 2.2 percent monthly increase in bank deposits in Uganda during the sample period, ceteris paribus. Keywords. Financialization, Political economy, Financial regulation. JEL. C01, C10, G18, P16, P34.

Asymmetric effects of monetary policy and output shocks on the real estate market in China

The real estate market is essential for promoting economic growth, and it plays an important role in the transmission mechanism of monetary policy in China. In this study, we apply a smooth transition vector autoregression model to investigate the asymmetrical effects of monetary policy and output on the real estate market. The empirical results verify the effectiveness of the monetary policy based on the real estate market and the asymmetrical effects of monetary policy and output on the real estate market. In addition, the smaller response of the real estate market to output in a low-speed growth regime means that negative shocks (e.g., COVID-19) from output have weak effects on the real estate market. Finally, monetary policy has bigger positive effects on the real estate market in a low-speed growth regime; thus, quantitative easing monetary policy can effectively stimulate China's real estate market at present.

Analisis Efektivitas Kebijakan Moneter Dalam Perspektif Konvensional dan Syariah Terhadap Inflasi di Indonesia Tahun 2013-2020

This scientific research was conducted to see the effect and how the effectiveness of the monetary policy transmission mechanism from both conventional and sharia perspectives to tackle inflation in 2013-2020. The conventional monetary policy transmission mechanism can be seen from the total conventional bank credit (LOAN), the interest rate on Bank Indonesia Certificates (SBI), and the average yield on Government Securities (SUN). Meanwhile, sharia monetary policy can be seen from the yield rates on Bank Indonesia Sharia Certificates (SBIS), total Islamic bank financing (FINC) and the average yield of State Sharia Securities (SBSN). Through the Vector Error Correction Model method, it is found that the SBI results have a significant negative effect so that if the interest rate increases by one percent it will reduce inflation. Unlike the case with the effectiveness as measured by the Impulse Response Function (IFR) and Forecast Error Variance Decomposition (FEVD), where conventional monetary policy is fast in controlling the inflation rate compared to Islamic monetary policy. However, the magnitude of Islamic monetary policy is greater than conventional monetary policy.

Non-Linearities, State-Dependent Prices and the Transmission Mechanism of Monetary Policy

AbstractA sticky price theory of the transmission mechanism of monetary policy shocks based on state-dependent pricing yields two testable implications that do not hold in time-dependent models. First, large monetary policy shocks should yield proportionally larger initial responses of the price level. Second, in a high trend inflation regime, the response of the price level to monetary policy shocks should be larger and real effects smaller. Our analysis provides evidence supporting these non-linear effects in the response of the price level in aggregate US data, indicating state-dependent pricing as an important feature of the transmission mechanism of monetary policy.

Asymmetric effects of monetary policy in Russia

We analyze the heterogeneous influence that monetary policy has on the growth rates of real personal income in 79 Russian regions over the period from 2Q2015 to 4Q2019, taking into account some of the channels of monetary policy transmission mechanism and spatial effects. The analysis was performed on the basis of panel data and a spatial autoregressive model. Besides that, we have calculated individual direct effects of changes of the interest rate for each region. Our results confirm the existence of a negative relationship between changes in the interest rate and growth rates of real personal income. This relationship is heterogeneous for different regions. Among the significant factors affecting the heterogeneity of the influence of monetary policy are the industrial structure and concentration of small businesses in regional economies. We have also found significant positive spatial effects of neighboring regions on each other. Our results generally coincide with those received in analyses of the effects of monetary policy in other countries.

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.

Monetary Transmission in the Term Structure of Interest Rates in Spain (1995-2003)

The aim of this paper is to investigate whether the effectiveness of the transmission mechanism of monetary policy in Spain has changed since EMU establishment. The analysis is based on the fulfillment of the Expectations Hypothesis under rational expectations and the methodology is implemented through a cointegrated bivariate VAR model. The results reveal the existence of monetary transmission in the term structure in the period prior to EMU, even though the evidence is stronger up to the one-year rate. From 1999, the results are only consistent with a weak evidence of monetary transmission.

Еволюція поглядів на роль політики центрального банку: висновки для України

The effects of COVID-19 pandemic resulted in modification of the goals and instruments of central banks activities in the context of strengthening their responsibility for supporting aggregate demand, more effective financial intermediation, smooth functioning of financial markets and creating conditions for inclusive economic growth. The purpose of the article is to elaborate proposals for changing the priorities of monetary policy in an economy with emerging markets in the post-crisis economic recovery. The article criticizes the concept of money supply neutrality from the standpoint of its simplified interpretation of the impact of the interest rate on activities with different duration and complexity of the technological process, as well as its detachment from the principles of inclusive economic growth. The authors reveal the factors that reduce the effectiveness of the application of the monetary regime of inflation targeting in countries with emerging markets, which consist in the dominance of non-monetary inflation factors, high import dependence of the economy etc. Based on empirical data for 1990-2019, they prove that low inflation is not a sufficient and necessary prerequisite for achieving economic success by a country. Authors suggest that the share of components of the inflation basket in Ukraine with high non-monetary effects is 62%, which indicates the presence of high risks of failures of the monetary policy transmission mechanisms. They argue that under the Ukrainian conditions at the beginning of 2021 an increase in the central bank’s key rate will appear to be counterproductive: the access to critically needed borrowed resources will go down, economic agents will spend more of their savings, and the pace of economic recovery will slow down. The recommendations for improving the NBU policy have been devised; they consist in ensuring the flexibility of the monetary inflation targeting regime, introducing targeted refinancing instruments to increase the efficiency of the financial intermediation, developing effective coordination of monetary and fiscal policy, and implementing measures aimed at creating conditions for inclusive economic growth.