Monetary Transmission Channels Research Articles

A tale of two tightenings

Balance sheet policy is now a prominent facet of monetary policy. Based on the U.S. experience between 2017 and 2019, Smith and Valcarcel (2023) show the first period of quantitative tightening (QT1) was markedly different from earlier balance sheet expansions. This paper provides evidence the Federal Reserve's second balance sheet unwind effort that began in January 2022 (QT2) is strikingly different from QT1. We find substantial announcement effects during QT2 for various treasury yields and interest rate spreads, which are largely absent from QT1. At the time of this writing—by February 2023—both episodes have experienced a similar percent reduction in reserve balances. Yet, QT2 shows a stronger market response upon implementation. Not only are the underlying financial conditions different across the two periods, but the conduct of monetary policy in 2022 seems to be different as well. A clearer signaling mechanism for the expectations channel of monetary transmission takes place during QT2 than was apparent during QT1. The liquidity effects that seemed to be so important during QT1 have been largely attenuated during the second episode of balance sheet tightening.

The credit-augmented Divisia aggregates and the monetary business cycle

Abstract We follow Belongia and Ireland (2021) and investigate the role that the Center for Financial Stability credit card-augmented Divisia monetary aggregates could play in monetary policy and business cycle analysis. We use Bayesian methods to estimate a structural VAR under priors that reflect Keynesian channels of monetary transmission, but produce posterior distributions for the structural parameters consistent with classical channels. We also find that valuable information is contained in the credit-augmented Divisia monetary aggregates and that they perform even better than the conventional Divisia aggregates, in terms of highlighting the role of the money supply in aggregate demand.

Revisiting the monetary transmission mechanism via banking from the perspective of credit creation

<abstract> <p>Many transmission channels of monetary policy have been proposed to enrich and deepen the understanding of its mechanisms. However, some channels have not been clarified, particularly for those unconventional quantitative policies implemented after 2008 financial crisis. In this paper, we develop a unified model of a credit economy where bank regulations and decisions and loanable funds market are placed at a central position, while stocks and flows are incorporated with each other to formulate banks' credit creation and circulation. We find that bank regulations can induce some new channels of monetary transmission by imposing credit constraints, including the new bank capital channel, the credit supply channel, the new bank balance sheet channel, and the new bank risk-taking channel. Comparing these channels with the traditional ones, we underscore the impact of bank regulations on monetary transmission. As aggregate demand can be decomposed into two monetary flows generated by money circulation and bank lending respectively, the direct channels of monetary transmission to aggregate demand can be renewed as follows: the money channel, the narrow money circulation channel, the new bank lending channel, and the repayment channel. In addition, based on the relevant data from the United States, we have conducted vector autoregressive (VAR) impulse response analysis to confirm the effectiveness of some direct channels. Our work not only aids in revisiting the monetary transmission from a credit view but also facilitates the assessment of efficiency of monetary policy.</p> </abstract>

The effects of the monetary transmission mechanisms on inflation in Türkiye

The goal of this paper is to examine the impacts of the monetary transmission mechanisms on inflation in Türkiye using monthly data over the period 2006:M01-2021:M11. To this end, the paper considers the interest rate channel, the exchange rate channel, and the credit channel as the main monetary transmission channels. For unit root and cointegration analyses, the paper relaxes the assumption of linearity and employs time series methods based on nonlinear models. Besides, the paper performs a causality test based on the bootstrapping procedure. The findings indicate that the inflation rate is positively related to the interest rate, the exchange rate, and the credit growth rate and that all these variables have predictive power in forecasting future inflation rates in Türkiye. These results imply the existence of efficient monetary transmission channels in Türkiye. Theoretical and practical implications are discussed.

Global financial cycle: Impact on Ukraine

Global financial fluctuations that arise in the financial centres – the US and the EU through international channels of monetary transmission affect the financial markets of peripheral countries, including Ukraine, where the assessment and consideration of such an impact is an important element of monetary policy. Therefore, the purpose of the article was to assess the impact of cyclical fluctuations of the global financial situation on the financial sector of Ukraine’s economy. As a result of correlation analysis, a direct relationship between leverage indicators in Ukraine and the Chicago Board Options Exchange Volatility Index and Euro Stoxx Volatility Index has been revealed. At the same time, the direct relationship between these indices and the growth of domestic credit in Ukraine contradicts the concept of the global financial cycle and may indicate the presence of more important factors of domestic credit. Correlation analysis of the volatility index of the Chicago Board Options Exchange and capital flows in Ukraine showed that in the years of increased global uncertainty and volatility, the volume of capital flows decreased, especially for portfolio debt instruments. Analysis of the cyclical components of the global and domestic credit cycle in Ukraine obtained with the Godric-Prescott filter indicates a higher level of volatility in domestic lending. The obtained value of the concordance coefficient did not make it possible to draw an unequivocal conclusion about the counter- or procyclical nature of domestic credit fluctuations relative to the global volume of loans in the non-banking sector. It has been found that the global financial cycle was not a significant factor in domestic credit in Ukraine in the studied period. The practical significance of the results lies in the fact that the National Bank of Ukraine will be able to implement a monetary policy independent of the global financial fluctuations and limit the outflow of capital during the period of growing uncertainty in the international financial markets

Are monetary transmission channels effective under the quantitative and qualitative easing policy?

AbstractThis study measures the effectiveness of monetary transmission channels of the Bank of Japan's (BOJ) Quantitative and Qualitative Monetary Easing (QQE) policy in affecting Japan's inflation rate. The monetary transmission channels are interest rate, portfolio rebalancing and foreign exchange rate channels. Based on data from 1 August 2013 to 31 October 2019, the Granger's Causality Test showed that the interest rate channel was vital in transmitting the effect of monetary easing. Specifically, the interest rate channel transmitted the effect of QQE, QQE with a negative interest rate and QQE with yield curve control policy to the domestic price level. Portfolio rebalancing and foreign exchange rate channels did not influence Japan's inflation rate in all the QQE policy periods. The empirical results are robust against different estimation methods. Based on the findings, the study offers some imperative policy recommendations.

Learning, Central Bank Conservatism, and Stock Price Dynamics

Abstract This paper studies how adaptive learning affects the interactions between monetary policy, stock prices and the optimal degree of Rogoff conservatism in a New Keynesian DSGE model with non-Ricardian agents whose heterogeneous portfolios generate a financial wealth channel of monetary transmission. A positive intergenerational portfolio turnover in the stock market could improve the dual-mandate central bank’s intertemporal trade-off allowed by learning and implies a positive weight on financial stability in the social welfare criterion. For plausible learning gains and turnover rates, a rise in the turnover rate could lead the central bank to reduce the aggressiveness in its policy needed to manage private beliefs if the learning gain is high enough. Both the distortion due to learning and the central bank’s lack of concern for financial stability could lead the government to appoint a liberal central banker, i.e. less conservative than society. A rise in the turnover rate implies a higher (lower) degree of liberalism for low (high) learning gains.

The Efficiency of The Interest Channel in The Context of Monetary Policy in Developed Countries

In recent years, the consequences of globalization and global developments in an area or around the world have harmed monetary transmission channels, creating an axis shift and diminishing the efficiency of monetary policy instruments. There is significant evidence about the influence of foreign monetary policy transfer on the excess supply of credit, according to studies on the subject. As a result, dynamically unbundling different monetary policy channels or comparing the outcomes of various policies is regarded as a crucial observation. The efficiency of the interest rate channel of the monetary transmission mechanism is explored in this study using annual data from the IMF and World Bank databases for the countries included in the MSCI emerging markets index for the years 1995 to 2021. In the study, panel unit root tests, panel cointegration tests with structural breaks, and panel causality tests developed by Kónya (2006) were applied to the variables determined to contain cross-sectional dependence. Within the framework of the panel VAR model established in line with the results obtained from these tests, the efficiency of the interest channel was investigated with the impulse-response functions and variance decomposition methods. While interest rate shocks have no statistically significant impact on loans, they do have a beneficial impact on inflation in the first two years and a negative impact in the subsequent years (up to the 6th year). In conclusion, the findings of this analysis suggest that, while shock rises in interest rates have a modest influence on the gross domestic product, they do promote, albeit slightly, the drop in the inflation rate.

Uncovering Asymmetries in Monetary Policy Transmission in the Economic Community of West African States: Dynamic Heterogeneous Panel Analysis

ABSTRACT As the Economic Community of West African States (ECOWAS) gravitates toward establishing a monetary union, characterized by a common central bank and a single currency, the eco, there is need for deeper knowledge of the monetary policy transmission mechanism to ensure the effective conduct of a common monetary policy in the region. This study investigates the existence of potential asymmetries in the transmission of monetary policy impulses and the implications for monetary policy effectiveness under a unified framework. It employs the dynamic heterogeneous structural panel vector autoregressive (VAR) modeling technique developed by Pedroni (2013), which allows for heterogeneous country-specific dynamics and accommodates cross-sectional dependencies. Based on quarterly data covering the period 1994–2016, the findings reveal statistically insignificant responses of real gross domestic product (GDP) and inflation in member countries to a common monetary policy shock, though the country-specific responses exhibit some asymmetries. The panel estimates for the region also do not produce statistically significant responses to the unanticipated monetary policy shock. In addition, the results indicate that the two plausible monetary transmission channels—the bank lending channel and the exchange rate channel—are either weak or inoperable at the level of ECOWAS and that could undermine the effective conduct of a common monetary policy within the proposed monetary union. Policy should, therefore, be directed at enhancing the transmission of monetary policy impulses in the region, including through far-reaching financial sector reforms, modernization of monetary policy frameworks, and the comprehensive harmonization of institutional and operational mechanisms of monetary policy across member countries.

How Automatic Adjustment Mechanism Works in Practice – A VECM Analysis of Monetary Transmission Mechanism in Bosnia and Herzegovina

ABSTRACT This paper takes stock of the literature on the monetary transmission mechanism in currency boards and analyzes the process of monetary transmission in Bosnia and Herzegovina. The transmission of monetary signals through the economy is based on the automatic adjustment mechanism of the currency board. Three channels of monetary transmission are discussed in this paper: the interest rate channel, the narrow credit channel, and the exchange rate channel. The empirical analysis shows how exogenous monetary shocks are transmitted through different channels and how long it takes for the automatic adjustment mechanism to restore equilibrium in the economy.

Monetary Policy and Stock Market Interaction: International Evidence

This article investigates monetary policy and stock market interaction across 41 developed and developing economies using GMM-Panel VAR model. The analysis is undertaken in two sub-periods—before and after the crisis of 2008 to make a comparative assessment of whether the relationship between monetary policy and stock prices altered in the aftermath of the crisis. We verify the existence of different channels of monetary transmission to stock prices. Our results point to the prevalence of discount rate channel of monetary policy in affecting stock prices after the crisis of 2008. Further, our results indicate an important role of excess liquidity in pushing stock prices upward in developed economies in the post-crisis period. In developing economies, term premia channel is the dominant channel of transmission to stock prices. Also, we find evidence of monetary authorities of developed economies responding directly to stock price movements to ensure financial stability in the post-crisis period. Central banks react primarily to inflationary pressures by tightening monetary policy both before and after the crisis in developed and developing economies. JEL Codes: C32, E44, E52, F42

Specific of transmission mechanism of monetary policy in Ukraine in the conditions of martial law

Introduction. The current state of the Ukrainian economy is determined by the unfolding of crisis as a result of full-scale military aggression, which determines the need to optimize the regulatory influence of monetary policy in order to ensure the stability of the economy against the negative consequences of the war, minimize and localize the impact of the negative consequences of the crisis for the real sector of the economy. Under such circumstances, the study of problems related to the choice of the most optimal monetary policy strategy, which is implemented in practice through the appropriate channels of monetary transmission, which operate on the basis of the selected targeting regime, is especially relevant. At the same time, military actions determine the need to reassess the system of economic coordinates, in which the central bank, defending its institutional independence, could focus monetary regulation exclusively on price stability, ignoring other strategic goals of state influence on the economy, related to the urgent need to save economic activity and prevent unfolding recession precisely with the help of monetary policy instruments. Goal. The purpose of the study is to find out the features of practical implementation and to identify problematic aspects of the transmission mechanism of monetary regulation, as well as to determine on this basis the most optimal channels of monetary transmission, suitable for use in conditions of martial law, external shocks and the unfolding of the economic crisis. Methodology. General scientific techniques and tools, methods of analysis and synthesis, comparison, summary and grouping, scientific abstraction are used. The results. The article examines the action of the main monetary transmission channels and their impact on key macroeconomic parameters. The features and effectiveness of the transmission mechanism of monetary policy in the conditions of unfolding economic crisis during the period of martial law are analyzed. Problematic aspects of the practical implementation of the channels of monetary policy transmission mechanism have been identified. The fallacy of certain actions of the NBU regarding use of interest rate channel and inflation targeting regime while rejecting the exchange rate stability is emphasized. The advantages of using the exchange rate channel as more effective in the system of central bank transmission of monetary impulses to the economy in order to achieve the goals of financial stabilization, maintenance of economic growth and employment are substantiated.

ECONOMIC OUTPUT, MONETARY POLICY TRANSMISSION AND THE ROLE OF ISLAMIC BANKS: EVIDENCE FROM PAKISTAN DUAL BANKING SYSTEM

Using co-integration analysis, this study evaluates the role of Islamic banks in monetary transmission and the economic growth of Pakistani economy. More specifically, it investigates the role of Islamic bank deposits and financing in the transmission of monetary policy impacts to the real economy. The findings suggest that Islamic bank financing and deposits play key roles in Pakistan's monetary transmission process. The bank lending channel has the potential to become a major channel of monetary transmission in Pakistan's economy. The bank lending channel highlights the significance of Islamic financial institutions in disseminating the effects of monetary policy across the economy. Therefore, more efforts should be made to establish a more effective Islamic money market, which might offer Islamic banks with an alternative funding source.

Firm behaviour under negative deposit rates

Using rich microdata from Denmark, the first country in the world to move its key monetary-policy rate below zero, we find that firms which become exposed to negative interest rates on their bank deposits increase their fixed investments and employment to a larger extent than what can be explained by the associated reduction in the level of interest rates. They also tend to rebalance their liquid portfolio, reduce their degree of leverage and become more inclined to change bank connections. Our results also indicate that it is the event of becoming exposed to negative rates (the extensive margin), not the share of deposits exposed to negative interest rates (the intensive margin), that matters for firm behaviour. These findings support the existence of a corporate channel of monetary transmission when bank deposit rates cross zero and become negative.

VIRTUAL ASSETS AND MONETARY POLICY

The emergence and spread of virtual assets worldwide are at the center of many researchers’ attention. Virtual assets began to be used for settlement, capital accumulation, and speculative income, which creates competition with state fiat money, to the state monopoly of the central bank on money issuance and potentially rise a threat to financial stability.The purpose of the article is to assess the current state and development potential of both state and non-state virtual assets, their role in money circulation, and the potential impact on the monetary and credit system of Ukraine in the context of the possible launch of the central bank digital currency - the e-hryvnia.The article presents the main forms of virtual assets and defines their characteristics, evaluates the possibility of their usage for settlements, and the potential for partial or complete replacement of fiat money in cash or non-cash forms.It is proven that nowadays the main restraining factor for the acquisition of money functions by virtual assets are the insufficient prevalence of technological means for carrying out transactions, the high volatility of their prices, and legislative limits. It is determined that technically some retail virtual assets can acquire all money qualities and conceptually differ only in the issuer and the system of centralization: public or private issuer, centralized or decentralized system.Furthermore, it has been proven that the introduction of the e-hryvnia into circulation as a monetary policy tool with interest accrual would significantly strengthen the interest channel of monetary transmission, contribute to the achievement of central bank targets, and hence to non-inflationary monetization of the economic growth. At the same time, the introduction of the third form of money would probably give rise to new risks, which are proposed to be mitigated by proper parameterization of the new form of money.

English

The study explores the impacts of systematic and nonsystematic monetary policy shocks and how they affect the monetary transmission process in Nigeria from 1986 to 2020 using quarterly data. The objective of the study was to improve the understanding of the systematic and non-systematic monetary shocks and how they affect the monetary transmission process in Nigeria. Data on variables such as monetary policy rate, all-share index, exchange rate, private sector credits, and inflation rate were used to investigate the impact of these shocks on monetary transmission channels. The study adopted methods such as unit root, historical decomposition as well as a non-linear Autoregressive Distributed Lag (NARDL) framework to carry out this investigation. The results showed that both the systematic and nonsystematic shocks influenced interest rate and expectations channels, while the negative systematic shocks influenced the credit channel. However, these shocks had no significant influence on exchange rate and asset price channels. The study was concluded by recommending that these channels should be well managed to avoid negative systematic and nonsystematic shocks to improve the monetary transmission process and foster a sound financial system in Nigeria.   Key words: Monetary policy, monetary transmission mechanism, systematic monetary shocks, nonsystematic monetary shocks, non-linear ardl, historical decomposition.

Теоретичні засади та практичні аспекти впровадження і використання цифрових грошей

The study is devoted to the analysis of the practice of using certain types of digital money and substantiation of the theoretical foundations of the mechanisms of use of digital money of central banks. It is determined that the process of digitization of money, which is based on the use of new algorithms, data channels, information sources, evaluation and decision criteria, is a new stage in the development of banking and payment systems, central banks, national monetary systems and, in general, the entire monetary and financial system of the world. The shortcomings of the use of cryptocurrencies, the peculiarities of the functioning of unregulated digital markets that arise from their use are described, and the risks that cryptocurrencies may pose to national monetary and financial systems are identified. Calculations were made and a close correlation was found between the value of the NASDAQ 100 stock index and the price of bitcoin. Based on the analysis of the essence of digital money of central banks, organizational and technical approaches to their design, production and use, the objectivity of the process of their introduction is proved, the advantages and disadvantages of the new form of money are described, the mechanisms of transition from private to digital money is proposed. The main problems that hinder the process of introduction of digital money by central banks are identified and characterized. It has been proved that the introduction of digital money by central banks is the basis of the country's monetary sovereignty and an important tool for implementing economic and social policy. It is substantiated that the use of digital money of central banks will contribute to the transformation of fiscal and tax policy implementation mechanisms, financial monitoring system, monetary transmission channels, significant changes in the structure and functions of commercial and central banks, and strengthen the role of fintech companies in payment systems and financial markets.

The Role of Financial Structural Factors in Retail Rate Adjustment: Evidence from Sri Lanka

This paper examines the interest rate channel of monetary policy transmission. It assesses the impact of banking structural factors on commercial bank pricing decisions and their pass-through in Sri Lanka. The empirical analysis uses aggregate monthly interest rates data from January 2008 to December 2018, a total of 132 observations. The findings suggest that the interest rate pass-through is significant overall, but incomplete. The credit quality, operational efficiency and excess liquidity play essential roles in explaining the adjustments of the bank lending and deposit rates. Non-performing loans increase the lending rate, and this result is robust to different combinations of the control variables. This suggests that banks with higher proportions of non-performing loans attempt to pass their credit losses on to customers. Further, bank inefficiency is passed on to customers in the form of lower deposit rates and excess liquidity in the banking system, both of which have a negative effect on the interest rate adjustments of both lending and deposit rates. A puzzling negative relationship is observed between the lending rate and operational inefficiency. The findings of this paper support the claim that banks in Sri Lanka take into consideration their structural factors as well as the monetary policy rates when setting the lending and deposit rates.

New evidence on credit channel of monetary policy transmission in India

This article examines a credit channel of the monetary policy transmission mechanism in India. One hundred thirty-two commercial banks in India were studied for ten years, from 2009 to 2018, using STATA for data analysis. The question of this study is: do bank features and macroeconomic variables combine to influence credit supply in India? According to the data, the bank's features have a large and negative liquidity ratio compared to the loan amount. Furthermore, there is a significant but negative relationship between the interaction of inflation and interest rates with the liquidity ratio and loan amount in India.

Currency Crisis in South Sudan: Contexts, Causes and Policy Options

This study combines contextual framework, review of South Sudan elites’speculative policies and empirical evidence between July 2011 to December 2017to explain the causes of the exchange rate crisis in South Sudan. The study findselites' speculative policies and a surging money supply caused the depreciation ofthe exchange rate. The study argues that policymakers implemented unsustainablepolicies, and speculative regulations in the financial sector as conduits for the elitesto benefit through rent-seeking. Disabled by ineffective monetary and exchangerate transmission channels, the Bank of South Sudan signaled its inability to defendthe fixed exchange rate in November 2013 by devaluing the pound. Politics came inthe way, the devaluation was rescinded by parliament in December 2013. Thedevaluation was later implemented in December 2015 at a higher exchange ratewhen the Bank of South Sudan surrendered to defending a fixed exchange rateregime. South Sudan's macroeconomic environment is characterized byhyperinflation, depreciation and lack of political will to ensure good economicgovernance prevails. Resolving macroeconomic challenges of such magnitude,requires external policy and financial support for the Bank of South Sudan tocorrect the exchange rate and monetary policy challenges.