Monetary Transmission Channels Research Articles

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.

The Cost Channel of Monetary Policy Transmission

In this paper, we develop the new Keynesian Phillips curve augmented by the cost channel of monetary transmission and analyze the central bank's best monetary policy if the central bank is obliged to minimize inflation. It can be shown that a small change of the cost channel's coefficient might lead from a major increase in interest rates to a major decrease in interest rates and vice versa. Even though the optimal interest rate might change dramatically, the inflation response is of only marginal effect.

The bank lending channel of monetary transmission in Brazil: A VECM approach

Abstract This paper tests for the existence of a lending channel in the transmission of monetary policy in Brazil using aggregate monthly data for the period 1995:12 through 2008:6. The test is carried out in a VECM setting that allows for multiple cointegrating relationships among the variable of interest. We find evidence of two cointegrating vectors, which we identify as loan demand and supply functions by testing for a number of exclusion and exogeneity restrictions on the cointegrating relationships. Loan supply is found to be negatively related to the interbank deposit certificate rate, suggesting the existence of a lending channel for monetary transmission. The VECM's short-term dynamics show that loan demand is equilibrium-correcting. But short-term disequilibria in the supply of loans are corrected through changes in the interbank deposit certificate rate, suggesting that monetary policy plays a role in restoring equilibrium in the credit market by affecting the borrowing rate faced by banks to raise non-deposit funds.

Optimal Monetary Policy with an Uncertain Cost Channel

The cost channel of monetary transmission describes a supply‐side effect of interest rates on firms' costs. Previous research has found this effect to vary, both over time and across countries. Moreover, the cyclical nature of financial frictions is likely to amplify the cost channel. This paper derives optimal monetary policy in the presence of uncertainty about the true size of the cost channel. In a min–max approach, the central bank derives an optimal policy plan to be implemented by a Taylor rule. It is shown that uncertainty about the cost channel leads to an attenuated interest rate setting behavior. In this respect, the Brainard (1967) principle of cautious policy in the face of uncertainty continues to hold in both a Bayesian and a min–max framework.

Robust Monetary Policy with the Cost Channel

Recent research argues that model uncertainty leads the central bank to adjust interest rates stronger to exogenous disturbances than under certainty. This paper investigates whether the introduction of a cost channel of monetary transmission, whose presence is empirically supported, changes the impact of model uncertainty on interest rate setting. The model is simple enough to facilitate an analytical solution. I find that the presence of the cost channel dampens the effect of model uncertainty on interest rate setting and can offset the activist policy stance. A richer model that allows for persistent supply and demand shocks corroborates these findings.

MONETARY TRANSMISSION MECHANISM IN CENTRAL AND EASTERN EUROPE: SURVEYING THE SURVEYABLE

Abstract This paper surveys recent advances in empirical studies of the monetary transmission mechanism, with special attention to Central and Eastern Europe (CEE). Our results indicate that the strength of the exchange rate pass‐through substantially declined over time mainly due to a fall in inflation rates and to some extent due to the so‐called composition effect. The asset price channel is weak and is likely to remain weak because of shallow stock and private bond markets and because of low stock and bond holdings of domestic households. House prices may become an exception with booming mortgage lending and with high owner occupancy ratios. While the credit channel could be a powerful channel of monetary transmission – as new funds raised on capital markets are close to zero in CEE – it is actually not, as both commercial banks and non‐financial corporations can escape domestic monetary conditions by borrowing from their foreign mother companies. The moderately good news, however, is that those banks and firms are influenced by monetary policy in the euro area because their parent institutions are themselves subjected to the credit channel in the euro area.

Monetary and exchange rate regimes changes: The cases of Poland, Czech Republic, Slovakia and Republic of Serbia

The paper explores (former) transition economies, Poland, Czech Republic, Slovakia and the Republic of Serbia, concerning abandonment of the exchange rate targeting and fixed exchange rate regimes and movement toward explicit/implicit inflation targeting and flexible exchange rate regimes. The paper identifies different subperiods concerning crucial monetary and exchange rate regimes, and tracks the changes of specific monetary transmission channels i.e. exchange rate channel, interest rate channel, indirect and direct influences to the exchange rate, with variance decomposition of VAR/VEC model. The empirical results indicate that Polish monetary strategy toward higher monetary and exchange rate flexibility has been performed smoothly, gradually and planned, compared to the Slovak and, especially, Czech case. The comparison of three former transition economies with the Serbian case indicate strong and persistent exchange rate pass-through, low interest rate pass-through, significant indirect and direct influence to the exchange rate as potential obstacles for successful inflation targeting in the Republic of Serbia.

The time-varying cost channel of monetary transmission

This paper studies the time-varying role of the cost channel of monetary transmission, i.e. the supply-side effect of monetary policy based on firms' costs of holding working capital. For that purpose, we provide rolling-window estimates of an augmented New Keynesian Phillips curve and show that the cost channel exhibits important time-varying dynamics. We find, as a general pattern, that the cost channel was most important in the pre-Volcker period and less important in the Volcker–Greenspan era. Recently, however, the cost channel regained importance. Since the cost channel is based on the transmission of policy impulses through bank lending, it is likely that the time-varying cost channel reflects the cyclical nature of financial frictions.

The bank lending channel and monetary transmission in Central and Eastern European countries

This paper carries out a systematic empirical investigation of the bank lending channel of monetary transmission in the 8 CEE countries which have joined the EU: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic and Slovenia. We examine in particular whether the impact of monetary policy changes on bank lending differs depending on the banks' size, capital strength, liquidity and ownership structure. Panel data for a large number of banks over the period 1994–2003, and dynamic panel estimation techniques are employed. Looking at the experience of individual countries, there is evidence of a bank lending channel in all countries, though the strength of it varies across countries. Bank size and liquidity seem to play the most significant role in distinguishing banks' reactions to changes in monetary policy. We also investigate the macroeconomic consequences of the bank lending channel and find evidence connecting aggregate loan supply to real economic activity in the CEE countries. Journal of Comparative Economics 37 (2) (2009) 321–334.

Instruments of Monetary Policy in China and Their Effectiveness: 1994-2006

China’s monetary policy applies to two sets of monetary policy instruments: (i) instruments of the Central Bank (CB), the People’s Bank of China (PBC); and (ii) non-Central Bank (NCB) policy instruments. Additionally, the PBC’s instruments include: (i) price-based indirect; and (ii) quantity-based direct instruments. The simultaneous usage of these instruments leads to various distortions that ultimately prevent the interest rate channel of monetary transmission from functioning. Moreover, the strong influence of quantity-based direct instruments and non-central bank policy instruments bring into question the approach of indirect monetary policy in general.

The credit channel of monetary transmission in a small open economy

This paper studies the credit channel of monetary transmission in a small open economy. We develop a simple general equilibrium model by extending Bernanke and Blinder's (1988) CC-LM framework and Edwards and Végh's (1997) banking specification. Under a floating exchange rate regime and with imperfect capital mobility, we establish that bank-lending behavior may amplify, neutralize or attenuate the impact of monetary policy on output, price and the nominal exchange rate as compared to the standard interest rate channel. An important explanatory factor is the sensitivity of banks and firms to loans and market interest rates. This examination is important to consider in light of the standard AD-AS model at the policy-making level, and in light of recent empirical evidence regarding the credit channel as an important element of the monetary transmission mechanism.

Macroeconomic Cycles and the Stock Market's Reaction to Monetary Policy

This paper examines cyclical variation in the effect of Fed policy on the stock market. We find a much stronger response of stock returns to unexpected changes in the Federal funds target rate in recession and in tight credit market conditions. Using firm-level data, we also show that firms that face financial constraints are more affected by monetary shocks in tight credit conditions than the relatively unconstrained firms. Overall, the results are consistent with the credit channel of monetary policy transmission.

Do interest rates drive inflation dynamics? An analysis of the cost channel of monetary transmission

Abstract This paper proposes a novel approach to empirically assessing the impact of the cost channel of monetary transmission on the dynamics of inflation within a New Keynesian Phillips curve framework. According to the cost channel, higher interest rates translate into higher marginal costs of production and, eventually, into higher inflation. We exploit the present-value implications of the model to derive a series of fundamental inflation that is contrasted with actual inflation. We show that the cost channel adds significantly to the explanation of inflation dynamics in forward-looking sticky-price models for the US, the UK, and the Euro area. Moreover, the cost channel can explain inflation episodes that cannot be accounted for by the standard New Keynesian model.

The cost channel of monetary transmission–revisited

This article empirically re-examines the importance of the cost channel of monetary transmission–the effect of money supply shocks on the costs of production and supply, as opposed to the traditional effect on demand. Unlike Barth and Ramey (2002), this article identifies the response of industry-level wages to money supply shocks by assuming long-run monetary neutrality. The pervasive findings of a positive response of real wages to money supply shocks in this study provide even stronger support for the cost channel than Barth and Ramey (2002).

Does Monetary Policy Transmission in Ukraine Go Through the Interest Rates?

The paper investigates the monetary transmission mechanism in Ukraine and in particular studies the relative importance of its interest rate channel (IRC). First, we discuss the essential institutional arrangements associated with conduct of monetary policy. Second, we quantify the IRC by means of semi-structural five-variable VAR model. We use the total reserves of banking system as monetary policy variable and employ a simple model of market for bank reserves to disentangle monetary policy shocks. To assess the relative importance of IRC, we have applied special procedure to isolate the interest rate component of a monetary policy shock in total reserves. We have found some weak traces of interest rate channel, yet have not detected persuasive evidence that the IRC dominates other channels of monetary transmission. Further, we use preferred specifications to conduct a set of policy experiments. First, we consider loosening of reserve requirements of realistic magnitude. Our estimates predicted that a 19 percent hike in total reserves forces interest rate to fall by 4-6 percentage points, prices to rise by 0.2 percent or 0.9 percent depending on the measure and output to expand by 0.2 -0.7 percent (all over 6 to 12 months). Second, we simulate and interpret the working of monetary policy in the presence of some counterfactual shifts in the economy that affect the speed of economy’s adjustment to long-run equilibrium – unfavorable terms of trade shock, persistently higher inflow of capital and liberalization of regulated prices. Finally, we briefly discuss implications of our results for Ukraine’s recent anti-inflation policy.

The Bank Lending Channel of Monetary Transmission: Does it Work in Turkey?

Does the bank lending channel of monetary transmission work in Turkey? Using the May- June 2006 financial turbulence as an exogenous shock that prompted a significant tightening of monetary policy, this paper examines the loan supply response of Turkey's banks, depending on their balance sheet characteristics. The empirical results indicate that banks can play a role in Turkey's monetary transmission mechanism. Specifically, bank liquidity is found to have a significant effect on loan supply in Turkey. This suggests that the effect of monetary policy in Turkey can be propagated by the banking sector, depending on its liquidity position.

The Bank Lending Channel of Monetary Transmission: Does it Work in Turkey?

Does the bank lending channel of monetary transmission work in Turkey? Using the May-June 2006 financial turbulence as an exogenous shock that prompted a significant tightening of monetary policy, this paper examines the loan supply response of Turkey's banks, depending on their balance sheet characteristics. The empirical results indicate that banks can play a role in Turkey's monetary transmission mechanism. Specifically, bank liquidity is found to have a significant effect on loan supply in Turkey. This suggests that the effect of monetary policy in Turkey can be propagated by the banking sector, depending on its liquidity position.