Monetary Transmission Research Articles

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

Mekanisme Trasmisi Kebijakan Moneter Ganda Jalur Harga Aset Terhadap Inflasi di Indonesia

The effectiveness of the monetary policy transmission mechanism is important to determine how strong and the lag lenght in the transmission channel. Indonesia implements a dual monetary system policy (conventional and sharia). This study aims to analyze, which monetary system has more effectiveness in controlling inflation in by using the monetary policy transmission of the asset price channel. This study uses the VAR-VECM method to see the level of speed or time lag between the two monetary systems. The results of the study show that the transmission channel of the Islamic monetary mechanism (through the asset price channel has a better effect mechanism in influencing inflation compared to the conventional monetary transmission mechanism.

Financial frictions, bank intermediation and monetary policy transmission in India

AbstractDo the different types of financial friction have differential implications for monetary transmission in emerging economies? We investigate this question using India as the country for analysis. We adopt a New Keynesian business cycle model with bank intermediation, extend it by the Indian economy‐specific features and validate with the data. The baseline model explains the co‐movements of interest rates, incomplete pass‐through and sluggish adjustment mechanism of the macro‐financial variables for a policy interest rate shock. It identifies the collateral‐constrained, financially excluded households and low proportion of savers as the primary sources of frictions causing weak monetary transmission.

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.

Deposit Market Concentration and Monetary Transmission: Evidence from the Euro Area

Deposit Market Concentration and Monetary Transmission: Evidence from the Euro Area

Monetary Transmission and Portfolio Rebalancing: A Cross-Sectional Approach

Monetary Transmission and Portfolio Rebalancing: A Cross-Sectional Approach

Some Implications of Micro Price-Setting Evidence for Inflation Dynamics and Monetary Transmission

Some Implications of Micro Price-Setting Evidence for Inflation Dynamics and Monetary Transmission

Alternative Analysis of Bank Lending Channel in Turkey After 2010

Traditional bank lending channel in the monetary transmission explains the relationship between monetary policies of Central Banks and the bank lending behavior. In this article, the existence of traditional bank lending channel and an alternative analysis of bank lending in the monetary transmission of Turkey is investigated between 2011 and 2018 using bank level data and GMM method. Additionally, we indicate whether the reaction of banks differ according to their bank specific caharacteristics. Asset quality, capital adequacy, liquidity ratio, asset size and profitability rates are used as bank characteristics. Since Central Bank of Turkey began to use multiple monetary policy tools to cope with financial stability issues at the end of 2010, the choice of an indicator for the monetary policy is important. In this article, we revise the analysis of bank lending view as the key assumptions of traditional bank lending are not valid. Different from prior research, to analyze the change in credit supply we use both monetary policy rates and actual interest rates (BISTREPO and weighted average cost of Central Bank of Turkish Republic) as monetary policy indicators. Using monetary policy rates, our findings indicate that traditional bank lending channel does not work. Using BISTREPO as monetary policy indicator, our findings indicate that it is significant in the credit supply change. Taking the bank characteristics into account only bank size is significant in mitigating the negative effects of monetary policy shocks. This finding shows that banks that have larger asset size may find different funding alternatives and continue to lend during monetary policy shocks. Additionally, when weighted average cost of the CBTR funding are used as a monetary policy indicator, our findings show that this rate is also significant in the credit supply change and similar to prior results higher bank size may mitigate the negative effects of monetary policy shocks.

Fintech, Market Power and Monetary Transmission

Fintech, Market Power and Monetary Transmission

Real and nominal effects of monetary shocks under time-varying disagreement

This paper investigates the heterogeneity of monetary policy transmission under time-varying disagreement regimes using a threshold VAR. Empirically, I establish that during times of high disagreement, prices respond more sluggishly in response to monetary shocks. These stickier prices cause a flatter Phillips curve, leading to the empirical result that monetary policy has stronger real (output) effects in high disagreement periods. I develop a tractable theoretical model that show rationally inattentive price-setters produce this result. The model also links disagreement and uncertainty – two fundamentally different concepts, and bridges the results of this paper to the literature on state-dependent monetary transmission. The main result highlights a role for improved central bank communications that reduce disagreement among economic agents, which lessens output falls when implementing disinflationary monetary policies.

Is Quantitative Easing Productive? The Role of Bank Lending in the Monetary Transmission Process

Is Quantitative Easing Productive? The Role of Bank Lending in the Monetary Transmission Process

Monetary Transmission Mechanism in Jamaica: A Systematic Overview of the Credit Channel - Empirical Literature

Monetary Transmission Mechanism in Jamaica: A Systematic Overview of the Credit Channel - Empirical Literature

Responsiveness of Headline Inflation to the Dynamics of Monetary Aggregates in Nigeria: A Structural Vector Autoregressive (SVAR) Approach

This paper contributes to the literature on the monetary transmission mechanism by using monthly data (January 2001 to December 2022) from the Central Bank of Nigeria (CBN) Statistical Bulletin to investigate how headline inflation responds to changes in monetary aggregates in Nigeria. The structural vector auto regression (SVAR) method by which the impulse response functions (IRF) and variance decomposition were used to examine the response of inflation to changes in narrow money (M1), M2, M3, and the interbank call rate In deviation from economic theory, the study found that positive shocks to M1 and M2 caused inflation to decline insignificantly. Positive shocks to M3 had an insignificant positive impact on inflation both in the short- and long run. This finding highlights that shocks to M3 are not a significant source of inflation pressure, and its control may not be a useful tool for the CBN to tame inflation in Nigeria. The study found that inflation declined insignificantly in response to positive shocks to the interbank call rate. This finding suggests that hiking interest rates have not been effective in addressing the problem of inflation in Nigeria. Overall, the results showed that using M1, M2, and M3 and interbank call rates is less potent in controlling inflation in Nigeria. Hence, this paper recommends reducing the number of financially excluded Nigerians by encouraging banking habits among Nigerians, especially those in un served and underserved rural areas.

The optimization of continuous discount function through the continuous yield curve trajectories involving the parsimonious Nelson-siegel model

Yield curves which explain the variation in interest rates over varying maturities, provide important indicators with potentially useful implications on the investment choices, risk management strategies of financial institutions and fiscal policies of regulators. Accurately estimating the parsimonious parameters of the yield curve and modelling the discount function is highly important. The continuous forward rate function is a transformed discount function as a numerical device employed to obtain the price of a collection of bonds since the present value of a set of cash flows is computed by finding the product of these cash flows and the associated discount function. Nigeria’s bond market representing a major segment of the capital market and an important means of monetary transmission framework has suffered continuous liquidity problems. The lack of functional capital market instruments in form of government bonds has accounted for the poor performance of bond market. Consequently, this study intends to (i) Compute the discount function and (ii) Show its applications on life insurance offerings. This study analysed the term structure of interest rates using the Nigerian Eurobond which was collected for the years 2018 and 2019 from which the discount functions were constructed by adopting the continuous Nelson Siegel continuous function. A t-test conducted on the adjusted R2 on the model using Ordinary Least Square method after fixing the shape parameters was applied after computing the exponentially decaying factor. Computational evidence from the results reveals that the adjusted 𝑅square for 2018 and 2019 are 0.976and respectively0.986. This indicates that 97.6%of 2018 and 98.6% of the observed data can be explained by the Nelson-Siegel model of data using the estimated parameters for the two years and hence the result suggests a high level of accuracy confirming the degree to which the Nelson-Siegel yield curve parameters has estimated the illiquid Nigerian financial market.

Population Aging and International Monetary Transmission

AbstractThis paper examines whether U.S. monetary policy has different effects on young and old countries. I first empirically show that a contractionary U.S. monetary policy shock brings about a smaller fall in output and a greater rise in net exports in old countries using vector autoregressions (VARs), and that the shock leads to a larger fall in consumption and a smaller decrease in investment in old countries using the local projection method. I then construct a three‐country life‐cycle model including the U.S., a young country, and an old country. Consistent with the empirical analyses, the simulation results of the model show that a contractionary U.S. monetary policy shock has weaker effects on output in the old country than in the young country. In response to the shock, despite a larger fall in consumption in the old country, investment there decreases by less and net exports rise by more, which enables output in the old country to decline by less. The stronger incentives to save in the old country, resulting from the longer life expectancy and hence the longer retirement period, play a key role in generating these results.

Sectoral Effects of Monetary Policy: Evidence from Pakistan

Does monetary policy have economically significant effects on the real output? Historically, economists have tended to hold markedly different views with regard to this question. In recent times, however, there seems to be increasing consensus among monetary economists and policy-makers that monetary policy does have real effects, at least in the short run.1 Consequently, focus of monetary policy analysis has recently shifted from the big question of whether money matters, to emphasising other aspects of monetary policy and its relations to real economic activity. One aspect that has received considerable attention of late is the sectoral or regional effects of monetary policy shocks. Recent studies on the subject make it quite clear that different sectors or regions of the economy respond differently to monetary shocks. This observation has profound implications for the macroeconomic management as the central bank will have to weigh the varying consequences of its actions on different sectors or regions of the economy. For instance, the tightening of monetary policy might be considered mild from the aggregate perspective, yet it can be viewed as excessive for certain sectors. If this is true then monetary policy should have strong distributional effects within the economy. Accordingly, information on which sectors react first and are more adversely affected by monetary tightening provides valuable information to monetary authorities in designing appropriate monetary policies. Additionally, the results can contribute to our understanding of the underlying nature of transmission mechanism. And for that reason, many economists have called for a disaggregated analysis of monetary transmission mechanism [e.g., Domac (1999), Dedola and Lippi (2005), Ganley and Salmon (1997), Carlino and DeFina (1998)].

Monetary policy, financial development and firm investment in Pakistan: an empirical analysis

PurposeThis paper aims to empirically examine the presence of a balance sheet channel (BSC) of monetary transmission mechanism (MTM) using firm-level panel data of Pakistan. It also explores the role of financial sector development (FSD) and firm age (FAge) in formulating the effect of monetary policy (MP) on the investment decisions of firms.Design/methodology/approachThe authors applied the two-step system generalized method of moments (SYS-GMM) estimator proposed by Blundell and Bond (1998) to carry out the empirical analysis. The final sample of the study includes 450 nonfinancial firms listed at the Pakistan Stock Exchange (PXS) during the period 1988–2021. The empirical framework of the study is based on the new classical model of investment. Different measures of MP are used to obtain the robust empirical evidence. To take into account the different dimensions of FSD, the index developed by Svirydzenka (2016) is utilized. To examine the moderating role of FSD and FAge, the interacted model is estimated, which enables the authors to estimate the MP effects at different percentiles of the moderating variables.FindingsThe study’s findings confirm the existence of BSC by revealing that MP instruments have negative, significant effects on firms’ investment decisions. These findings suggest that during periods of tight MP, firms significantly cut their investment expenditures. The results of the interacted model show that both FSD and FAge play an important role in lessening the adverse effects of MP on firms’ investment policy. Specifically, the calculated total effects suggest that the negative effect of MP on investment is considerably weaker at the higher percentiles of FSD and FAge.Practical implicationsThe findings of the study have several important policy implications for different stakeholders. Specifically, the evidence suggests that the monetary authorities should keep in mind the adverse effects of MP while designing tight MP. The tight MP will have a negative effect on firm investment, which, in turn, will adversely affect firm growth and subsequently the growth rate and level of employment in the economy. Thus, during episodes of tight MP, the authorities should provide other facilities such as a friendly tax environment, better legal and regulatory framework, special credit arrangements, and provisions of loan guarantees. The findings of the moderating role suggest that the government may improve FSD to minify the adverse impacts of tight MP. Finally, the findings suggest that the government should design external financing-friendly policies to provide more opportunities to newly established firms to avoid tight MP’s effects.Social implicationsThe findings of the moderating role suggest that the government may improve FSD to minify the adverse impacts of tight MP. Finally, the findings suggest that the government should design external financing-friendly policies to provide more opportunities to newly established firms to avoid tight MP’s effects.Originality/valueThere are three significant contributions of the paper. Firstly, it provides empirical evidence on the existing of BSC of MTM using firm-level panel data spanning over 43 years for an emerging and small economy, namely Pakistan. Secondly, it examines the moderating role of FSD and FAge in formulating the effects of MP. Finally, it presents the total impact of MP at different percentiles of FSD and FAge, which definitely broadens the understanding of MTM through indirect channels.

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.

Can central bank credibility promote a substitution effect in the monetary transmission mechanism?

ABSTRACT We analysed whether the credibility of the Central Bank of Brazil (CBB) influences the substitution effect between the interest channel and the inflation expectations channel. Specifically, based on a DSGE model, we investigate the effects of central bank credibility on key domestic macroeconomic variables. The results show that higher central bank credibility reduces the harmful effect of fighting inflation on domestic macroeconomic variables.