Tight Monetary Policy Research Articles

Small and Medium-sized Enterprises Private Equity Risk Management

Small and medium-sized enterprises are playing an important role in Chinese economic development. However, due to the lag in system construction, the scale of small and medium-sized enterprises is relatively small; many of these enterprises lack funds, and it is difficult to get loans. The financing difficulty of small and medium-sized enterprises always exists in China, which has become an important reason restricting their further development. In the past, smes used to borrow money from banks to finance their development. They have been borrowing from banks with their assets as collateral, but as the country has adopted a tight monetary policy, most of the loans applied for by smes have been rejected by banks. Private equity fund has the characteristics of low financing threshold and high added value of enterprises, helping many small and medium-sized enterprises to solve the capital problem, enabling them to develop and grow. In the process of private equity fund financing, the macro environment and micro factors bring huge risks to the whole financing process. Therefore, it is necessary to evaluate, analyze and control every risk that may cause financing failure in the financing process. This paper uses the method of literature review, qualitative and quantitative combination, through the construction of small and medium-sized enterprise private equity fund investment risk evaluation index system, from the micro and macro environment to evaluate and analyze the risk, for the analysis of small and medium-sized enterprises may face financing risk to provide effective avoidance measures.

Corporate market power and monetary policy transmission in Asia

This paper empirically examines the effect of corporate market power on monetary policy transmission in Asia. Using panel local projections based on a firm-level dataset for 11 advanced and emerging Asian economies, we find that after a monetary policy tightening, the real sales of firms with low market power significantly decline, while real sales of firms with high market power respond little. Moreover, we find that the average responses of firms’ real sales to monetary policy shocks are driven by firms with low markups. Our findings indicate that rising market power impairs the effective transmission of monetary policy. We discuss the implications in terms of balancing the need for industrial policies that promote innovation-led productivity against effective competition policy to compress heterogeneity in market power dynamics and enhance the monetary policy transmission mechanism.

Undesired monetary policy effects in a bubbly world

AbstractStock market bubbles arise as a joint monetary and financial phenomenon. We assess the potential of monetary policy in mitigating the onset of bubbles by means of a Markov-switching Bayesian Vector Autoregression model estimated on US 1960–2019 data. Bubbles are detected and dated from the regime-specific interplay among asset prices, fundamental values, and monetary policy shocks. We rationalize the empirical evidence with an Overlapping Generations model, able to generate a bubbly scenario with shifts in monetary policy, and where agents form beliefs over transition dynamics. By matching the VAR impulse responses, we find that procyclicality and financial instability align with high equity premia and the presence of asset price bubbles. Monetary policy tightening, by increasing real rates, is ineffective in deflating bubble episodes.

Are Cryptocurrencies Really a Threat to the Financial Stability and Economic Growth? Evidence From the Cointegration Approach

The main purpose of this paper is to investigate whether the cryptocurrency market affects financial stability and economic growth of India. The study used quarterly data on bitcoin, financial stability, inflation rate, real GDP, economic volatility uncertainty, exchange rate, and market volatility index for the period 2015Q1-2021Q4. The robustness of the findings was confirmed by the fully modified OLS (FMOLS) and canonical cointegration regression (CCR). The study results demonstrated that an increase in cryptocurrency investments will affect the financial stability of India significantly. Each 1% increase in the cryptocurrency would reduce the financial stability by 5% approximately. However, there was a marginal effect of cryptocurrency on economic growth. The results also found that exchange rate volatility and inflationary pressure would also deteriorate the financial stability of the country. Furthermore, the results also identified positive and significant cointegration between economic growth and financial stability. Due to most transactions in the economy being done through the financial system, it is paramount for economic growth. Going forward, aggressive monetary policy tightening, volatility in capital flows and exchange rates, deanchoring of inflation expectations, faltering in the economic recovery, disruptions due to global supply chains and climate change will be the major risks to the financial stability and economic growth of India.

The Nexus Between Monetary Policy, Innovation Efficiency, and Total Factor Productivity-Evidence from Global Panel Data

ABSTRACT This research explores the impact of monetary policy on the growth rate of total factor productivity (TFPG) and innovation efficiency (IE) through panel data of 30 countries from 1983 to 2018 by the bias-corrected fixed-effect dynamic (BCFE) model. We find that tight monetary policy negatively impacts the growth rate of total factor productivity (TFPG) and innovation efficiency (IE), which is still valid after a series of robustness tests. We then perform sub-sample regressions, and the results show that countries with higher government efficiency, higher financial development, and stricter environmental policy can reduce the negative impact of tightening monetary policy on total factor productivity and innovation efficiency. Our research illustrates that a tightening monetary policy not only adversely impacts total factor productivity but also influences the main driving force of its growth-innovation efficiency.

Bàn về một số phương pháp lượng hóa rủi ro tỷ giá

Exchange rate is the price of one currency expressed in terms of another currency. The fluctuation of the exchange rate depends on both domestic factors and foreign factors, in which changes in interest rate policies of central banks become a factor that causes exchange rates to fluctuate rapidly, significantly, and unpredictably. From the beginning of 2022 up to now, inflation has been exploded all over the world, including the US, EU and developed countries, forcing central banks to apply tight monetary policies by raising interest rates. During the period from the beginning of 2022 until now, the US Federal Reserve (Fed) has raised interest rates 8 times with a very high frequency and great intensity, causing the USD to be appreciated against most currencies, including VND. When the exchange rate fluctuates, it will affect almost all of economic activities such as import-export activities, foreign investment, international trade competitiveness, and even businesses and consumers that do not generate receipts or payments in foreign currency. Therefore, the study of measurement of exchange rate risks has become increasingly important from the perspectives of both theory and practice

Становлення мікро- та макроекономічного аналізу фінансового посередництва Стаття друга. Макроекономічний аналіз ролі фінансових посередників у роботах Б. Бернанке та застосування теорії фінансового посередництва у боротьбі з фінансовими кризами

The second of two articles which reveal the theoretical and practical significance of the researches awarded 2022 Sveriges Riksbank Prize in Economic Sciences. The author shows the theoretical and practical influence of B. Bernanke's research on the non-monetary effects of the banking crisis on the course of the Great Depression, which marked the beginning of recognition and measurement of the macroeconomic effects of financial intermediaries as institutions performing important functions under information asymmetry. The peculiarities of the global financial crisis and the latest crisis processes in the banking sector, which are taking place in the conditions of a change in the global monetary environment, are considered in light of the laureates' works. This change – a rapid tightening of monetary policy in developed economies was a reaction not only to global price shocks associated with the full-scale Russia's invasion of Ukraine, but also to the previous delay in anti-inflationary efforts in the conditions of a combination of supply shocks with monetary demand stimulation and monetary authorities' faith in well-anchored inflationary expectations. The article considers the extent to which the crisis processes at Silicon Valley Bank, Signature Bank, First Republic Bank and Credit Suisse are described by the models developed by the 2022 Nobel laureates. Based on that analysis, the author adjusts the answer to the question about the role of banking panics in the market economy. Probable directions for reforming banking regulation in the USA are characterized. It is substantiated that the government faces a complex set of tasks: to minimize social losses from banking panics; to prevent large business losses that would have broad macroeconomic consequences; and to prevent irrational contagion with panic moods and panic as a self-fulfilling prophecy, without eliminating the very possibility of depositors fleeing from a bank with poor management. It is shown that increasing and complicating the public presence in the financial sector has an extremely powerful and difficult to assess influence on the incentives of financial intermediaries, which embody the latter’s nature as special economic entities.

Are cryptocurrencies a threat to financial stability and economic growth of India? Evidence from the cointegration approach

The purpose of this paper is to investigate whether the cryptocurrency market affects the financial stability and economic growth of India. The study used time series quarterly data on bitcoin, financial stability, inflation rate, real GDP, economic volatility uncertainty, exchange rate, and market volatility index for the period 2015Q1–2022Q4. The robustness of the findings was confirmed by the fully modified OLS (FMOLS) and canonical cointegration regression (CCR). The study results demonstrated that an increase in cryptocurrency investments will affect the financial stability of India significantly. Each 1% increase in the cryptocurrency would reduce the financial stability by 5% approximately. However, there was a marginal effect of cryptocurrency on economic growth. The results also found that exchange rate volatility and inflationary pressure would also deteriorate the financial stability of the country. Furthermore, the results also identified positive and significant cointegration between economic growth and financial stability. Due to most transactions in the economy being done through the financial system, it is paramount for economic growth. Going forward, aggressive monetary policy tightening, volatility in capital flows and exchange rates, de-anchoring of inflation expectations, faltering in the economic recovery, disruptions due to global supply chains and climate change will be the major risks to the financial stability and economic growth of India.

The role of a discount rate in a transmission mechanism and its influence on the deposits market

The article focuses on the analysis of the dynamics of the discount rate as a key monetary policy tool. It examines how the discount rate, through the transmission mechanism, influences fluctuations in interbank interest rates and the bank deposit market. The study examines the indicators of Ukraine's banking sector over the past 5 years, considering the impact of external shocks such as the COVID-19 pandemic and large-scale armed aggression by Russia. These factors have resulted in inflation and interest rate growth in developed countries, a stronger US dollar, decreased business activity, and negative business expectations, all of which significantly impact Ukraine's small open economy. Consequently, the National Bank of Ukraine has implemented measures to stimulate creditworthiness, support entrepreneurship during lockdowns, and ensure access to profitable long-term financing, while also maintaining stability in the banking system during crises. The study analyzes the effects of the regulator's policy of increasing the discount rate and curtailing anti-crisis measures to curb inflation, which have had positive consequences during the most challenging crisis periods and the initial stages of economic recovery. It also highlights macroeconomic measures and restrictions imposed by the central bank to stabilize the economy in the face of a full-scale Russian military invasion, including state interventions to offset costs in priority areas of the economy. Despite the ongoing impact of tight monetary policy on the domestic market, a potential slowdown in inflation, stabilization of the exchange rate, and the funding market may contribute to the revival of the interbank market, bank lending, and potential revision of the discount rate and/or dollar exchange rate in the long term. The study further conducts a simulation of the balanced level of the discount rate using the classic Taylor equation, indicating the possibility of revising and gradually relaxing tight monetary conditions in 2023. However, it suggests that the rate reduction may be moderate, around 0.5-1.5 percentage points in the short term and 2 to 4 percentage points in the medium term. Overall, the study underscores the importance of the discount rate as a monetary policy tool and its implications for Ukraine's banking sector, given the external shocks and challenges faced by the country.

Research on the Two-way Influence of US Monetary Policy Since the COVID-19 Pandemic

Based on the novel coronavirus outbreak, the global economy has been strongly impacted, resulting in a worldwide economic recession. This paper mainly studies the orientation and target changes of the US monetary policy, adopts the method of dialectical analysis and data empirical analysis to study the two-way influence of the Fed monetary stance, and shows that implementation of monetary policy has an obvious two-way influence on the economy, that is, monetary policy will inevitably cause the imbalance between inflation and unemployment rate. Expansionary monetary policy can reduce unemployment and stimulate the economy meanwhile, it will lead to the accumulation of inflation. The tightening of monetary policy will lead to unemployment and economic recession while easing inflation. Excessive accumulation of negative consequences of monetary policy will result in a deeper economic crisis, which will become the main factor affecting the change of monetary policy direction. This shows that the monetary stance orientation of the Federal Reserve is based on the balance of advantages and disadvantages of its two-way effects, and the timely change of monetary policy orientation is the key to mitigating the negative effects caused by monetary policy.

Climate Finance: An Overview

Climate Finance: An Overview

Non-significant in life but significant in death: Spillover effects to euro area banks from the SVB fallout

Did Silicon Valley Bank (SVB) fallout spillover to the euro area banking sector? We find that euro area banks’ cumulative abnormal returns declined by about 10% on average after the collapse of SVB. Surprisingly, we also find that investors did not react to euro area banks sharing similar vulnerabilities as SVB, such as lower liquidity and less stable funding sources. Instead, they were more concerned about the possible negative repercussions on banks’ balance sheets coming from the pace of the current monetary policy tightening.

Factor-Augmented Vector Autoregression with narrative identification. An application to monetary policy in the US

We extend the Bayesian Factor-Augmented Vector Autoregressive model (FAVAR) to incorporate an identification scheme based on an external instrument approach. Using this novel modelling framework, we show that a monetary policy tightening in the United States has contractionary effects on the economy. Moreover, accounting for a large information set seems to help mitigate price and real economic puzzles in the estimated impulse responses.

The state of the global financial architecture: current trends and prospects for reform

Methods. The methodological basis of the research is a system of general scientific and specific methods, in particular, the method of logical analysis made it possible to build the logic of the research; the method of comparison – to assess the key parameters of the global financial architecture; analysis and synthesis – to generalize research results, the deduction method – to single out individual factors affecting the state of the modern world financial architecture. The graphic method made it possible to visualize the obtained research results. Results. The article is devoted to defining the trends of the world financial architecture. The structure of the modern world financial architecture, which includes global, regional and national levels, has been formed. The main problems of the global financial system have been identified, such as: the emergence of «bubbles» in some of its segments; increased volatility of international capital flows; volatility of exchange rates, etc. A list of global indicators influencing the global financial architecture has been determined. The need to reform the world financial architecture as a result of the global economic crisis of 2008–2009 is substantiated. The main directions of reforming the world financial architecture are identified: global financial management; banking sector; over-the-counter derivatives market and fight against offshore jurisdictions. New risks were identified, which caused the need to develop new mechanisms for reforming the global financial architecture at the end of 2018 – the beginning of 2020, the threat of new crises in countries with markets based on the principle of the «contagion effect». The impact of the pandemic on the world stock market was studied through the dynamics of the FTSE, Dow Jones Industrial Average and Nikkei indices. The article substantiates that an important aspect of the current state of the global financial architecture is the wide implementation of FinTech innovations. It has been proven that the war situation in Ukraine definitely affects the state of the financial architecture due to the strengthening of global inflation and the tightening of monetary policy by Ukraine's partner countries. Novelty. The originality and value of the research lies in the formation of a methodology for diagnosing the state of the world financial architecture. The main trends in the functioning of the world financial architecture have been determined. The importance of FinTech for achieving progressive changes in the global financial system and the development of the global financial architecture is determined. Practical value. There is substantiated the practical role of certain factors, which made it possible to determine the trends of the current state of the world financial architecture, which will become an analytical basis for assessing the degree of development of the financial architecture of the countries of the world.

Global Inflation and Global Monetary Policy Tightening: Implications for the Euro Area

Global Inflation and Global Monetary Policy Tightening: Implications for the Euro Area

Monetary policy uncertainty and corporate cash holdings: Evidence from China

This paper empirically explores the effect of monetary policy uncertainty on corporate cash holdings in China. We find robust evidence that monetary policy uncertainty is positively related to corporate cash holdings. The firms’ precautionary behavior in cash holdings is chiefly attributed to the increase in financial frictions rather than the reduction in corporate investments. The promoting effect of monetary policy uncertainty on cash holdings is more pronounced among firms with more severe financial constraints, firms with higher dependence on external finance, firms with worse access to bank financing, and non-SOEs, and during the period of monetary policy tightening. Our study suggests that firms hold more cash to cushion potential liquidity shortfalls induced by the increase in monetary policy uncertainty.

The EURIBOR surge and bank deposit costs: an investigation of interest rate pass-through and deposit portfolio rebalancing

Against the backdrop of sharp monetary policy tightening, this article studies the links between bank deposit costs and the EURIBOR. In doing so the authors employ an SVAR multivariate model that jointly includes deposit rates and volumes, fitted on monthly data covering the period 2003-2019. Increases in the EURIBOR are found to pass through to bank deposit rates in Spain, pushing up interest rates on term deposits in particular. In turn, increases in the EURIBOR triggered shifts from sight to term deposits. Through both mechanisms, bank deposit costs increased. The article documents that in 2022 the pass-through from the EURIBOR to deposit rates is falling short, relative to what would be expected according to the historical pattern captured by model results; as a result, the increase in bank deposit costs has been weaker than expected. To draw insights into the reasons behind this pattern, the authors analyse several euro area economies. Correlation analyses suggest that the impact of the EURIBOR on deposit rates and costs was weaker in banking sectors with greater excess liquidity and higher market concentration.

The role of liquidity in monetary policy transmission: Evidence from Indian banks1

AbstractThe role of bank liquidity in monetary policy transmission has received insufficient attention in the literature. Faced with monetary tightening, banks with more liquidity can sell off securities and protect their loan portfolios. We test this proposition using panel data for Indian banks during 2005–2020. Employing dynamic threshold panel regressions with liquid assets as the threshold variable, we show that bank lending declines with monetary policy tightening in low liquidity regimes, but not in high liquidity regimes. We also find evidence for different portfolio reallocation behaviour by banks in high versus low liquidity regimes in response to monetary policy changes.

The Effect of Higher Financing Costs on Job Openings and Online Job Postings

In this Economic Commentary, we consider whether the declines in vacancies seen in the second half of 2022 could have been driven by monetary policy tightening. We look at whether the variation in this decline across industries and states was consistent with increases in the federal funds rate. Our first strategy focuses on variation at the industry level in exposure to higher borrowing costs. Our second leverages geographic differences in the effect of monetary policy tightening on financing costs. Both strategies suggest that monetary policy is, at least in part, responsible for the recent decline in vacancies.

Monetary policy, macroeconomic uncertainty and corporate liquid asset demand: a firm-level analysis for India

PurposeThe study examines how the liquid assets holdings among non-financial Indian firms vary due to tightening monetary policy and increasing macroeconomic uncertainty.Design/methodology/approachThe authors analyze 5,640 firms for the period 2011–2021. The authors first estimate India’s monetary policy shocks by decomposing the exogenous shocks from the systematic component of monetary policy changes. The authors then examine the effects of the estimated monetary policy shocks and a range of macroeconomic and policy uncertainty indicators on companies’ cash and bank balances to asset ratios using two-step system generalized method of moments (GMM) estimators.FindingsThe authors find that monetary policy shocks cause the cross-sectional variances for the firms’ liquidity holdings to increase. In anticipation of macroeconomic volatility, companies respond to these shocks after taking into account all the firm-level information to minimize the opportunity costs of holding extra cash or too few cash balances that can hamper firms’ operations. Furthermore, compared to other shocks, the contribution of inflation-induced shocks is predicted to be the largest in the cross-sectional deviation of the firm’s cash holdings. The authors also find that low-growth, older and financially constrained firms observe lesser heterogeneity in their cash holdings as they tend to hold cash as a precautionary buffer.Originality/valueThe authors’ approach to the analysis is unique in many ways. To address potential transmission bias, the authors use nowcasts and forecasts of real gross domestic product (GDP) growth and inflation to generate a series of exogenous monetary policy shocks for identifying unanticipated changes in short-term interest rates. Subsequently, the authors estimate how these shocks affect the cross-sectional deviation of liquid assets. For estimating the effects of macroeconomic uncertainty on corporate cash demand, the authors utilize a range of proxies for uncertainty. Unlike previous attempts, the authors offer evidence for a developing and fast-emerging economy.