Tightness Of Monetary Policy Research Articles

Allocation of Credit Resources and "Borrow to Lend" Activities: Evidence From Chinese-Listed Companies.

Credit distribution is uneven in the domestic financial market since it is relatively easy for listed companies, mainly state-owned enterprises, to obtain banks’ funds. Unbalanced credit distribution has caused some listed companies to participate in “Borrow to Lend” activities. Based on the traditional “financing priority” theory and credit rationing theory, this paper studies the “Borrow to Lend” shadow banking activities of China’s non-financial listed companies based on the 2007–2018 financial statement data of Chinese-listed companies and discusses the micro-level and macro-level related factors behind this activity. The empirical results show that China’s non-financial listed companies, especially the state-owned enterprises, are participating in obvious “Borrow to Lend” activities. The real economy’s rate of return shows a negative relationship with “Borrow to Lend” activities at the level of individual companies and their industries. This article uses the exogenous growth part of M2 growth to measure monetary policy tightness in terms of macro and credit policies. It uses the ratio of state-owned enterprise loans to total corporate loans as an approximate indicator of the credit distribution structure. The empirical results indicate that state-owned enterprises’ “Borrow to Lend” activities have shifted in the same direction as the tightening of monetary policy after the financial crisis. The proportion of state-owned enterprise loans positively correlates with state-owned enterprises’ “Borrow to Lend” activities.

Monetary policy transmission: Balance sheet channel and investment behavior of firms in Pakistan

Purpose - This study investigates the relevance of the balance sheet channel of monetary policy transmission concerning non-financial firms at the Pakistan Stock Exchange (PSX), a firm-level data.Methods - This paper estimates a family of panel data regression models and constructs a dummy variable for monetary policy tightness.Findings - The result indicates a positive relationship between cash flows and investment during periods of monetary tightness. The impact on cash flows is visibly more pronounced than that of the quantitative effect of an increase in capital cost, which gives rise to a balance sheet channel. Three financial constraints, namely size, leverage, and dividend policy, are used to segregate firms into financially constrained and unconstrained firms.Implication - The results highlight the balance sheet channel impact on smaller firms cash. The cash flows of highly leveraged firms were impacted more during the tight monetary policy periods and thereby were more prone to decline in investments. Results on constraints of dividend policy are, however, inconclusive.Originality - The paper contributes to the literature by investigating the relevance of the balance sheet channel of monetary policy transmission concerning non-financial firms using firm-level data. It also contributes to the literature by constructing a dummy variable to measure monetary policy tightness.

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Bond Spreads and Economic Activity in Eight European Economies

We provide new insights into the relationship between financial market tightness and real activity, using a new database of corporate bonds issued in eight European countries. Bond spreads have a significant negative relationship with four real activity variables at horizons 1–8 quarters ahead. The relationship is robust to adding measures of monetary policy tightness and leading indicators, providing strong support for models previously only evaluated on US data. A subset of northern European countries have similar sensitivity of real GDP to bond spreads, but others have greater sensitivity to bond spreads, revealing diverse responses in Europe to financial market tightness.

Asset allocation and monetary policy: Evidence from the eurozone

The eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by real short-term interest rates varied substantially across countries in the period 2003–2010. We use this cross-country variation in the (local) tightness of monetary policy to examine its influence on equity and money market flows. In line with a powerful risk-shifting channel, we find that fund investors in countries with decreased real interest rates shift their portfolio investment out of the money market and into the riskier equity market, causing significant equity price inflation in countries where investment home bias is the strongest.

Monetary Policy of Bank of Russia: Strategy and Tactics

In recent years Bank of Russia has made several major changes in its monetary regime, including elimination of the exchange rate corridor and introduction of the key rate as the main monetary policy instrument. The article discusses these developments in the context of long-term priorities of the monetary authority. We put emphasis on the extent to which monetary policy should stimulate economic growth and assess whether the policy of the Central Bank of RF was excessively tight in 2010-2014. In order to do that we use the real interest rate on short-term loans in the interbank market as an indicator of monetary policy tightness. Cross-country comparisons together with the analysis of dynamics of selected indicators suggest that Bank of Russia’s policy was rather soft. We conclude with comments regarding tactics of monetary policy under current turbulent macroeconomic conditions.

Corporate Investment Decisions and Monetary Policy

This paper examines the impact of monetary shocks on corporate investment. I find evidence that industrial firms tend to increase their capital expenditures in response to continuously unexpected monetary policy tightness, implying that cumulative unexpected monetary policy tightness depreciates financial assets quickly and destroys the market price of assets, therefore, firms can take this opportunity to expand their investment with lower spending.

Asset Allocation and Monetary Policy: Evidence from the Eurozone

The eurozone has a single short-term nominal interest rate, but monetary policy conditions measured by real short-term interest rates varied substantially across countries in the period 2003-2010. We use this cross-country variation in the (local) tightness of monetary policy to examine its influence on equity and money market flows. In line with a powerful risk-shifting channel, we find that fund investors in countries with decreased real interest rates shift their portfolio investment out of the money market and into the riskier equity market causing significant equity price inflation in countries where investment home bias is the strongest.

Determinants of Bank Liquidity Creation

This paper measures liquidity creation of German savings banks over the period of 1997-2006 and tries to detect possible influence factors thereof. Using two recently developed techniques to measure liquidity creation, the so called “BB-Measure” as developed by Berger and Bouwman in 2009 and the “Liquidity Transformation” (LT) Gap as developed by Deep and Schaefer in 2004, we are able to determine both absolute amounts of liquidity created for the economy as well as relative magnitudes of maturity transformation the observed banks perform to create liquidity. Using a multivariate dynamic panel regression framework we differentiate between two different sets of potential liquidity determinants: macroeconomic factors, such as monetary policy or economic strength indicators, as well as bank characteristic factors, such as size or business focus. We additionally account for most recent legal developments in the German banking sector by measuring the effects of the abolishment of state guarantees in the public banking sector on liquidity creation. Analyzing a proprietary dataset comprised of all 457 German savings banks containing detailed balance sheet as well as profit & loss account variables, we show that over the given period, the total amount of liquidity created by the savings banks increased by 51% (from 120.7 billion Euro in 1997 to 182.2 billion Euro in 2006). In terms of influence factors we find highly significant and robust values for economy and monetary policy indicators. It can be shown that liquidity creation seems to depend strongly negatively on monetary policy tightness: a monetary policy tightening induces a decrease in created liquidity. We do not find any bank specific factors, such as financial performance or size, to have any influence on liquidity creation.

Monetary Policy Rules and the Effects of Fiscal Policy

We explore the implications of adopting a Taylor-type interest-rate rule in a simple monetary growth model in which budget deficits are financed partly by unbacked government debt. To ensure uniqueness of the steady-state equilibrium, monetary policy cannot be either too or too passive. The effects of fiscal policy depend crucially on whether monetary policy is active or passive, and are independent of the tightness of monetary policy.

Tariffs, trade and unemployment in a disequilibrium model: issues and policies

This paper studies the disequilibrium transition process engaged by increased openness to trade, and the effect of institutions, market behaviors and economic policies on that transition. The issue is analyzed with a simple two country (north and south), two goods model, amended in order to take into account the time dimension of both the production and the decision processes. Investigating the consequences of a tariff decrease by means of numerical simulations, we show to what extent wage and price setting, and the degree of tightness of monetary policy affect the outcome of the disequilibrium process. The main result is that capturing the gains associated with international trade requires market behaviors and economic policies, which are rather different from what is usually prescribed.

Doing without Money: Controlling Inflation in a Post-Monetary World

This paper shows that it is possible to analyze equilibrium inflation determination without any reference to either money supply or demand, as long as one specifies policy in terms of a “Wicksellian” interest-rate feedback rule. The paper's central result is an approximation theorem, showing the existence, for a simple monetary model, of a well-behaved “cashless limit” in which the money balances held to facilitate transactions become negligible. Inflation in the cashless limit is shown to be a function of the gap between the “natural rate” of interest, determined by the supply of goods and opportunities for intertemporal substitution, and a time-varying parameter of the interest-rate rule indicating the tightness of monetary policy. Inflation can be completely stabilized, in principle, by adjusting the policy parameter to track variation in the natural rate. Under such a regime, instability of money demand has little effect upon equilibrium inflation and need not be monitored by the central bank.Journal of Economic LiteratureClassification Numbers: E42, E52.

Properties of the Monetary Conditions Index

In recent years increasing use has been made in monetary policy analysis of the so-called Monetary Conditions Index (MCI). The index is defined as a linear combination of changes in a short-term real interest rate and in the real effective exchange rate, whose coefficients are equal to the estimated effects of the two financial variables on real aggregate demand or, alternatively, on a price index. The MCI is usually regarded as a measure of the degree of tightness of monetary policy in an open economy. In this paper the properties of the index and its possible uses in monetary policy are investigated by means of a macroeconomic model of the Mundell Fleming Dornbusch type; the reaction of the index to different kinds of aggregate shock is considered. Two possible meanings of the index are discussed: as a measure of the stance of monetary policy in an open economy and as an inflation indicator. It is shown that the index can be misleading in both cases. The MCI is ineffective in signalling changes in the stance of monetary policy in the cases of a financial shock and an exchange rate shock and it may also be misleading in the case of a supply shock. As an inflation indicator the index is also subject to some drawbacks in the case of real shocks. The MCI is to be properly interpreted as a summary measure of the inflationary pressures stemming from the short term real interest rate and the real exchange rate. An MCI constructed for Italy turns out to have been affected in recent years by the wide fluctuations of the lira exchange rate, which were mainly due to shocks originating in the financial and foreign exchange markets.

A Skeptical Note on the Usefulness of a Tight Fiscal Policy Applied to the Czech Case

In my article On the Statutory Autonomy of the Czech National (Sergi 1994), 1 wrote about the newly established Czech National Bank (CNB). The CNB was created in 1993 on the basis of a statute granting the CNB remarkable autonomy to act independently of the government. This fact implied strong consequences for the conduct of economic policy and for the overall strategy to follow during the next years of economic transformation. In particular, I built up a new index of central-bank independence following the line of research pioneered by Bade and Parkin (1982). My analysis yielded the basic message that Czech national bankers were found to have a strong independence from the Czech government in the use of the interest rate and the money supply and in setting the exchange-rate regime. Simply stated, such independence is unusually greater than that of many Western national banks, above all when considering the use of the exchange rate. I additionally argued that this independence should be used wisely, especially in terms of the degree of tightness of monetary policy, in order to make the transition smooth. The CNB has to address conflicting aims

Some Evidence on the Efficacy of the U.K. Inflation Targeting Regime: An Out-of-Sample Forecast Approach

Inflation targeting (IT)--a policy framework that directly targets an explicit inflation goal--has gained widespread attention recently as it has been adopted by several OECD countries. There is a growing body of literature on the ultimate long-term benefits of price stability and on theoretical issues related to inflation targeting. But the short duration of this practice has limited the number of works that empirically analyze the performance of IT regimes. This paper examines the British inflation targeting experience since 1993 by focusing on the out-of-sample forecast performance of models fitted to the 1980s. The model over-predicts actual short-term and long-term interest rates, while its inflation forecast is on tract for the recent period. This implies that it took less monetary tightening to obtain a favorable inflation outcome. Identical exercises were repeated for France and the US, countries that have not adopted IT but have experienced low inflation in the recent period. The results for these countries show that recent low inflation has not been unusual when compared to forecasts from the models designed to fit the second half of the 1980s. That is, given the level of inflation, the degree of actual monetary policy tightness (measured in terms of short-term interest rate) is about what the model expects. Findings of this paper could be explained by enhanced credibility of the UK monetary policy since the adoption of IT.

The predictive power of the money market term structure

The term structure of interest rates is analyzed using weekly data from the Danish money market. Using the methods from Campbell and Shiller (1991, Review of Economic Studies 58, 495–514) it turns out that interest rate spreads are much more powerful predictors of future interest rates in perinds with relative volatile interest rates than in periods with relative smooth interest rates. However, also in the latter case spreads significantly predict future short rate changes. This implies, among other things, that the slope of the term structure may be used by the monetary authorities as a useful indicator of the tightness of monetary policy.

A proposed framework for monetary policy

A proposal is outlined for reconciling the use of many indicators or instruments in setting monetary policy, with the need for clarity and openness. The proposal draws on the literature of unobserved component models (Stock and Watson, 1991), constructing the unobserved component using the Kalman Filter, from a set of unobservable series. The technique used allows for cointegration between variables and for the appropriate specification of stochastic trends (Garratt, Hall and Henry, 1992). In the empirical application a single measure of the tightness of monetary policy is derived from a range of observable indicators based on monthly UK data for the period 1978–92.

The Use of Market Prices in Implementing Monetary Policy: The Bullionist Contribution

The demise of the level of interest rates and the monetary aggregates as intermediate indicators or targets for monetary policy has left policymakers searching for alternative indicators. Recently, proposals to use auction market prices-namely commodity prices, foreign exchange rates, and interest rate spreads-have been suggested by certain policymakers [11 ]. In particular, it has been suggested that the use of these prices as indicators, not in isolation but in conjunction with one another, would be an appropriate strategy to gauge the ease or tightness of monetary policy. This paper demonstrates that this strategy is not novel. More specifically, under circumstances of a fiat monetary standard and a flexible exchange rate regime, classical (Bullionist) monetary writers such as Wheatley, Thornton, Ricardo and others all explicitly endorsed such a strategy. Since this approach has existed for more than one hundred and eighty years, it is most surprising that modem-day monetarists, who claim to be direct intellectual descendants of the above-cited classical monetary writers, remain critical opponents and detractors of such a strategy. Since outlines of the approach have been given elsewhere [11; 13], the strategy will not be presented here. After describing elements of classical monetary thought set forth prior to bullionist writers, the third section of the paper describes the bullionist policy prescriptions. Bullionists quite forcefully established all the key elements of a market price approach.

Commodity Prices, Money Surprises and Fed Credibilit

STRICT MONETARIST THEORY, IN AN EXTREME FORM, holds that excessive money growth, or the expectation of future money growth, shows up immediately in the rapid inflation of goods prices. However, it is widely argued that for most goods prices are in fact sticky in the short run and reflect money growth only in the long run. If one seeks a sensitive market measure of the perceived looseIless or tightness of monetary policy, one must. look elsewhere than at the general price level. Interest rates, being determined in quickly adjusting financial markets, are free to respond immediately to expectations regarding monetary policy. In 1981 and 1982, every Friday at 4:10 P.M. Eastern Standard Time the Federal Reserve Board would announce the money stock for the week ending nine days previously. If the announced money stock was different from what the market had been expecting, interest rates generally jumped in the same direction. Clearly they were responding to revisions of the expected future path of the money stock. But nominal interest rates are an ambiguous indicator of expectations. On the one hand, an announced increase in the money stock may be received by the market as indicating a higher