Monetary Policy Transmission Channels Research Articles

Monetary Transmission through Shadow Banks

This paper documents a new transmission channel of monetary policy: the shadow money channel. Analyzing U.S. money supply data from 1987 to 2012, I find that shadow money, namely liquid deposits created by shadow banks, expands significantly when the Federal Reserve tightens monetary policy. Using a structural model of bank competition, I show that this new channel is a result of imperfect competition between commercial and shadow banks in the deposit market with heterogeneous depositors. Due to a lack of a bank charter, shadow banks offer lower transaction convenience and hence must compete on yields. During periods of monetary tightening, shadow banks pass through more rate hikes to depositors, thereby poaching yield-sensitive deposits from commercial banks. Fitting my model to institution-level data from commercial banks and money market funds, I show that shadow money creation offsets 35 cents of each dollar in commercial bank deposit reductions, significantly dampening the impact of monetary tightening. My results suggest that monetary tightening may unintentionally drive more deposits into the uninsured shadow banking sector, thereby amplifying the risk of bank runs.

International Bank Lending Channel of Monetary Policy

How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel.

International Bank Lending Channel of Monetary Policy

How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel.

통화정책이 자본유출입에 미치는 영향: 행태방정식 분석(Nonlinear Effects of Monetary Policy on International Capital Flows)

Korean Abstract: 본고에서는 통화정책이 정책기조별, 금리수준별, 시기별로 정책여건에 따라 자본유출입에 미치는 영향의 정도가 다른지 여부에 대해 점검해 보았 다. 자본이동에 대한 행태방정식을 대상으로 분석한 결과 정책기조별, 금리 수준별, 시기별로 정책여건에 따라 통화정책의 영향은 비선형성을 보이는 것으로 분석되었다. 정책기조별로 보면 정책긴축은 국내 투자수익률 상승 효과로, 정책완화는 미래경기에 대한 기대감(signaling effect)으로 자본유입 을 확대시키는 것으로 분석되고 있다. 금리수준별로 보면 저금리 수준에서 는 자본유출입에 대한 통화정책의 영향은 크지 않는 것으로 분석되고 있다. 또한 글로벌 금융위기 이후 저금리 기간 중에는 우리나라 통화정책이 자본 유출입에 미치는 영향이 약화된 것으로 추정되었다. 이는 향후 정책금리 수 준이 높아질수록 동 영향의 크기가 확대될 가능성이 있다는 것을 의미한다. 본고는 자본유출입 행태방정식을 통해 자본유출입에 대한 통화정책의 영 향을 직접적 영향과 간접적 영향으로 분해하고 누적적으로 나타나는 간접 적 영향이 통화정책의 비선형성으로 이어지고 있는 경로를 일부 확인하고 있다는 점에서 분석의 의의가 있다. 또한 행태방정식 추정이라는 점과 자본 이동이 국내적인 요인보다는 국제적인 요인에 영향을 받았을 수 있다는 분 석상 한계에도 불구하고 통화정책이 자본유출입에 대해 통계적으로 유의 한 비선형적 영향을 주고 있다는 실증분석 결과는 정책효과 분석에 있어 동 효과의 비선형성까지도 면밀히 고려할 필요가 있음을 시사한다. English Abstract: This paper investigates whether monetary policy has nonlinear effects on the flows of international capital. After estimating a behavioral equation for international capital flows, we find that tightening monetary policy shocks cause international capital inflows to increase by raising the returns on investment, and that easing monetary policy shocks also lead to increased inflows of international capital by affecting investors’ expectations of future economic conditions. We also find that the effects of monetary policy on international capital flows are not large during periods of low interest rates, and that in the low interest rate conditions since the global financial crisis its effects have weakened. This implies that, as the level of the Base Rate is increased in the future, the policy effects on international capital flows could be strengthened. The contribution of this paper is that, using our behavioral equation for international capital flows, we decompose the direct and indirect effects of monetary policy and check the nonlinear channel of monetary policy transmission to international capital flows. Although there are methodological limits in estimating the behavioral equation, the finding that monetary policy has statistically significant nonlinear effects on international capital flows implies that the monetary policy analysis should closely consider nonlinear effects as well.

The credit channels of monetary policy transmission: implications on output and employment in Nigeria

There has been an increasing trend in the unemployment rate despite the growth rate witnessed. Monetary policy is presumed as one of the ways to improve the situation. Likewise, the relationship between monetary policy and employment has generated controversial debates in the literature. Though its connection has been extensively studied, however, the implications of monetary policy in respect to time frame perspectives on employment and output have not been widely addressed in the literature. This study provides evidence on shock effects, long and short-run impacts of monetary policy transmission through the credit channels on output and employment in Nigeria within the period of 1981 to 2016 using the Structural Vector Autoregression and Autoregressive distributed lags (ARDL). Evidence from the forecast error shock showed that variations in monetary policy indicators affect output more than employment in the first two periods; however, it affects employment more afterwards. The ARDL results show no evidence of co-integration when output is used as the dependent variable; conversely, cointegration exists when employment is used as the dependent variable. The monetary policy indicators: money supply, bank deposit liability and interest rate are statistically and economically significant with employment in the long run. In the short run, money supply and interest rate are economically and statistically significant. The findings revealed that the Nigerian government can maximize the long-run benefits of monetary policy through the credit channels on employment. Hence, there is a need for policymakers to look beyond short-run gain and promote long-run employment via monetary policy among others.

Risk-taking Channel of Monetary Policy: Evidence from Indian Banking

Some recent articles have studied the link between the central bank’s monetary policy stance and the risk-taking behaviour of banks in the context of advanced economies. Loose monetary policy can encourage banks to reach for yield, which will increase their share of risky assets, and also induce them to use more short-term funding. We empirically examine the existence of this risk-taking channel of monetary policy transmission in India. We find that expansionary monetary policy may increase default risk particularly for foreign banks and new private sector banks. We also find that tightening of monetary policy leads to lower liquidity risk and market risk and the effects are stronger for foreign banks than for other bank groups. In terms of market risk, the effect on foreign banks is weaker in cases of monetary tightening compared to expansion. JEL Classification: G21, G28, G32

Channels of Monetary Policy Transmission in Indonesia: A VAR Model Analysis

This study examines the various channels of monetary policy transmission mechanism in Indonesia. The interest rate, exchange rate, asset price and credit channels will be analysed using a VAR short-run restriction model for quarterly data, ranging from 2000Q1 to 2018Q1. The results show that the interest rate (cost of capital) channel is the most effective channel of monetary transmission in stabilising output and price level. Meanwhile, the exchange rate and asset price are the least effective channels of monetary policy, which operate via trade pass-through and Tobin’s q asset valuation channel. The credit channel is also found to be weak in controlling the price level.

The transmission of foreign monetary policy shocks into the United States through foreign banks

This paper examines how the lending of all foreign banks (branches and subsidiaries) in the US responds to foreign monetary policy actions in their parents’ home countries. Using a rarely studied bank-level dataset covering US-based foreign bank offices over the 1997–2014 period, I find strong evidence of a bank lending channel of inward monetary policy transmission: In response to home country monetary tightening, foreign banks with less access to liquid funds reduce their business lending in the US substantially more than foreign banks with more funding access. This inward transmission is strongest for the pre-crisis period, and for foreign banks originating from Europe.

The international transmission of monetary policy

This paper presents the novel results from an internationally coordinated project by the International Banking Research Network (IBRN) on the cross-border transmission of conventional and unconventional monetary policy through banks. Teams from seventeen countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the United States, euro area, Japan, and United Kingdom. Two other studies use international data with different degrees of granularity. International spillovers into lending to the private sector do occur, especially for US policies, and bank-specific heterogeneity influences the magnitudes of transmission. The effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission. They also show that the frictions that banks face matter; in particular, foreign currency funding and hedging considerations can be a key source of heterogeneity. The forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries. International spillovers into lending can be large for some banks, even while the average international spillovers of policies into nonbank lending generally are not large.

The Effects of the Sharing Economy: How Does Internet Finance Influence Commercial Bank Risk Preferences?

ABSTRACTIn this article, we provide an evidence on the effects of the sharing economy by studying internet finance. It aims to explore how internet finance affects the relationship between commercial bank risk preferences and monetary policy, and discusses whether this impact varies across heterogeneous banks. The results suggest that having a loose monetary policy encourages a preference for risk. In addition, internet finance alters the sensitivity of bank risk behavior to monetary policy. Internet finance has a heterogeneous influence, depending on a bank’s ownership (i.e., state or private) and size. At privately owned banks, internet finance has only a moderate impact on the bank risk-taking transmission channel of monetary policy, unlike the subsample of large banks.

The Redistributive Effects of Monetary Policy Across Generations

The paper revises the redistributive channels of monetary policy transmission and their impact on income and wealth distributions in a New-Keynesian Overlapping Generations (OLG) model. The model mimics total asset holdings and earnings processes of several types of households across generations, based on their attitude to saving and income group. In this environment, expansionary monetary shocks stimulate capital and debt accumulation to a larger extent for middle-aged individuals, contributing to intergenerational inequality. Heterogeneity of labor income augments this effect, benefitting richer and more productive workers.

The risk-taking channel of monetary policy transmission in the euro area

Abstract In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through the relaxation of lending standards for borrowers. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react aggressively to an expansionary monetary policy shock by lowering their lending standards. The banks’ efforts to keep their lending margin stable, however, are not successful as we detect a significant compression. We document these findings for the euro area as a whole and for its individual member states. In particular, banks in the Netherlands, Portugal, Spain, and Ireland lowered their lending standards after expansionary monetary policy shocks. The compression of the lending margin is most pronounced in the five crisis countries (Greece, Ireland, Italy, Portugal, and Spain)

Monetary Policy and Return on Equity of Quoted Insurance Firms: A Time Series Study from Nigeria

The financial system is the transmission channel of monetary policy. This study examines the effect of monetary policy on the performance of insurance firms in Nigeria from 1990 – 2017. The objective is to investigate the existing relationship between monetary policy instruments and the performance indicators of insurance companies. Secondary data were sourced from Stock Exchange factbook, Central Bank of Nigeria (CBN) Statistical Bulletin. Multiple linear regressions were formulated to examine the effect of the independent variables on the dependent variable. Return on equity was modeled as a function of treasury bill rate, monetary policy rate, interest rate, growth of money supply and exchange rate. R2, T-Statistics, β Coefficient, F-Statistics and Durbin Watson were used to examine the extent to which the independent variables affect the dependent variables while augmented dickey fuller unit root test, granger causality test, cointgration test and error correction models was used to ascertain the dynamic relationship between monetary policy variables and return on equity of the insurance firms. Findings revealed that, all the explanatory variables have positive effect on return on equity except treasury bill rate. The unit root test found that the variables are stationary at first difference, the cointgration test found the presence of long run relationship while the granger causality test found a uni-directional causality. The study concludes that monetary policy has moderate effect on the return on equity of the insurance firms. We recommend that management of insurance companies should devise measures of managing the negative effects of the monetary policy instruments to enhance the performance of the insurance companies.

The Existence of a Risk-Taking Channel of Monetary Policy Transmission in Iran’s Banking System

The Existence of a Risk-Taking Channel of Monetary Policy Transmission in Iran’s Banking System

Risk-Taking, Reaching-for-Yield, and Monetary Policy: Evidence from Peer-to-Peer Lending

This paper examines how monetary policy affects risk-taking and reaching-for-yield behavior of individual investors in the peer-to-peer lending market. Using data from Prosper.com from 2006 to 2013, we find that easy monetary policy, as measured by lower effective federal funds rates or the quantitative easing programs, induces individual investors to fund riskier loans and to fund loans with higher yields. We also find that loans originated during easy monetary policy regimes experience higher ex post default rates. The results suggest that the risk-taking channel of monetary policy transmission may be driven by individual behavior bias, instead of by frictions specific to financial institutions.

Long-run and Short-run Monetary Policy Transmission Channels in Lebanon

Abstract This research detects the existence of monetary policy transmission mechanisms in Lebanon through which the actions of the central bank propagate. By adopting co-integration analysis and VECM frameworks, and by exploiting monthly data between January 1994 and December 2016, the research revealed the existence of a long-run interest rate channel, affecting both resident private sector deposits and credit to the private sector. Another short-run capital channel was revealed, affecting total credit provided by the banking sector. Additionally, the empirical results show that (1) deposit inflows are not attracted by high interest rates, but stimulated by confidence provided by large foreign currency reserves held by the central banks; (2) non-residents deposit inflows could represent a substitute for local credit; (3) banks pass-through any increase in funding cost to borrowers; and (4) an increase in external interest rates may trigger deposit outflows.

The RiskkTaking Channel of Monetary Policy Transmission in the Euro Area

In this paper, we provide evidence for a risk-taking channel of monetary policy transmission in the euro area that works through the relaxation of lending standards for borrowers. Our dataset covers the period 2003Q1-2016Q2 and includes, in addition to the standard variables for real GDP growth, inflation, and the monetary policy stance, indicators of bank lending standards and bank lending margins. Based on vector autoregressive models with (i) recursive identification and (ii) sign restrictions, we show that banks react aggressively to an expansionary monetary policy shock by lowering their lending standards. The banks' efforts to keep their lending margin stable, however, are not successful as we detect a significant compression. We document these findings for the euro area as a whole and for its individual member states. In particular, banks in the Netherlands, Portugal, Spain, and Ireland lowered their lending standards after expansionary monetary policy shocks. The compression of the lending margin is most pronounced in the five crisis countries (Greece, Ireland, Italy, Portugal, and Spain).

Investice v transmisním mechanismu cílování inflace verifikace zdrojů variability investic v České republice

The paper is devoted to the topic of investment with emphasis on their position within the transmission mechanism of inflation targeting. It briefly discusses starting-points of inflation targeting regime, individual transmission channels of monetary policy, and routes through which the central bank may influence the investment. There are mentioned selected investment theories. Other factors, whose changes may induce changes in investment, are derived using these theories. Using available data, sources of investment variability are verified for the Czech Republic. Correlation analysis is performed and the vector error correction model is compiled. It seems that rise of aggregate demand is transformed into rise of investment. Similarly in case of asset prices. Appreciation of CZK is reflected in decline of investment. All three relations are consistent with the theory. On the contrary, sensitivity of investment to changes in market expected real interest rates is not clear.

Monetary Policy Transmission and Industrial Sector Growth: Empirical Evidence From Nigeria

The goal of this study is to assess the industry effects of monetary policy transmission channels in Nigeria within the period 1981-2014. Techniques of analysis employed in the study are the Johansen cointegration and the error correction model (ECM). Our regression estimates reveal that the private sector credit, interest rate, and exchange rate channels have negative effects on real output growth, both in the long run and in the short run. The results further show that, relatively, the degrees of the established effects are higher in the long run than in the short run. We employed the Johansen cointegration approach to determine the nature of relationship that exists between our dependent variable and the independent variables. The results show that, in the Nigerian case, monetary policy transmission channels jointly have a long-run relationship with real output growth of the industrial sector, and disequilibrium in the system is corrected at the speed of 72.2% annually.

(How) do credit market conditions affect firms' post-hedging outcomes? Evidence from bank lending standards and firms' currency exposure

Tighter bank lending standards could increase firms' post-hedging currency exposure by reducing firms' ability to fund hedging (funding channel) and/or by constraining counterparties' capacity to facilitate hedging (capacity channel). We find that tighter lending standards materially increase firms' exposure. In addition, we find no support for a funding-channel effect as firms' internal liquidity does not mitigate the impact of lending standards on exposure, indicating that the impact is through the capacity channel. Finally, we find a negative association between lending standards and aggregate transactions in currency derivatives, bolstering support for a capacity-channel effect. Our results have implications for firms' hedging policy and the bank lending channel of monetary policy transmission.