Monetary Policy Transmission Research Articles

Market Power, Financial Constraints, and Monetary Transmission

There is growing evidence that corporate market power is increasing and affecting monetary policy transmission. This paper develops a partial equilibrium model that highlights the role of financial constraints in shaping the role of markups for the response of firms to monetary policy shocks. We find support for such a role using a large cross-country firm-level dataset for 14 advanced economies.

Monetary policy as market stabilizer in the COVID-19 pandemic

We categorize expansionary monetary policies based on interest rates, monetary easing, and liquidity decisions. We find that the stock market reacts positively to liquidity policy announcements by a more significant margin during and after the COVID-19 at market and industry levels compared with reactions to interest rate or monetary easing policy announcements. The economic consequences are large and persistent. Using firm characteristics as proxies for monetary policy transmission channels, we find that at firm level, the positive responses to liquidity policy announcements during the crisis are more pronounced for small and medium-sized businesses and non-state-owned enterprises relative to other enterprises.

MONETARY POLICY AND ASSET PRICES: THE CASE OF PAKISTAN

This paper sets the objective of estimating the mediating role of asset prices in the transmission of monetary policy. Vector autoregressive model comprising short-term interest rate, output, inflation and asset prices has been estimated using data of Pakistan economy for the period 2000m01 to 2019m06. We find significant role of asset prices in transmission of monetary policy to target variables, especially when individual asset prices are taken instead of asset price index. Stock prices are found important mediator of transmission from interest rate to output while exchange rate is so for inflation rate; role of house prices remains moderate.

Working of Expectations Channel of Monetary Policy Transmission in India

In this paper, we examine the working of the expectations channel of monetary policy transmission for India, first by investigating the role of inflation expectations in an aggregate supply-demand (AS-AD) adapted to the Indian economy. Second, formulating an inflation function determining convergence of core inflation to its expected value in a fixed point arising through interactions between central bank (CB) expected inflation and expectations of different agents. Finally, we estimate SVARs with variables derived from the above exercises. We first estimate how expectations shocks affect macroeconomic aggregates. Second, we identify the shocks affecting expectations of households and professional forecasters (PFs). In addition, we estimate shocks influencing core inflation. Results suggest the expectation channel worked through interactions between PF forecasts and CB projections, with causality from CB projections to core and from core to household expectations. Supply shocks had short-run effects but core inflation dominated in the longer run. Expectations converged. The expectations channel of transmission to inflation was more effective through communication than through the policy rate, since the rate had low and sometimes even perverse effects. The relatively low impact of demand variables on inflation supports the hypothesized AS-AD structure.

Assessment of the Effects of Monetary Policy Shocks from ECOWAS Member Countries to Nigeria

The paper evaluated the effects of monetary policy shocks from ECOWAS Member Countries to Nigeria using a combination of quarterly, annual time-series and panel data spanning from 1995–2021. The Standard Global Vector-Autoregressive (GVAR) Model of analysis was used to draw structural inference for the study using data on: consumer prices, international commodity prices (oil, agricultural raw material and metal ore), exchange rate, interest rate (short and long run), real output, money supply, and export diversification index. The result of the Impulse Response Function (IRF) revealed that shocks resulting from monetary policy transmission from the ECOWAS member Countries to Nigeria has diverse effects on Nigeria and is largely determined by the extent of monetary policy accommodative stance. The shock that may occur is likely to be country-specific because ECOWAS is an economic union that hardly has the foundation to share common economic or monetary risk. Additionally, the extent of trade flow between Nigeria and the rest of ECOWAS, determines the tendency that such shocks affect Nigeria. Finally, whether ECOWAS is a shock source, or a channel of transmission determines how much of an impact shocks from that region will have.

The transmission of euro area monetary policy to financially euroized countries

AbstractThis paper provides a comprehensive analysis of the interest rate pass‐through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroization and on the transmission channels of monetary policy spillovers. The results suggest that in the long run, more than the one‐third of all euro retail rates in euroized countries of central, eastern, and south‐eastern Europe is linked to the euro area shadow rate. Compared with euro area monetary policy, the share of cointegration of the domestic monetary policy rate is on average lower, suggesting that domestic central banks in euroized countries with independent monetary policy can only partially control the “euro part” of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission.

Four facts about relationship lending: The case of Chile 2012-2019

Using confidential credit-registry data on the universe of bank loans, we characterize the monthly behavior of relationship lending in Chile between 2012 and 2019. We focus on two aspects of relationships between firms and banks: their closeness, and their concentration. We uncover four stylized facts about relationships lending: their behavior through time, cyclical properties, properties of credit contracts in relationships, and the effect of relationships on monetary policy transmission. Our results show that relationship lending plays an important role in credit allocation and in the implementation of financial policies.

Liquidity creation channel of monetary policy transmission in India: Do bank characteristics matter?1

AbstractIn this paper, we examine the effect of monetary policy on liquidity creation (LC) by banks in India. We also study the role of bank characteristics in the transmission of monetary policy to LC. We apply static and dynamic panel regressions to bank‐level data from India, spanning the period 1999–2020. We find a negative impact of monetary policy tightening on total as well as on‐balance sheet LC. We also find that the capital, size and profit of banks support the monetary policy transmission to LC. Finally, the LC channel seems to operate for both public sector and private sector banks. Our findings suggest that the monetary policy authority must closely monitor bank‐level characteristics to improve the efficacy of the LC channel of monetary policy.

Household net saving positions and unconventional monetary policy transmission: Evidence from Japan

This paper investigates the heterogeneous effect of unconventional monetary policy (UMP) on household consumption across different household net saving positions. Using Japanese household survey data on household balance sheet positions, income, and expenditures, we enhance the role of the cash-flow channel in the UMP transmission. Households in a lower net saving position (with a higher level of debt) exhibit significantly positive expenditure responses to expansionary UMP shocks. In contrast, households in an upper net saving position (with a lower level of debt) respond little. We also find that households in lower net saving positions primarily drive the aggregate effects of UMP on household consumption.

The bank lending channel of monetary policy transmission in Vietnam: Impacts of the COVID-19 pandemic and the financial crisis

This paper aims to analyze changes in the transmission of monetary policy via bank lending when considering the impact of the COVID-19 pandemic and the financial crisis. Using bank-level data of 31 commercial banks in Vietnam from 2007 to 2021, we provide consistent evidence that the impact of monetary policy on bank lending tends to be more pronounced in the period of the COVID-19 pandemic. Besides, we document that the bank’s loan supply is more sensitive to monetary policy adjustments during the global financial crisis. Thus, a general pattern can be detected, i.e. the monetary policy transmission through the bank lending channel is stronger under unfavorable macro contexts in Vietnam. Accordingly, it can be suggested that adjustments in the monetary policy of the central bank have still been effective in periods of macro difficulty and the implementation of unconventional monetary policy in Vietnam is not necessary yet. Regression results when using the sample-splitting technique are consistent with those using interactive variables, providing evidence to confirm the robustness of the findings obtained in the study.

Hiệu quả truyền tải chính sách tiền tệ qua kênh tín dụng thương mại ở Việt Nam

Existing research in Vietnam mainly focuses on the traditional transmission channels of monetary policy. This article investigates the effectiveness of monetary policy transmission through an alternative funding channel for bank credit, which is the trade credit channel. Panel data regression was conducted with datasets from 501 Vietnamese enterprises in the period of the second quarter of 2010 to the second quarter of 2020. The results show that most enterprises in Vietnam do not have the ability to use trade credit as an alternative fund for bank credit in the context of monetary tightening, thereby helping to maintain or even increase the transmission efficiency of monetary policy. The transmission of monetary policy through the trade credit channel is most effective for enterprises with low credit ratings and is partly weakened for large enterprises, which can use trade credit as complementary short-term financing in the situation of credit supply shortage.

Temporal Aggregation Bias and Monetary Policy Transmission

Temporal aggregation biases estimates of monetary policy effects. We hypothesize that information mismatches between private agents and the econometrician—the source of temporal aggregationbias—are as important as the more studied mismatch between private agents and the centralbank (the “Fed information effect”) in the study of monetary policy transmission. In impulse responsesfrom both local projections and an unobserved components model, we find that the responseof daily inflation to high-frequency monetary shocks confirms theoretical predictions. If thereis an adverse-signed response such that inflation increases in response to a contractionary monetaryshock, it is much less prominent than previously thought and explained by frequency mismatches ofshocks and dependent variables.

Specifics of the impact of the Bank of Russia's monetary policy on the economies of the Eurasian Economic Union

The article is a part of the author's (Zagoytiy V.L.) dissertation research. The purpose of this paper is to identify the key effects of the Bank of Russia's monetary policy on the economies of the Eurasian Economic Union. The authors' initial assumption is that the monetary policy shock of the Russian economy has the same effect on the economies of the other member states of the Eurasian Economic Union. The conclusions about the response of macroeconomic variables to economic policy shocks are based on impulse response function analysis. The authors conduct their modelling in two stages. In the first stage, we identify monetary policy shock for the Russian economy by constructing a vector autoregression model using standard Kholetsky decomposition. At the second stage, we analyze the impact of a Russian monetary policy shock on the economies of the EEU member states. The impact of this shock on the main macroeconomic indicators of the countries of the Eurasian Economic Union has been estimated using O. Jorda's local projections’ method. The analysis reveals the significant impact of the monetary policy of the Bank of Russia on the economies of Armenia and Belarus in the short term. The initial assumption that monetary policy shock of Russian economy has the same impact on the economies of other member states of the Eurasian Economic Union is disproved. The authors conclude that the monetary policy shock of the Bank of Russia is transmitted to the economies of the Eurasian Economic Union partner countries primarily through money markets, leading to an increase in market interest rates in Armenia and Belarus and, consequently, to a decline in industrial production. This reflects the operation of the currency channel of cross-border transmission of monetary policy, whereby a rate hike in a large regional economy triggers a rate hike in the region in order to prevent depreciation of national currencies

Monetary Policy Shocks and Output Growth in Nigeria: Which Shocks are more Important

Purpose: Recognizing the importance of effective policymaking requires an understanding of Monetary Policy Shocks and Output Growth in Nigeria. The purpose of the paper is to examine how interest rate and exchange rate channels of the transmission mechanism affect output growth in Nigeria in response to monetary shocks. Methodology: The structural vector autoregression method is the empirical model. In the empirical analysis, quarterly data from 2000 to 2020 were used for the gross domestic product, nominal effective exchange rate, consumer price index, monetary policy rate, and open buyback. Findings: The results of the impulse response function showed that in Nigeria, monetary policy shocks are more significant because they have a long-lasting impact on growth up to the sixteenth quarter of the forecast horizon. Originality/value: The study's conclusions would enable Nigerian policymakers to anticipate consequences of monetary policy shocks through indirect demand-side Keynesian monetary policy transmission mechanism through the channels of exchange and interest rates. The study recommends that to move the economy toward pre-determined directions, monetary authorities should be cautious of the level/quantity of money in circulation rather than focusing on increasing or decreasing the monetary policy rate.

How does uncertainty drive the bank lending channel of monetary policy?

The literature has ignored the mediating role of uncertainty in the link between monetary policy and bank lending. Using data from commercial banks in Vietnam from 2007 to 2019, this article expands the literature stream on monetary policy transmission by investigating the impact of uncertainty on the bank lending channel. We employ the variability of shocks to bank-specific factors to measure banking uncertainty and a set of interest- and money-supply-based instruments to capture monetary indicators. We reveal that bank loan growth may increase in response to monetary expansion when the regulatory authority lowers interest rates or increases liquidity injection. Further analysis shows that this bank lending channel is less effective with increased uncertainty in the banking sector. Our finding firmly holds with the generalized method of moments (GMM) estimator and the least squares dummy variable corrected (LSDVC) technique.

Deep dive into beggar-thy-neighbour effects of monetary policy spillovers

AbstractWe analyse the effect of the European Central Bank's (ECB) monetary shock spillover and its impact on the European Union's 9 countries outside the euro area (EA) between 2000 and 2020. We use the sign-restricted Bayesian VAR model and subsequent interpretation by plotting the impulse-response functions. Moreover, we investigate both conventional and unconventional monetary policies and its international transmission. The spillover of monetary policy is growing with the openness of economies and the ongoing deepening of integration. The output responds to the EA's monetary shock flexibly and persistently, but there is considerable heterogeneity across countries. We claim that it is essential for central banks outside the EA to monitor and incorporate the ECB's monetary policy spillover into decision-making processes. In particular, the international transmission of the unconventional monetary policy has a fundamental effect on the development of the price level, thus achieving price stability. In the case of implementing a counter-cyclical policy, it is also necessary to monitor conventional policy. However, there is no need to fight the spillover effect since there is no beggar-thy-neighbour problem, i.e., spillover effect works in the same direction in both domestic and foreign country.

Undisclosed material inflation risk

We identify many major U.S. corporations that are highly exposed to inflation risk. Yet, although the SEC legally requires disclosing possible risk factors, more than 61% of the inflation-exposed corporations do not disclose inflation risk. However, after being sued in a securities class action lawsuit, while all firms increase the length of their reported risk factor texts, only inflation-exposed firms are more likely to begin disclosing inflation risk. Simulations using calibrated parameters from our models reveal that 2%–6% inflation shocks over the subsequent three years result in market cap damages of $0.9 to $2.8 trillion for shareholders of inflation-exposed firms that never disclosed this risk. The inadequate inflation risk disclosure holds after allowing risk to be time varying, controlling for firm/industry characteristics, and/or exploiting a quasi-natural experiment that identifies causal effects and controls for possible unobservable factors. The evidence is consistent with corporate managers paying inadequate attention to inflation risk. Our framework enables identification and evaluation of stock price drop damages, especially for firms with inadequate risk disclosures, possibly improving disclosure practices, inflation expectations, and monetary policy transmission.

Monetary Policy, Corporate Finance, and Investment

Abstract In response to a change in interest rates, younger firms not paying dividends adjust both their capital expenditure and borrowing significantly more than older firms paying dividends. The reason is that the debt of younger non-dividend payers is far more sensitive to fluctuations in collateral values, which are significantly affected by monetary policy. The results are robust to a wide range of possible confounding factors. Other channels, including movements in interest payments, product demand, profitability, and mark-ups, are also significant but seem unlikely to explain the heterogeneity in the response of capital expenditure. Our findings suggest that these types of financial frictions play an important role in the transmission of monetary policy.

Impact of monetary policy on the macroeconomy under dollarization: evidence from the Lao PDR

PurposeThis study empirically aims to analyze the transmission of monetary policy in consideration of asymmetry based on the Bank of the Lao PDR (BOL)'s monetary policy tools and real and financial variables in the domestic market.Design/methodology/approachThis study adopts two approaches, conventional vector autoregression (VAR) and asymmetric VAR, to investigate the impact of monetary policy on macroeconomic variables including inflation and real GDP growth in the Lao PDR.FindingsUnder a highly dollarized monetary regime, the policy rate change plays a weaker role compared with M0, which exerts significantly positive effects on real GDP growth and inflation. The results of the asymmetric VAR model further substantiate that the real economy responds to a positive M0 shock (easing monetary policy) rather than a negative shock (tightening monetary policy).Practical implicationsOverall estimation results suggest that the effectiveness of monetary policy is limited in Laos, which would take priority over efforts to strengthen the development of the short-term financial market and de-dollarization.Originality/valueThis study can fill the gap in the literature in which the discussions on the transmission mechanism of monetary policy in the BOL's monetary policy are still little known.

Pengaruh Jalur Transmisi Kebijakan Moneter terhadap Inflasi di Indonesia

Historically, actual inflation could not reach the inflation target, resulting in a deviation between the actual inflation and the inflation target. To overcome this problem, Bank Indonesia implemented a monetary policy transmission channel for inflation in Indonesia through the loan interest rate channel, the exchange rate channel, and the consumption credit channel. This article aims to determine the effect of the monetary policy transmission channel on inflation in Indonesia, as seen from the interest rate, exchange rate, and consumption credit channels. The research method of this article is quantitative with VAR/VECM analysis techniques. The results of the study state that (1) in the short term, interest rates on loans and consumption credit have a significant effect on the inflation rate; (2) in the long run, loan interest rates and the rupiah exchange rate have a significant effect on the inflation rate; (3) when shocks occur in loan interest rates, the rupiah exchange rate, and consumer credit, the inflation rate will respond differently; and (4) changes in interest rates on loans and consumption credit are effective in explaining variations in changes in the inflation rate. The results of this study imply that the determination of lending rates by each bank must still refer to the reference interest rate (BI7DRR), public sentiment and the volatility of the rupiah exchange rate in the short term must be the focus of consideration in the exchange rate channel, and consumption must consider the feasibility of the 5C aspect. Keywords: Inflation, Loan Interest Rates, Rupiah Exchange Rates, Consumption Credit