The asymmetric effects of monetary policy in a matching model with a balance sheet channel

The monetary instruments and capital market are closely related as these tools are operating in the money market. The influence of the monetary policy to the stocks and indexes’ performance has been the research interest in the previous literature. The monetary policies along with its’ instruments are transmitted not only in banking lending channel to affect the economic growth but also in the balance sheet channel. However, the conventional tools and policies are not adhering the sharia tenets. Hence, the sharia-compliance monetary system is emanated in Muslim majority countries, including Indonesia. Additionally, this establishment of policy is coupled with the emergence of the Islamic capital market in Indonesia. Thus, the analysis of the impact of either Islamic or conventional monetary system on the Islamic capital market in Indonesia that represented by the Jakarta Islamic Index (JII) is essential to look at its’ furthers effect on financial market growth.This study examines the impact of the Islamic and conventional monetary variables on the performance of the Jakarta Islamic Index in Indonesia. It also investigates the stability of the JII under the occurrence of the shock derived from the monetary instruments. Monthly closing value of the JII, conventional or interest rate, Islamic policy rate, and monetary base are assessed to address the research objectives in this paper. This study employs the VAR-VECM and Granger analysis to analyse the phenomenon. The monetary policy transmission mechanism through the financial market channel is the main channel that will be investigated in this paper. The study comprises of introduction, literature review, methodology, and lastly the discussion and conclusion.

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THE CREDIT SUPPLY CHANNEL OF MONETARY POLICY TRANSMISSION MECHANISM: AN EMPIRICAL INVESTIGATION OF ISLAMIC BANKS IN PAKISTAN VERSUS MALAYSIA

Journal of Islamic Monetary Economics and Finance ◽

10.21098/jimf.v5i1.1046 ◽

2019 ◽

Vol 5 (1) ◽

Cited By ~ 1

Author(s):

Syed Muhammad Abdul Rehman Shah

Keyword(s):

Monetary Policy ◽

Balance Sheet ◽

Banking System ◽

Real Income ◽

Transmission Mechanism ◽

Islamic Banks ◽

Differential Impact ◽

Credit Supply ◽

Balance Sheet Channel ◽

Supply Channel

The transmission mechanism of monetary policy is explained through the relationshipsbetween a change in money supply and the level of real income. Monetary policytransmits to the real sector through several different channels. Such channels includethe interest rate channel, the exchange rate channel, the asset-pricing channel, the creditsupply channel, and the bank balance sheet channel. This paper empirically investigatesthe credit supply channel of monetary policy and explores the differential impact ofmonetary policy on credit supply of Islamic banks in Pakistan versus Malaysia. Therobust two-step System-Generalize Method of Moments (GMM) estimator is appliedon an unbalanced panel dataset over the period 2005-2016. While estimating the effectsof three alternative measures of monetary policy on banks’ credit supply, several bankspecificvariables are included in the specification as control variables. We providestrong evidence on the existence of credit supply channel in the baseline models forboth countries and differential impact of monetary policy through Islamic banks inPakistan versus Malaysia in the extended models. Our findings suggest that there isa vital need to consider the nature of Islamic banks while devising the instrumentsof an effective monetary policy in countries with dual banking system like Pakistan,Malaysia, Indonesia, Bahrain, Saudi Arabia, Qatar and others.

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Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications

The American Economic Review ◽

10.1257/aer.102.5.2301 ◽

2012 ◽

Vol 102 (5) ◽

pp. 2301-2326 ◽

Cited By ~ 389

Author(s):

Gabriel Jiménez ◽

Steven Ongena ◽

José-Luis Peydró ◽

Jesús Saurina

Keyword(s):

Monetary Policy ◽

Firm Heterogeneity ◽

Supply And Demand ◽

Balance Sheet ◽

Economic Conditions ◽

Balance Sheet Channel ◽

Loan Demand ◽

Loan Supply ◽

Credit Restriction ◽

The Impact

We analyze the impact of monetary policy on the supply of bank credit. Monetary policy affects both loan supply and demand, thus making identification a steep challenge. We therefore analyze a novel, supervisory dataset with loan applications from Spain. Accounting for time-varying firm heterogeneity in loan demand, we find that tighter monetary and worse economic conditions substantially reduce loan granting, especially from banks with lower capital or liquidity ratios; responding to applications for the same loan, weak banks are less likely to grant the loan. Finally, firms cannot offset the resultant credit restriction by applying to other banks. (JEL E32, E44, E52, G21, G32)

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Α Model of Debt Deflation and the Phillips Curve: Implications for Business Cycles and the Balance Sheet Channel of Monetary Policy / Schulden-Deflation und die Phillips-Kurve: Implikationen für Konjunkturzyklen und den Bilanzkanal der Geldpolitik

Jahrbücher für Nationalökonomie und Statistik ◽

10.1515/jbnst-2000-0402 ◽

2000 ◽

Vol 220 (4) ◽

Author(s):

Lutz Arnold

Keyword(s):

Monetary Policy ◽

Business Cycles ◽

Phillips Curve ◽

Balance Sheet ◽

New Keynesian ◽

Inflation Expectations ◽

Natural Rate ◽

Net Worth ◽

Balance Sheet Channel ◽

Debt Deflation

SummaryNew Keynesian economics stresses the positive link between firms’ net worth, on the one hand, and the equilibrium level of credit granted and aggregate employment, on the other hand. The present paper argues that once money is introduced and adaptive inflation expectations are assumed, an accelerationist Phillips curve emerges: because of debt deflation, an increase in the rate of inflation reduces firms' real debt burden; because of the negative link between real debt and employment, unemployment falls. The natural rate of unemployment is the rate that occurs when inflation is constant. Frisch has proposed modeling business cycles by means of stochastic linear second-order difference equations which display damped oscillations in the absence of stochastic impulses. The New Keynesian model with adaptive expectations expounded here gives rise to business cycles in Frisch’s sense. This can be shown by applying Laidler’s result, derived in a different set-up, that the interaction between an accelerationist Phillips curve and the quantity theory of money yields Frisch-type cycles. Moreover, the model presented sheds some light on the working of the balance sheet channel of monetary policy.

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