The Channels of Transmission of Monetary Policy

2021 ◽  
pp. 45-88
Author(s):  
Juan Antonio Morales ◽  
Paul Reding
Keyword(s):  
Monetary Policy ◽  
Emerging Market ◽  
Asset Price ◽  
Balance Sheet ◽  
Transmission Mechanism ◽  
Monetary Transmission ◽  
Monetary Transmission Mechanism ◽  
The Interest Rate ◽  
The Impact ◽  
Transmission Of Monetary Policy

This chapter explores the monetary transmission mechanism (MTM) in low financial development countries (LFDCs). It successively discusses the interest rate, asset price, bank credit, balance sheet, expectations, and real balance channels. For each channel, conceptual aspects about how it operates, how it transmits monetary policy impulses to the economy’s financial and real spheres, are first presented. Next, the impact of the specificities of LFDCs on the channel’s strength and reliability are examined and the available empirical evidence is surveyed. The chapter concludes with a global assessment of the effectiveness of the monetary transmission mechanism in LFDCs. Evidence points to a transmission mechanism that is effective although not very strong, and possibly also more uncertain than in advanced and emerging market countries.

scholarly journals Structural VARs and the Monetary Transmission Mechanism in Low-Income African Countries†

2019 ◽  
Vol 28 (4) ◽  
pp. 455-478
Author(s):  
Bin Grace Li ◽  
Christopher Adam ◽  
Andrew Berg ◽  
Peter Montiel ◽  
Stephen O’Connell
Keyword(s):  
Monetary Policy ◽  
Low Income ◽  
Transmission Mechanism ◽  
Low Income Countries ◽  
Monetary Transmission ◽  
Finite Sample ◽  
African Countries ◽  
Monetary Transmission Mechanism ◽  
Structural Vars ◽  
The Impact

AbstractStructural Vector Autoregression (SVAR) methods suggest the monetary transmission mechanism may be weak and unreliable in many low-income African countries. But are structural VARs identified via short-run restrictions capable of detecting a transmission mechanism when one exists, under research conditions typical of low-income countries (LICs)? Using a small DSGE as our data-generating process, we assess the impact on VAR-based inference of short data samples, measurement error, high-frequency supply shocks, and other features of the LIC environment. The impact of these features on finite-sample bias appears to be relatively modest when identification is valid—a strong caveat, especially in LICs. Nonetheless many of these features undermine the precision of estimated impulse responses to monetary policy shocks, and cumulatively they suggest that statistically and economically insignificant results can be expected even when the underlying transmission mechanism is strong. These data features not only undermine the efficacy of the SVAR methodology for research and policy-making, but are also severe enough to motivate a continued search for monetary policy rules that are robust to these limitations.

On the Monetary Transmission Mechanism in Europe / Zum Transmissionsmechanismus in Europa

1999 ◽  
Vol 219 (3-4) ◽  
Author(s):  
Jan Gottschalk
Keyword(s):  
Monetary Policy ◽  
Money Demand ◽  
Transmission Mechanism ◽  
Monetary Transmission ◽  
Inflation Expectations ◽  
Real Rate ◽  
Policy Makers ◽  
Monetary Transmission Mechanism ◽  
Short Run ◽  
The Interest Rate

SummaryThis paper presents an analysis of a money demand system for the euro area. The objective is to investigate some aspects of the monetary transmission mechanism. Of particular interest is the interest rate channel, which asserts that monetary policy works by affecting the long real rate. The evidence suggests that the long bond rate is mainly determined by inflation expectations and that the long real rate appears to have been beyond the influence of monetary policy makers. In addition real money effects are considered. At least in the short-run excess money has positive significant effects on output and inflation.

scholarly journals The viability of asset price channel implementation to the monetary transmission mechanism of Ukraine

2016 ◽  
Vol 13 (4) ◽  
pp. 58-67 ◽  
Author(s):  
Serhiy Kozmenko ◽  
Oleksiy Plastun
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Asset Price ◽  
Jel Classification ◽  
Transmission Mechanism ◽  
Monetary Transmission ◽  
Tobin's Q ◽  
Monetary Transmission Mechanism ◽  
Viability Analysis ◽  
The Creation

Monetary transmission mechanism is a key element of the central bank’s activity, where the asset price channel plays an important role among others. Although in Ukraine it is not used. The viability analysis of this channel implementation in the monetary transmission mechanism of Ukraine is executed and the finding about current unavailability for this is made. However, the perspectivity and necessity of asset price channel implementation in the monetary transmission of Ukraine already today requires the creation of theoretic base appropriate for this. Therefore some propositions on the assets price channel implementation in the monetary transmission mechanism of Ukraine are offered. Keywords: Central Bank, the asset price channel, monetary transmission mechanism, monetary policy, Tobin’s q effect. JEL Classification: Е52, Е58

scholarly journals Innovation Mechanism in Monetary Policy Forecasting: Unification of all Macroeconomic Puzzles in SVAR Model

2020 ◽  
pp. 219-230
Author(s):  
Angela Kuznyetsova ◽  
Olha Klishchuk ◽  
Andrew Lisnyak ◽  
Atik Kerimov ◽  
Azer Babayev
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Real Exchange Rate ◽  
Foreign Exchange ◽  
Half Life ◽  
Transmission Mechanism ◽  
Monetary Transmission ◽  
The Real ◽  
Monetary Transmission Mechanism ◽  
The Impact

The article is devoted to developing a forecasting mechanism unifying all macroeconomic puzzles, which violate fundamental macroeconomic relationships among variables of the monetary transmission mechanism in Ukraine. The violations mentioned above caused by breaking one-law price (PPP puzzle), uncovered interest rates rule (UIP puzzle), plausible emergence of new sophisticated financial instruments, and causality of international risk-sharing conditions under the financial capital spillover. The authors calculated the residuals in the VAR model of monetary transmission mechanism (MTM) to analyze the correlations between shocks and disturbances in these variables. Furtherly these correlations were put in constructing the restriction matrix for building a structural vector autoregressive model. The correlations between shocks and disturbances were employed for estimating the impulse response functions used for determining the duration of half-life shocks for the real exchange rate. The obtained results allowed noticing that relationships between macroeconomic variables in the monetary transmission mechanism were not similar if considering the established foreign exchange arrangement. In particular, during 2007-2020, relationships among MTM variables were violated. Besides, the half-life duration of the real exchange rate was far longer. While in cases for Ukraine before switching to floating exchange rate regime and after it became less explicit and half-lives were shorter. The findings allowed confirming the impact of the currency arrangement switching on violation of traditional linkages between the variables of foreign exchange rate channel of MTM. Thus, it showed that during the fixed arrangement, absolutely all reactions were violated. Although after the introduction of a flexible exchange rate, the sign of REER correlation with foreign trade terms has changed to positive and more strengthened. Therefore, it has demonstrated a positive impact on the dynamics of real GDP and lower inflation. The findings of the current study could be used to improve existed methodical approaches for establishing structural constraints on variables responses to the shock of the exchange rate. The algorithm for designing optimal monetary policy strategies could take place in empirical data and forecasting exchange rate volatility. Keywords: PPP puzzle, UIP puzzle, MTM, financial innovations, REER, SVAR.

scholarly journals ALUR TRANSMISI DAN EFEKTIFITAS KEBIJAKAN MONETER GANDA DI INDONESIA

2012 ◽  
Vol 14 (3) ◽  
pp. 283-315
Author(s):  
Ascarya Ascarya
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Negative Impact ◽  
Transmission Mechanism ◽  
Monetary Transmission ◽  
Monetary Transmission Mechanism ◽  
Monetary System ◽  
Data Form ◽  
Pass Through ◽  
The Interest Rate

This study aims to investigate transmission mechanism of dual monetary system from conventional and Islamic policy rates to inflation and output using Granger and VAR methods on monthly Indonesian banking data form January 2003 to December 2009. The result shows that conventional transmission mechanismsfrom conventional policy rate are all linked tooutput and inflation, while Islamic policy rate are not linked to output and inflation.In addition, the interest rate, credit and conventional interbank rate shocks give negative and permanent impacts to inflation and output, while PLS, financing and Islamic interbank PLS, as well as SBIS(Central Bank Shariah Certificate) as Islamic policy rate shocks give positive and permanent impacts to inflation and output. SBI (Central Bank Certificate) as conventional policy givespositive impact to inflation and negative impact to output.Keywords: Monetary transmission mechanism, Interest rate pass through, Conventional Banking, Islamic BankingJEL Classification: E43, E52, G21, G28

Does bank capital affect the monetary policy transmission mechanism? A case study of Emerging Market Economies (EMEs)

2019 ◽  
Vol 06 (02) ◽  
pp. 1950019
Author(s):  
Zia Abbas ◽  
Syed Faizan Iftikhar ◽  
Shaista Alam
Keyword(s):  
Monetary Policy ◽  
Emerging Market ◽  
Generalized Method Of Moments ◽  
Transmission Mechanism ◽  
Bank Capital ◽  
Monetary Policy Transmission ◽  
Policy Transmission ◽  
Loan Supply ◽  
Monetary Policy Transmission Mechanism ◽  
The Impact

The objective of this study is to investigate the impact of bank capital on monetary policy transmission mechanism during the period from 2010 to 2016 for 20 Emerging Market Economics (EMEs) by using the two-step system generalized method of moments (GMM). The coefficient of excess capital in low-asset countries is found to be negative which reveals the importance of excess capital for the effectiveness of monetary transmission. However, the study could not find the significance of excess capital for high-asset countries as they may afford the risky way to generate their income by increasing the loan supply.

scholarly journals An Empirical Analysis of the Monetary Transmission Mechanism of Developing Economies: Evidence from Ghana

2018 ◽  
Vol 10 (4) ◽  
pp. 72
Author(s):  
Felix S. Nyumuah
Keyword(s):  
Developing Economies ◽  
Transmission Mechanism ◽  
Monetary Transmission ◽  
Clear Understanding ◽  
Monetary Transmission Mechanism ◽  
Developed Economies ◽  
Transmission Mechanisms ◽  
Long Run ◽  
Short Run ◽  
The Interest Rate

Policymakers need a clear understanding of their monetary transmission mechanisms for effective implementation of monetary policy. The aim of this study is to carry out an econometric analysis of the channels of monetary transmission mechanism in less developed economies so as to determine their effectiveness. The study uses Ghana macroeconomic data and finds the money supply channel to be the strongest in the long run while the exchange rate channel seems the strongest in transmitting monetary impulses in the short run. The interest rate and the bank credit to private sector channels emerge as very weak channels of monetary transmission.

What Do a Million Observations on Banks Say About the Transmission of Monetary Policy?

2000 ◽  
Vol 90 (3) ◽  
pp. 407-428 ◽  
Author(s):  
Anil K Kashyap ◽  
Jeremy C Stein
Keyword(s):  
Monetary Policy ◽  
Bank Lending ◽  
Monetary Transmission ◽  
Bank Lending Channel ◽  
Data Set ◽  
Balance Sheets ◽  
Lending Channel ◽  
The Impact ◽  
Transmission Of Monetary Policy ◽  
Quantitative Importance

We study the monetary-transmission mechanism with a data set that includes quarterly observations of every insured U.S. commercial bank from 1976 to 1993. We find that the impact of monetary policy on lending is stronger for banks with less liquid balance sheets—i.e., banks with lower ratios of securities to assets. Moreover, this pattern is largely attributable to the smaller banks, those in the bottom 95 percent of the size distribution. Our results support the existence of a “bank lending channel” of monetary transmission, though they do not allow us to make precise statements about its quantitative importance. (JEL E44, E52, G32)

scholarly journals MONETARY TRANSMISSION MECHANISM UNDER DUAL FINANCIAL SYSTEM IN INDONESIA: CREDIT-FINANCING CHANNEL

2019 ◽  
Vol 4 (2) ◽  
pp. 251-278
Author(s):  
Reza Jamilah Fikri
Keyword(s):  
Monetary Policy ◽  
Error Correction ◽  
Financial System ◽  
Error Correction Model ◽  
Transmission Mechanism ◽  
Monetary Transmission ◽  
Correction Model ◽  
Monetary Transmission Mechanism ◽  
Financing Channel

The presence of Islamic and conventional banking in the dual financial system of Indonesia equally hold the role as financial intermediator which theoretically banks collect fund from the debitors to be distributed to creditors. However, along with the changing of time there has been a development in the financial industry, when financial deregulation occurs, where the role of providing credit is not only owned by the banks but also other financial institutions. As the result, banks are no longer considered as the center of financial intermediation but could be replaced by other financial instruments. This study aims to reconsider the role of banking as financial intermediation in the monetary transmission mechanism using three methodoligal approaches which  are Vector Autoregression and Vector Error Correction Model (VAR-VECM), Error Correction Model (ECM), and Autoregressive Distributed Lag (ARDL). The long-term results of ECM and VECM estimations both show that credit and finacing channel are still relevant to be employed in the monetary transmission mechanism after the development of financial sector and the change of monetary policy, yet only have an impact to economy and do not give effect to inflation. While the result of ARDL estimation indicates that none of the variables affect the  monetary policy objectives which means that credit and financing channel are considered to be getting weaker in the monetary transmission mechanism.   Keywords : Monetary Transmission Mechanism, Credit Channel, Dual Financial System JEL Classification: E51, E52, E58

Absence of price pressures checks central bank hawks

2017 ◽  
Keyword(s):  
Monetary Policy ◽  
Regime Change ◽  
Emerging Market ◽  
Balance Sheet ◽  
Policy Regime ◽  
Bank Of Canada ◽  
Content Type ◽  
Full Swing ◽  
The Impact ◽  
First Time

Subject The impact of persistently low inflation on the pace of monetary policy 'regime change' in most countries. Significance The US Federal Reserve (Fed) published the minutes of its June 14 interest rate-setting meeting on July 5, showing increasing divisions over the pace of tightening as inflation eases. The Fed remains committed to starting to shrink its 4.5-trillion-dollar balance sheet this year, but there are disagreements over the timing of both the unwinding and further rate hikes. Subdued inflation is also constraining the ECB’s plans to withdraw its monetary stimulus, despite speculation about a ‘regime change’ in monetary policy driving the yield on the benchmark 10-year Bund to its highest point since January 2016. Impacts The yield on 10-year US Treasuries has risen since June but remains below its mid-March level when ‘reflation trading’ was in full swing. Emerging market bond funds are vulnerable to tighter policy and suffered outflows for the first time this year in the week ending July 5. The average world oil price has fallen by more than 10% since May to below 50 dollars a barrel amid concerns of a supply glut. The Bank of Canada may raise rates for the first time in nearly seven years on July 12, while the Fed chair will testify before Congress.

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