Keep your friends close and your enemies closer – the case of monetary policy and financial imbalances

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Małgorzata Iwanicz-Drozdowska ◽  
Łukasz Kurowski
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Financial Stability ◽  
Global Financial Crisis ◽  
Financial System ◽  
Main Tool ◽  
Monetary Policies ◽  
Low Interest Rates ◽  
The Stability ◽  
The Global Financial Crisis

Abstract The global financial crisis (GFC) has shown that monetary policy focused on a stable price level may negatively affect the stability of the financial system. Therefore, achieving price and financial stability using interest rates as the main tool is difficult. In this paper, we analyse how often monetary policy strengthened imbalances in the financial system in 20 countries from 1999Q1 to 2020Q2. To this end, we compare monetary policy stance with a novel financial imbalance index (FII). We find that monetary policy is material in aggravating financial imbalances mostly in Eurozone countries. We attribute this finding to the ECB’s “too loose, too long” monetary policy and to difficulties with applying single monetary policies in countries with different economic conditions and in different phases of credit and financial cycles. Our results point to a need for a proactive macroprudential policy in the environment of low interest rates.

scholarly journals Macroprudential Policy Versus Other Economic Policies

2021 ◽  
Vol 23 (2) ◽  
pp. 33-66
Author(s):  
Eva Lorenčič ◽  
◽  
Mejra Festić ◽  
Keyword(s):  
Financial Crises ◽  
Financial Stability ◽  
Global Financial Crisis ◽  
Financial System ◽  
Policy Instruments ◽  
Economic Policies ◽  
Macroprudential Policy ◽  
Descriptive Research ◽  
The Stability ◽  
The Global Financial Crisis

After the global financial crisis of 2007, macroprudential policy instruments have gained in recognition as a crucial tool for enhancing financial stability. Monetary policy, fiscal policy, and microprudential policy operate with a different toolkit and focus on achieving goals other than the stability of the financial system as a whole. In ligh of this, a fourth policy – namely macroprudential policy – is required to mitigate and prevent shocks that could destabilize the financial system as a whole and compromise financial stability. The aim of this paper is to contrast macroprudential policy with other economic policies and explain why other economic policies are unable to attain financial stability, which in turn justifies the need for a separate macroprudential policy, the ultimate goal whereof is precisely financial stability of the financial system as a whole. Our research results based on the descriptive research method indicate that, in order to prevent future financial crises, it is indispensable to combine both the microprudential and the macroprudential approach to financial stability. This is because the causes of the crises are often such that they cannot be prevented or mitigated by relying only on microprudential or only on macroprudential policy instruments.

scholarly journals Framework for Preserving Financial Stability in Montenegro

2014 ◽  
Vol 3 (1) ◽  
pp. 27-41 ◽  
Author(s):  
Radoje Žugić ◽  
Nikola Fabris
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Interest Rates ◽  
Financial Stability ◽  
Global Financial Crisis ◽  
Central Banks ◽  
Primary Objective ◽  
Policy Framework ◽  
Policy Objective ◽  
The Global Financial Crisis

Abstract The global financial crisis has challenged the traditional monetary policy framework of one instrument (short-term interest rates) - one objective (price stability). More and more central banks nowadays consider financial stability as a monetary policy objective, whereas the Central Bank of Montenegro is the only one that has identified financial stability as its primary objective. As this is a relatively new objective, all central banks endeavouring to attain this objective have been facing numerous difficulties. Therefore, the article analyzes some of these difficulties such as defining financial (in)stability, the selection of indicators, macroeconomic environment for preserving financial stability, and the like. The main objective of the paper is to analyse the framework for preserving financial stability in Montenegro and the challenges that the Central Bank of Montenegro has been facing in accomplishing this objective

Assessing the Inter Bank Disparity in Non-Performing Assets (NPAs) Management in Indian Public Sector Banks

GIS Business ◽  
2017 ◽  
Vol 12 (5) ◽  
pp. 49-59
Author(s):  
Dhananjaya K. ◽  
Krishna Raj
Keyword(s):  
Public Sector ◽  
Financial Stability ◽  
Banking Sector ◽  
Global Financial Crisis ◽  
Banking System ◽  
Financial System ◽  
Public Sector Banks ◽  
Recovery Mechanisms ◽  
The Stability ◽  
The Global Financial Crisis

In a bank-dominated financial system like India, the strength of the overall financial system or financial stability highly depends on the soundness of banks. Indian Banking system proved to be strong and resilient during the global financial crisis of 2008. But of late, there has been increased concerns about the continued deterioration in the stability of the banking sector. Financial stability report of RBI confesses to the fact that the risks to Indian banking sector have been increasing in the post-recession period particularly the risk of accumulating NPAs. This study attempts to analyse the trend in profitability, NPAs, and the effectiveness of recovery mechanisms and interbank disparity in NPA management with respect to public sector banks. We found that the profitability of public sector banks is declining in the post-crisis period and the amount of NPA has been on the rise. Further, the recovery mechanisms have proved to be ineffective in containing the problem of bad debts.

scholarly journals The Effect of Central Bank Communication on the Capital Buffer of Banks: Evidence from an Emerging Economy

2018 ◽  
Vol 3 (1) ◽  
pp. 1-26
Author(s):  
Rodolfo Tomás da Fonseca Nicolay ◽  
Claudio Oliveira de Moraes ◽  
Bruno Pires Tiberto
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Interest Rates ◽  
Financial Stability ◽  
Global Financial Crisis ◽  
Regulatory Capital ◽  
Communication Signals ◽  
Central Bank Communication ◽  
The Interest Rate ◽  
The Global Financial Crisis

The global financial crisis has revealed that the coordination between monetary policy and financial stability should be part of economic policy. This study examines the effects of monetary policy on the capital buffer (financial stability proxy) in the Brazilian economy and, in particular, how communication about both monetary policy and normative macroprudential policy affect the capital buffer maintained by banks. The study presents three main results: i) banks react strongly to monetary policy changes by increasing (reducing) the capital buffer in response to an increase (decrease) in the interest rate; ii) banks increase (decrease) the capital buffer when the central bank monetary policy communication signals an increase (decrease) in interest rates; and iii) banks use the capital buffer to accommodate the new measures of regulatory capital: the announcement of restrictive (liberalizing) capital measures reduces (increases) the capital buffer.

Conclusion

2020 ◽  
pp. 601-609
Author(s):  
Ranald C. Michie
Keyword(s):  
Financial Crisis ◽  
Interest Rates ◽  
Global Financial Crisis ◽  
Low Cost ◽  
Financial System ◽  
Central Banks ◽  
Financial Instruments ◽  
The Stability ◽  
The Global Financial Crisis

The Global Financial Crisis that took place in 2007–9 was the product of both long-term trends and a specific set of circumstances. In particular, the thirty years preceding that crisis had witnessed a refashioning of the global financial system, which was, itself, a reaction to that which had emerged after the Second World War. Over those thirty years competitive markets gradually replaced governments and central banks in determining the volume and direction of international financial flows. The interaction within and between economies took place on a daily basis through the markets for short-term credit, long-term loans, foreign exchange, securities, and a growing array of ever more complex financial instruments that allowed risks to be hedged whether in terms of interest rates, currencies, exposure to counterparties, or other variables. This was a period of great innovation as new financial instruments were created in order to match the needs of lenders for high returns, certainty, and stability and those of borrowers for low cost finance and flexibility in terms of the amount, currency, and timing of repayment. Nevertheless, governments remained heavily involved through the role played by regulators and central banks, generating confidence in the stability of the new financial system. That confidence was destroyed by the Global Financial Crisis of 2008 and had not been rebuilt by 2020.

A SAFE MONETARY CENTRAL BANKING POLICY AS A SIGNIFICANT INSTRUMENT FOR LIQUIDITY MAINTENANCE IN THE FINANCIAL SYSTEM

2018 ◽  
Vol 8 (2) ◽  
pp. 123-125
Author(s):  
Dariusz Prokopowicz
Keyword(s):  
Monetary Policy ◽  
Financial Crisis ◽  
Interest Rates ◽  
Global Financial Crisis ◽  
Financial System ◽  
State Intervention ◽  
Developed Countries ◽  
Central Banking ◽  
Financial Crisis Of 2008 ◽  
The Global Financial Crisis

Currently, it is assumed that the global financial crisis of 2008 was effectively mastered and averted several years ago, but its sources have not been fully eliminated. The anti-crisis model of state intervention that was applied during the global financial crisis of 2008 was a modified Keynsian formula known from the 1930s, adapted to the realities of contemporary national economies. The main instrument of anti-crisis policy was the significant development of a mild monetary policy and interventionist measures aimed at reducing the risk of bankruptcy of enterprises and banking entities and stopping the decline in lending in banking systems. In developed countries, anti-crisis interventionist assistance programs for the financial system and pro-active interventionist measures were activated in order to stimulate significantly weakened economic growth. As part of pro-development state intervention activities, the Federal Reserve Bank applied a low monetary policy of low interest rates and a program for activating lending and maintaining liquidity in the financial system by financing the purchase from commercial banks of the most endangered assets. A few years later, the European Central Bank applied the same activities of activation monetary policy.

Thrift and Credit Cooperative Lending Channels under Prolonged Low-Interest Rates: The Case of Thailand

2020 ◽  
Vol 11 (1) ◽  
pp. 1-1
Author(s):  
Kovit Charnvitayapong
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Fixed Effects ◽  
Global Financial Crisis ◽  
Bank Lending ◽  
The United States ◽  
Credit Union ◽  
The European Union ◽  
Low Interest Rates ◽  
The Global Financial Crisis

Since the global financial crisis of 2007–08, the United States, Japan, and the European Union (EU) have heavily stimulated their economies with expansionary monetary policy. World finance has been affected by this policy conduct. Interest rates in most open economies were pushed to very low levels and have remained low ever since. Nevertheless, monetary stimulation has not improved the economic situation to a satisfactory level as of the end of 2019. Several studies such as Claudio Borio and Boris Hofmann (2017) and Nasha Ananchotikul and Dulani Seneviratne (2015) attempted to examine the inefficiency of expansionary monetary policy by looking at bank lending channels. Koot and Walker (1980) studied monetary policy effectiveness through credit union lending channels. They found that at first, credit unions responded well to expansionary monetary policy, but after prolonged easy money policy, the response died down. Keywords: Fixed effects, Lending channel, Prolonged low interest rates, Thrift and credit cooperatives (TCCs), Transmission mechanism.

Conclusions

2017 ◽  
Author(s):  
Yilmaz Akyüz
Keyword(s):  
Monetary Policy ◽  
Financial Crisis ◽  
Interest Rates ◽  
Global Financial Crisis ◽  
Developing Economies ◽  
Quantitative Easing ◽  
Unconventional Monetary Policy ◽  
Advanced Economies ◽  
The Global Financial Crisis ◽  
Zero Bound

The preceding chapters have examined the deepened integration of emerging and developing economies (EDEs) into the international financial system in the new millennium and their changing vulnerabilities to external financial shocks. They have discussed the role that policies in advanced economies played in this process, including those that culminated in the global financial crisis and the unconventional monetary policy of zero-bound interest rates and quantitative easing adopted in response to the crisis, as well as policies in EDEs themselves....

scholarly journals Confidence in future monetary policy as a way to overcome the liquidity trap

2019 ◽  
Vol 5 (2) ◽  
pp. 117-135
Author(s):  
Olga Kuznetsova ◽  
Sergey Merzlyakov ◽  
Sergey Pekarski
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Large Scale ◽  
Global Financial Crisis ◽  
Time Consistency ◽  
Central Banks ◽  
Time Inconsistency ◽  
Liquidity Trap ◽  
Developed Economies ◽  
The Global Financial Crisis

The global financial crisis of 2007–2009 has changed the landscape for monetary policy. Many central banks in developed economies had to employ various unconventional policy tools to overcome a liquidity trap. These included large-scale asset purchase programs, forward guidance and negative interest rate policies. While recently, some central banks were able to return to conventional monetary policy, for many countries the effectiveness of unconventional policies remains an issue. In this paper we assess diverse practices of unconventional monetary policy with a particular focus on expectations and time consistency. The principal aspect of successful policy in terms of overcoming a liquidity trap is the confidence that interest rates will remain low for a prolonged period. However, forming such expectations faces the problem of time inconsistency of optimal policy. We discuss some directions to solve this problem.

scholarly journals ECB policy responses between 2007 and 2014: A chronological analysis and an assessment of their effects

2016 ◽  
Vol 63 (4) ◽  
pp. 455-473 ◽  
Author(s):  
Carlos Rodríguez ◽  
Carlos Carrasco
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Interest Rates ◽  
Sovereign Debt ◽  
Global Financial Crisis ◽  
Debt Crisis ◽  
Lender Of Last Resort ◽  
Policy Responses ◽  
The One ◽  
The Global Financial Crisis

The paper analyses the monetary policy responses of the European Central Bank (ECB) to the global financial crisis and the European sovereign debt crisis. Our goals are on the one hand to explain chronologically the main measures in conventional and unconventional policies adopted by the ECB and on the other hand to analyse their effects on key interest rates, monetary aggregates and the money multiplier. The assessment is that the ECB?s monetary policy responses to the crisis have been ?too little, too late?, constrained by the institutional framework, which prevents the ECB from acting as a true central bank with the role of lender of last resort.

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