Interest Rate Pass-Through and Bank Risk-Taking under Negative-Rate Policies with Tiered Remuneration of Central Bank Reserves

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

Inside the Bank Box

The Oxford Handbook of the Economics of Central Banking ◽

10.1093/oxfordhb/9780190626198.013.12 ◽

2019 ◽

pp. 368-405

Author(s):

Leonardo Gambacorta ◽

Paul Mizen

Keyword(s):

Interest Rate ◽

Central Bank ◽

Interest Rates ◽

Adjustment Costs ◽

Bank Lending ◽

Bank Capital ◽

Bank Lending Channel ◽

Lending Channel ◽

Pass Through ◽

The Interest Rate

Central bank policy operates first through financial markets and then through banks as they adjust their interest rates. This chapter discusses the transmission of policy in this first step of the monetary transmission mechanism, known as interest-rate pass-through. Historically, the focus of attention has been the interest-rate channel. We show the origins of this channel via a microfounded model of interest-rate setting by deposit-taking institutions that are Cournot oligopolists facing adjustment costs. We then examine other channels such as the bank lending channel and the bank capital channel and the role of central bank communications, signaling, and forward guidance over future interest rates. Each is shown to influence the setting of current short-term interest rates. The chapter closes with some issues for the future of pass-through in the transmission process.

ROBUST MONETARY POLICY IN A NEW KEYNESIAN MODEL WITH IMPERFECT INTEREST RATE PASS-THROUGH

Macroeconomic Dynamics ◽

10.1017/s136510051400100x ◽

2015 ◽

Vol 20 (6) ◽

pp. 1504-1526 ◽

Cited By ~ 6

Author(s):

Rafael Gerke ◽

Felix Hammermann

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Central Bank ◽

Model Misspecification ◽

New Keynesian ◽

Optimal Monetary Policy ◽

Loan Rate ◽

Keynesian Model ◽

Pass Through ◽

Policy Shifts

We use robust control to study how a central bank in an economy with imperfect interest rate pass-through conducts monetary policy if it fears that its model could be misspecified. We find that, first, whether robust optimal monetary policy under commitment responds more cautiously or more aggressively depends crucially on the source of shock. Imperfect pass-through amplifies the robust policy. Second, if the central bank is concerned about uncertainty, it dampens volatility in the inflation rate preemptively but accepts higher volatility in the output gap and loan rate. However, for highly sticky loan rates, insurance against model misspecification becomes particularly pricy. Third, if the central bank fears uncertainty only in the IS equation or the loan rate equation, the robust policy shifts its concern for stabilization away from inflation.

The effect of negative policy rates on the interest-rate pass-through mechanism in the eurozone

Review of Keynesian Economics ◽

10.4337/roke.2019.02.09 ◽

2019 ◽

Vol 7 (2) ◽

pp. 247-262 ◽

Cited By ~ 2

Author(s):

Yannis Panagopoulos ◽

Ekaterini Tsouma

Keyword(s):

Interest Rate ◽

Central Bank ◽

Interest Rates ◽

Money Market ◽

Negative Interest Rates ◽

Time Period ◽

Pass Through ◽

The Interest Rate ◽

The Impact ◽

The Relationship

This paper examines the impact of the June 2014 switch to negative interest rates (NIRs) by the European Central Bank (ECB) on the operation of the eurozone interest-rate pass-through (IRPT) mechanism. We focus on the relationship between major central-bank policy rates and selected money-market rates. That link is identified as the first stage of the IRPT mechanism and its dynamics are analysed using Granger causality and cointegration techniques for the time period January 2000–June 2017. Our empirical findings indicate a feedback relationship between the ECB policy and the money-market rates in the period prior to June 2014, but that relationship is non-operative when considering only the period of NIRs.

LOLR and Central Bank Risk-Taking

Monetary Policy Operations and the Financial System ◽

10.1093/acprof:oso/9780198716907.003.0016 ◽

2014 ◽

pp. 248-263

Author(s):

Ulrich Bindseil

Keyword(s):

Central Bank ◽

Risk Taking ◽

Bank Risk

Interest Rate Pass-through in Pakistan: Evidence from Transfer Function Approach

The Pakistan Development Review ◽

10.30541/v44i4iipp.975-1001 ◽

2005 ◽

Vol 44 (4II) ◽

pp. 975-1001

Author(s):

Abdul Qayyum ◽

Sajawal Khan ◽

Idrees Khawaja

Keyword(s):

Interest Rate ◽

Central Bank ◽

Cost Of Capital ◽

Real Income ◽

Treasury Bills ◽

Deposit Rate ◽

Market Rate ◽

Lending Rate ◽

Pass Through ◽

The Cost

The transmission of monetary policy through the interest rate mechanism has been thoroughly discussed in economic literature for quite some time. The traditional view is that, the change in real interest rate influences the cost of capital. The change in cost of capital affects the magnitude of investment and consumption and therefore the level of, real income and prices [Mishkin (1995)].1 Operationally the State bank of Pakistan, influences the yield on treasury bills (T-bills). This is done on the assumption that the yield on treasury bills influences other interest rates like the Money Market rate (Call money rate), banks’ deposit and banks’ Lending rates. The change in these rates influences the cost of capital and thus level of investment and consumption in the economy. Given this, the central bank can influence the yield on T-bills to influence the level of real income and the level of prices. The foregoing explanation of the monetary transmission mechanism makes it clear that if the changes in yield on the T-Bill rate are not passed on to the Call money rate and the bank deposit and the Lending rate then it becomes difficult for the central bank to use the channels that involve interest rate, for influencing the level of output and prices. Hence it is important to test whether the changes in the treasury bill rate are passed on to money market rate, bank deposit rate and the bank lending rate and if yes at what speed and to what extent. Therefore this study examines the pass-through of the changes in Treasury bill rate to Call Money rate, Banks’ deposit rate and Banks’ Lending rate.

Loan Loss Provision and Risk-Taking Behavior of Commercial Banks in Pakistan: A Dynamic GMM Approach

Sustainability ◽

10.3390/su11195209 ◽

2019 ◽

Vol 11 (19) ◽

pp. 5209 ◽

Cited By ~ 1

Author(s):

Changjun Zheng ◽

Shumaila Meer Perhiar ◽

Naeem Gul Gilal ◽

Faheem Gul Gilal

Keyword(s):

Interest Rate ◽

Credit Risk ◽

Risk Taking ◽

Commercial Banks ◽

Capital Adequacy ◽

Bank Risk ◽

Loan Loss ◽

Loan Loss Provision ◽

Capital Adequacy Ratio ◽

Risk Taking Behavior

The paper analyzes the determinants of the loan loss provision (LLP) of 22 commercial banks in Pakistan from 2010 to 2017. The motive of the research is that LLP is a measure of credit risk as a proxy for bank risk-taking behavior profits and banks’ sustainability. Especially after the occurrence of a global financial crisis. The quantitative research method of data collection from Bureau Van Dijk’s BankFocus portal and the World Bank’s World Development Indicators. Other than considering specific bank variables such as capital adequacy ratio, return on average equity, and government securities, the effects of macroeconomic variable inflation and lending interest rates are explicitly studied. The model of pooled ordinary least squares (POLS), fixed effect (FE), panel corrected standard error (PCSE), and panel data estimation in the form of a general method of moments (GMM) two-step system is used to find the risk-taking behavior of banks in Pakistan. The results obtained by the use of inflation (INF) as an instrumental variable of LLP are highly dependable with a negative impact on loan loss provision. Lending interest rate (LIR) has a positive and significant relationship with LLP and contribute in the study of macroeconomic variables for bank risk-taking, excessive amount of interest rate was not beneficial for banks to earn profits especially during the economic crises. Return on average equity (ROAE) significantly moderates LLP with a negative interaction and helped the bank with profitable operations and save bank from solvency. Capital adequacy ratio (CAR) and government securities (GOV) are insignificant to LLP. The result is robust by measure of endogeneity, and highlights the important role of commercial banks’ sustainability to explain risk-taking behavior in Pakistan with the intention to increase profits after the occurrence of financial crises. The study further contributes to future research on managerial policy and decision making. In summary, the paper on loan loss provision has the capacity to forecast commercial banks’ credit risk for risk-taking in an emerging country.

Interest on reserves, helicopter money and new monetary policy

PLoS ONE ◽

10.1371/journal.pone.0253956 ◽

2021 ◽

Vol 16 (7) ◽

pp. e0253956

Author(s):

Duong Ngotran

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Central Bank ◽

Money Supply ◽

Taylor Rule ◽

Policy Framework ◽

Nonlinear Dynamic Model ◽

Demand Deposits ◽

Currency Demand ◽

Bank Reserves

We build a nonlinear dynamic model with currency, demand deposits and bank reserves. Monetary base is controlled by central bank, while money supply is determined by the interactions between central bank, commercial banks and public. In economic crises when banks cut loans, monetary policy following a Taylor rule is not efficient. Negative interest on reserves or forward guidance is effective, but deflation is still likely to be persistent. If central bank simultaneously targets both interest rate and money supply by a Taylor rule and a Friedman’s k-percent rule, inflation and output are stabilized. An interest rate rule policy is just a subset of a more general monetary policy framework in which central bank can move interest rate and money supply in every direction.

Interest Rate Pass-Through: Empirical Study Towards Monetary Policy Transmission Effectiveness in Indonesia

AFEBI Economic and Finance Review ◽

10.47312/aefr.v2i02.92 ◽

2018 ◽

Vol 2 (02) ◽

pp. 14

Author(s):

Heni Hasanah

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Central Bank ◽

Monetary Policy Transmission ◽

Deposit Rate ◽

Policy Transmission ◽

Lending Rate ◽

Pass Through ◽

Effectiveness Of Monetary Policy

This research aims to measure the effectiveness of monetary policy transmission, especially through the interest rate channel. The analysis was conducted on the first stage of its transmission, namely Interest Rate Pass-through (IRPT). IRPT refers to condition in which retail interest rate (both deposit and lending rate) responds to changes in policy rate of central bank. IRPT was measured using Error Correction Model (ECM) for time series data in the period of January 2010 - December 2015. The results of this study indicated that degree of long term and short term IRPT is incomplete for deposit and lending rate. In addition, IRPT for deposit rate is higher than lending rate, but the adjustment process of lending rate faster than deposit rate. Finally, model that include other variables (macroeconomic and internal banking indicator) generate long term IRPT which is smaller than the standard model. This results implies that the Central Bank, the FSA, and government needs to pay attention to the stability of the other variables that may interfere or reduce the effectiveness of monetary policy through the interest channel. JEL Classification: E42, E43, E52Keywords: Deposit rate, ECM, IRPT, Lending Rate, Policy Rate