Interest rate transmission mechanism of monetary policy in the selected EMU candidate countries

The stable macroeconomic environment, as one of the primary objectives of the Visegrad countries in the 1990s, was partially supported by the exchange rate policy. Fixed exchange rate systems within gradually widen bands (Czech Republic, Slovak Republic) and crawling peg system (Hungary, Poland) were replaced by the managed floating in the Czech Republic (May 1997), Poland (April 2000), Slovak Republic (October 1998) and fixed exchange rate to euro in Hungary (January 2000) with broad band (October 2001). Higher macroeconomic and banking sector stability allowed countries from the Visegrad group to implement the monetary policy strategy based on the interest rate transmission mechanism. Continuous harmonization of the monetary policy framework (with the monetary policy of the ECB) and the increasing sensitivity of the economy agents to the interest rates changes allowed the central banks from the Visegrad countries to implement monetary policy strategy based on the key interest rates determination. In the paper we analyze the impact of the central banks' monetary policy in the Visegrad countries on the selected macroeconomic variables in the period 1999-2008 implementing SVAR (structural vector autoregression) approach. We expect that higher sensitivity of domestic variables to interest rates shocks can be interpreted as a convergence of monetary policies in candidate countries towards the ECB's monetary policy.

Download Full-text

Monetary Policy Transmission under Inflation Targeting in Mongolia

Research in Applied Economics ◽

10.5296/rae.v10i2.12950 ◽

2018 ◽

Vol 10 (2) ◽

pp. 1 ◽

Cited By ~ 2

Author(s):

Erdenechuluun Khishigjargal

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Interest Rate ◽

Inflation Targeting ◽

Transmission Mechanism ◽

Monetary Policy Transmission ◽

Rate Transmission ◽

Policy Transmission ◽

Monetary Policy Transmission Mechanism ◽

The Interest Rate

This article aims to examine the monetary policy transmission mechanism under the inflation targeting in Mongolia for the period from June 2007 to August 2017 by applying a recursive vector-autoregressive model. Under the inflation targeting framework, the Bank of Mongolia has established the interest rate corridor since February 2013 for the purpose of improving the interest rate channel of the transmission mechanism. The study then contributes to the literature by assessing whether the interest rate corridor has really improved the policy rate transmission effects by comparing the effects between the pre-corridor period (from June 2007 to February 2013) and the post-corridor period (from March 2013 to August 2017). The main findings of this study are as follows. First, in the post-corridor period the effect of policy rate is clearly transmitted to the lending rate and inflation rate through the responses of interbank market rate, whereas the pre-corridor period does not represent any significant interest rate transmission effects. This outcomes implies that the interest rate corridor has contributed to enhancing monetary policy transmission mechanism. Second, the responses of exchange rate and industrial production to the policy rate shock are not significant even after the adoption of the interest rate corridor. This insignificance might come from the stick policy rate to stabilize the exchange rate, so-called a “fear of floating”.

Download Full-text

Monetary policy and market interest rates: literature review using text analysis

International Journal of Development Issues ◽

10.1108/ijdi-02-2021-0049 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Elena Fedorova ◽

Elena Meshkova

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Interest Rates ◽

Term Structure ◽

Text Analysis ◽

Financial Stability ◽

Central Banks ◽

Interest Rate Risk ◽

Transmission Mechanism ◽

Content Type

Purpose This paper aims to examine the relationship between monetary policy and market interest rates. This paper examines the efficiency of interest rate channel used in monetary regulation as well as implementation of monetary policy under low interest rates. This paper examines and reviews the scientific literature published over the past 30 years to determine primary research areas, to summarize their results and to identify appropriate measures of monetary policy to be used in practice in changing economic environment. Design/methodology/approach This paper reviews 94 studies focused on the relationship between monetary policy and market interest rates in terms of meeting the goals of macroeconomic regulation. The articles are selected on the basis of Scopus citation and bibliometric analysis. A major feature of this paper is the use of text analysis (data preparation, frequency of terms and collocations use, examination of relationships between terms, use of principal component analysis to determine research thematic areas). Using the method of principal component analysis while studying abstracts this paper reveals thematic areas of the research. Thus, the conducted text analysis provides unbiased results. Findings First, this paper examines the whole complex of relationships between monetary policy of central banks and market interest rates. Second, this research reviews a wide range of literature including recent studies focused on specific features of monetary policy under low and negative rates. Third, this study identifies and summarizes the thematic areas of all the researches using text analysis (transmission mechanism of monetary policy, efficiency of zero interest rate policy, monetary policy and term structure of interest rates, monetary policy and interest rate risk of banks, monetary policy of central banks and financial stability). Finally, this paper presents the most important findings of the studied articles related to the current situation and trends on the financial market as well as further research opportunities. This paper finds the principal results of studies on significant issues of monetary policy in terms of its efficiency under low interest rates, influence of its instruments on term structure of interest rates and role of banking sector in implementation of transmission mechanism of monetary policy. Research limitations/implications The limitation of the review is examining articles for the study period of 30 years. Practical implications Central banks of emerging economies should apply the instruments and results of the countries' monetary policies reviewed in this paper. Using text analysis this paper reveals the main thematic areas and summarizes findings of the articles under study. The analysis allows presenting the main ideas related to current economic situation. Social implications The findings are of great value for adjusting the monetary policy of central banks. Also, these are important for people because these show the significant role of monetary policy for the economic growth. Originality/value Using text analysis this paper reveals the main thematic areas (transmission mechanism of monetary policy, efficiency of zero interest rate policy, monetary policy and term structure of interest rates, monetary policy and interest rate risk of banks, monetary policy of central banks and financial stability) and summarizes findings of the articles under study. The analysis allows defining the current ideas relevant to the monetary policy of developing countries. It is important for central banks because it examines the monetary policy problems and proposes optimal solutions.

Download Full-text

FOREIGN EXPERIENCE OF REFINANCING OF COMMERCIAL BANKS

Market Infrastructure ◽

10.32843/infrastruct52-29 ◽

2021 ◽

Author(s):

Viktoriia Yankovska ◽

Olga Telepneva ◽

Nadiia Spivakova

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Interest Rate ◽

Interest Rates ◽

Commercial Banks ◽

Central Banks ◽

Business Activity ◽

Foreign Experience ◽

National Bank ◽

The Interest Rate

The article presents a morphological assessment of the concept of "refinancing of commercial banks" based on the legal framework and definitions of well-known world and Ukrainian scientists and economists. There given a definition of the concept of "refinancing" which means that refinancing is a comprehensive system of monetary policy implementation that is conducted in favor of commercial banks for the recovery of bank resources through such instruments as credit auction, bills of exchange, securities collateral. The refinancing policy of the central banks is different in each country but there are some exceptions to its management. The central bank with a change in the interest rate can influence the rates on commercial banks loans, the level of inflation in the country and the exchange rate of the national currency that is to implement monetary policy. Lowering of interest rates entails increased business activity and rising inflation while rising interest rates have seen a decline in business activity, falling inflation and strengthening the national currency. National banks regulate the domestic exchange rate at the interest rate and the economy as a whole. The formation of the refinancing rate by the National Bank of Ukraine requires constant monitoring that is given the economic situation of the state. Foreign experience in forming the refinancing rate and using a successful mechanism is an important element in building an effective banking system. The foreign experience of the refinancing rate formation by the central banks of the world was monitored. Particular attention is paid to the analysis of the dynamics of the refinancing rate of countries such as Japan, the United States, Australia, Great Britain and China. The main priorities that the central bank should be guided by when setting the refinancing rate have been identified. Changes in the discount rate of the National Bank of Ukraine for the last seven years and the factors influencing the decision to change the interest rate are analyzed. The priority tasks to be set by the Government of Ukraine is to stabilize the financial condition of the country have been identified. Ways to improve the mechanism of refinancing of commercial banks in the economic conditions of Ukraine are outlined.

Download Full-text

Sukuk and monetary policy transmission in Indonesia: the role of asset price and exchange rate channels

Journal of Islamic Accounting and Business Research ◽

10.1108/jiabr-09-2019-0177 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Suriani Suriani ◽

M. Shabri Abd. Majid ◽

Raja Masbar ◽

Nazaruddin A. Wahid ◽

Abdul Ghafar Ismail

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Interest Rates ◽

Asset Price ◽

Transmission Mechanism ◽

Monetary Policy Transmission ◽

Content Type ◽

Policy Transmission ◽

Monetary Policy Transmission Mechanism

Purpose The purpose of this study is to empirically analyze the role of sukuk in the monetary policy transmission mechanism through the asset price and exchange rate channels in the Indonesian economy. Design/methodology/approach Using the monthly data from January 2003 to November 2017, this study uses a multivariate vector error correction model causality framework. To examine the role of sukuk in the monetary policy transmission mechanism through the asset price channel, this study uses the variables of consumption, inflation, interest rates, economic growth and the composite stock price index. Meanwhile, to examine the role of sukuk in the monetary policy transmission mechanism through the exchange rate channel, this study used variables of inflation, interest rates, economic growth, foreign investment and exchange rate. Findings This study documented that sukuk has no causal relationship with inflation through asset price and exchange rate channels. Nevertheless, sukuk has a bidirectional causal relationship with economic growth through asset price and exchange rate channels. Sukuk is also documented to have a causal relationship with monetary policy variables of interest rate and stock prices through asset price and exchange rate channels. Finally, a unidirectional causality is recorded running from the exchange rate to sukuk in the exchange rate channel. Research limitations/implications The finding of independence of the sukuk market from interest rates provides evidence that the trading of the sukuk in Indonesia has been in harmony with the Islamic tenets. Practical implications The relevant Indonesian authorities need to enhance both domestic and global sukuk markets as part of efforts to promote the sustainability of Islamic capital market development in Indonesia. Originality/value To the best of the authors’ knowledge, this study is among the first attempts to empirically investigate the role of sukuk in monetary policy transmission through asset price and exchange rate channels in the context of the Indonesian economy.

Download Full-text

Negative Interest Rate Risk. Atavism or Normalization of Central Banks’ Monetary Policy

Acta Universitatis Lodziensis Folia oeconomica ◽

10.18778/0208-6018.342.05 ◽

2019 ◽

Vol 3 (342) ◽

pp. 89-116

Author(s):

Irena Pyka ◽

Aleksandra Nocoń

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Interest Rates ◽

Financial Stability ◽

Global Financial Crisis ◽

Central Banks ◽

Interest Rate Risk ◽

Interest Rate Policy ◽

Rate Policy ◽

Negative Interest Rate Policy

In the face of the global financial crisis, central banks have used unconventional monetary policy instruments. Firstly, they implemented the interest rate policy, lowering base interest rates to a very low (almost zero) level. However, in the following years they did not undertake normalizing activities. The macroeconomic environment required further initiatives. For the first time in history, central banks have adopted Negative Interest Rate Policy (NIRP). The main aim of the study is to explore the risk accompanying the negative interest rate policy, aiming at identifying channels and consequences of its impact on the economy. The study verifies the research hypothesis stating that the risk of negative interest rates, so far unrecognized in Theory of Interest Rate, is a consequence of low effectiveness of monetary policy normalization and may adopt systemic nature, by influencing – through different channels – the financial stability and growth dynamics of the modern world economy.

Download Full-text

Komparasi Jalur Moneter untuk Stabilitas Harga Dalam Kerangka Inflation Targeting Framework (Studi kasus pada interest rate, exchange rate dan credit channel)

Jurnal Ekonomi Bisnis dan Kewirausahaan ◽

10.26418/jebik.v8i3.34350 ◽

2019 ◽

Vol 8 (3) ◽

pp. 181

Author(s):

Setyo Tri Wahyudi ◽

Rinny Apriliany Zakaria ◽

Nurul Badriyah

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Interest Rate ◽

Interest Rates ◽

Error Correction ◽

Inflation Targeting ◽

Correction Term ◽

Secondary Data ◽

Credit Channel ◽

The Right

The monetary policy transmission mechanism has many ways in influencing inflation. This method became known as the monetary path. The use of appropriate channels in monetary policy will affect whether or not the objectives of the monetary policy are achieved. This study aims to determine which monetary path is appropriate for Indonesia, which is a developing country with an open economic system. The data used are secondary data taken from Bank Indonesia for the period 2005 to 2016. The research variables include inflation, BI-rate, credit interest rates (SBB), gross domestic product (GDP), exchange rate, bank reserve (BBR), and the amount of credit extended. This study focuses on the path of interest rates, exchange rates and bank credit using the Error Correction Model (ECM). The results of this study indicate that the right monetary path for Indonesia is the credit channel. This is because the value of the Error Correction Term (ECT) coefficient on the ECM model shows that the coefficient of the credit channel is smaller than the interest rate and exchange rate channel, which means that the imbalance that occurs can be resolved more quickly with the credit channel.

Download Full-text

Interest rates and prices causality in the Czech Republic – Granger approach

Agricultural Economics (Zemědělská ekonomika) ◽

10.17221/2/2009-agricecon ◽

2009 ◽

Vol 55 (No. 7) ◽

pp. 347-356 ◽

Cited By ~ 1

Author(s):

J. Poměnková ◽

S. Kapounek

Keyword(s):

Monetary Policy ◽

Czech Republic ◽

Interest Rate ◽

Interest Rates ◽

Inflation Rate ◽

Aggregate Demand ◽

Real Economy ◽

Investment Activity ◽

The Czech Republic ◽

The Interest Rate

Monetary policy analysis concerns both the assumptions of the transmission mechanism and the direction of causality between the nominal (i.e. the money) and real economy. The traditional channel of monetary policy implementation works via the interest rate changes and their impact on the investment activity and the aggregate demand. Altering the relationship between the aggregate demand and supply then impacts the general price level and hence inflation. Alternatively, the Post-Keynesians postulate money as a residual. In their approach, banks credit in response to the movements in investment activities and demand for money. In this paper, the authors use the VAR (i.e. the vector autoregressive) approach applied to the “Taylor Rule” concept to identify the mechanism and impact of the monetary policy in the small open post-transformation economy of the Czech Republic. The causality (in the Granger sense) between the interest rate and prices in the Czech Republic is then identified. The two alternative modelling approaches are tested. First, there is the standard VAR analysis with the lagged values of interest rate, inflation and economic growth as explanatory variables. This model shows one way causality (in the Granger sense) between the inflation rate and interest rate (i.e. the inflation rate is (Granger) caused by the lagged interest rate). Secondly, the lead (instead of lagged) values of the interest rate, inflation rate and real exchange rate are used. This estimate shows one way causality between the inflation rate and interest rate in the sense that interest rate is caused by the lead (i.e. the expected future) inflation rate. The assumptions based on money as a residual of the economic process were rejected in both models.

Download Full-text

A Neowicksellian in a New Classical World: The Methodology of Michael Woodford's Interest and Prices

Journal of the History of Economic Thought ◽

10.1080/10427710600676322 ◽

2006 ◽

Vol 28 (2) ◽

pp. 143-149 ◽

Cited By ~ 17

Author(s):

Kevin D. Hoover

Keyword(s):

Monetary Policy ◽

Interest Rate ◽

Financial Markets ◽

Interest Rates ◽

Theoretical Orientation ◽

Central Banks ◽

Point Of View ◽

Monetary Aggregates ◽

Classical World ◽

Interest Rate Rule

Michael Woodford's Interest and Prices: Foundations of a Theory of Monetary Policy (2003) is an important book. Woodford's title is, of course, a conscious revival of Wicksell's own famous work and it points to an effort to recast the analysis of monetary policy as centered on interest rates. I believe that Woodford's theoretical orientation is essentially correct. In repairing to Wicksell, he places the monetary aggregates into a more reasonable perspective, correcting the distortions of the monetarist and Keynesian diversions with respect to money. My money is, so to speak, where my mouth is: My own textbook-in-progress is also based around an IS/interest-rate rule/AS model, in which financial markets cleared by price rather than the LM curve are emphasized. Such an approach, as Woodford notes, has become standard in central banks, but has not yet captured either core undergraduate or graduate textbooks and instruction. My task here, however, was not to praise Woodford's economics nor to trace or evaluate its Wicksellian routes, but to consider Interest and Prices from a methodological point of view.

Download Full-text

Are Central Banks In CEE Countries Concerned About The Burden Of Public Debt?

Comparative Economic Research ◽

10.1515/cer-2017-0003 ◽

2017 ◽

Vol 20 (1) ◽

pp. 35-51 ◽

Cited By ~ 1

Author(s):

Joanna Mackiewicz-Łyziak

Keyword(s):

Monetary Policy ◽

Czech Republic ◽

Interest Rates ◽

Public Debt ◽

Central Banks ◽

Output Gap ◽

Markov Switching Model ◽

The Czech Republic ◽

Policy Regimes ◽

Switching Model

The aim of this study is to analyze the monetary policy rules in the Czech Republic, Hungary and Poland, with public debt as an additional explanatory variable. We estimate linear rules by the GMM estimation and non-linear rules, using the Markov-switching model. Our findings suggest that in the Czech Republic and Poland the monetary authorities respond to growing public debt by lowering interest rates, while in Hungary the opposite may be observed. Moreover, we distinguish between passive and active monetary policy regimes and find that the degree of interest rate smoothing is lower and the response of the central banks to inflation and/or output gap is stronger in an active regime. In the passive regime, the output gap seems to be statistically insignificant.

Download Full-text

PERBANDINGAN EFEKTIVITAS MEKANISME TRANSMISI KEBIJAKAN MONETER ANTARA JALUR SUKU BUNGA DENGAN JALUR NILAI TUKAR TERHADAP SASARAN AKHIR INFLASI

Media Ekonomi ◽

10.25105/me.v25i1.5199 ◽

2019 ◽

Vol 25 (1) ◽

pp. 1

Author(s):

Martin Simanjuntak ◽

Budi Santosa

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Interest Rate ◽

Time Lag ◽

Transmission Mechanism ◽

Monetary Policy Transmission ◽

Policy Transmission ◽

Monetary Policy Transmission Mechanism ◽

The Interest Rate ◽

Interest Rate Channel

This result discusses the effectiveness of the transmission mechanism of monetary policy by comparing the interest rate channel with the exchange rate channel towards the final inflation taget. This study using regression method Vector Error Correction Model (VECM). In the study of this monetary policy transmission mechanism using secondary data based on monthly time series, namely from January 2011 to December 2015. The data is obtained from Bank Indonesia Financial Economic Statistics (SEKI). From the results of this research, the transmission mechanism of monetary policy exchange rate channel is more effective than monetary policy transmission mechanism interest rate channel; it is proven through the test impulse responses and variance decomposition test. In the exchange rate channel time lag until reach the final target of monetary policy (inflation) is 4 months while for the interest rate channel time lag until reach the final target of monetary policy is 5 months. RPUAB very suitable for use as an operational target in the monetary policy transmission mechanism cause rapid and strong response from RPUAB in responding the shock of monetary policy. RPUAB is the biggest variable that dominates the formation of inflation.

Download Full-text