Monetary Transmission Mechanism

12 Key excerpts on "Monetary Transmission Mechanism"

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  eBook - ePub

  Reforging The Central Bank: The Top-level Design Of The Chinese Financial System In The New Normal

  The Top-Level Design of the Chinese Financial System in the New Normal

  • Haiqing Deng, Xi Chen(Authors)
  • 2016(Publication Date)
  • WSPC

    (Publisher)

  Chapter Six

  New Transmission Mechanism for Monetary Policy

  Monetary policy transmission mechanism refers to the process where monetary policies are realized with monetary policy tools. Research on the transmission mechanism focuses on interest rate channel, asset price channel, credit channel, etc. However, these channels do not represent the whole monetary policy transmission mechanism but form one of the many parts of the mechanism — how activities in the financial market (including interest rate, exchange rate, stock price, credit, etc.) impact the real economy. Nevertheless, researches on how central bank’s monetary policies transmit into the financial market are scarce.

  In the New Normal, China will build a “central bank → money market (benchmark interest rate) → financial market → real economy” transmission mechanism. In this mechanism, the process of “central bank → money market (benchmark interest rate)” mainly relies on short- to medium-term monetary tools such as open market operations and MLF; “money market (benchmark interest rate) → financial market” refers to the transmission from the money market to other markets; “financial market → real economy” stands for the traditionally defined monetary policy transmission channels.

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  Monetary Economics

  Theories, Evidence and Policy

  • David G. Pierce, Peter J. Tysome(Authors)
  • 2014(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  Monetary Transmission Mechanisms and the channels of monetary influence The purpose of this chapter is to provide an overview of the various mechanisms by which changes in the supply of money are transmitted to the goal variables of prices, output and employment. Some of the ideas presented in this chapter will be taken up again in later chapters where they will be considered in the context of particular models. The transmission mechanisms differ from one another in the way they see changes in the money supply working through intermediating variables to bring about changes in the goal variables. For a closed economy (or an open economy operating a fixed exchange rate) four transmission mechanisms have received prominent treatment in the literature. In the case of an open economy operating a floating exchange rate it can be argued that the exchange rate itself provides another transmission mechanism. We will consider the floating exchange rate case in the final section of the chapter but first we consider the four 'closed economy' transmission mechanisms. These are: (1) Money supply - link (a) Portfolio - link (b) Prices, output, employment balance (2) Money supply - link (a) Wealth - link (b) Prices, output, employment (3) Money supply - link (a) Credit - link (b) Prices, output, employment availability (4) Money supply - link (a) Expectations - link (b) Prices, output, employment The efficacy of these causal relationships depends upon whether or not both links in the causal chain are valid. If either Hnk (a) or (b) breaks down or is found to be invalid in any of these four causal connections, then we shall say that the particular Monetary Transmission Mechanism does not operate. If it is link (a) which breaks down it does not automatically follow that the 'intermediating' variable (wealth, credit availability, etc.) is irrelevant to an explanation of the behaviour of economic activity.

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  Monetary Economics in Developing Countries

  • Subrata Ghatak, José R. Sánchez-Fung(Authors)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  Figure 8.1 sketches three widely held views on the transmission mechanism of monetary policy. All these frameworks assume that the monetary policy transmission process begins with a change in the monetary policy stance of the authorities. An example would be a decrease in the money supply origin-ating from a policy aimed at altering bank reserves or changing a short-term interest 126 ........................................................................ Monetary policy transmission, rules and strategies 127 • Investment • Exchange rate and net exports Change in monetary policy stance affecting bank reserves and/or short-term interest rate → • Bank credit → Output and prices Figure 8.1 Standard monetary policy transmission mechanism rate – for example, the interbank interest rate, which is the rate commercial banks charge for lending funds to each other. One method of transmission would be the workhorse mechanism, which states that a contractionary monetary policy will affect output through an increase in the interest rate, with this increase leading in turn to a reduction in investment and output. Another possible transmission mechanism operates through the exchange rate’s impact on net exports. Specifically, a reduction in the money supply will generate an increase in the interest rate, which will subsequently cause the exchange rate to appreciate, reducing the amount of net exports and therefore aggregate demand. This outcome, however, is contingent on the fulfilment of the ‘Marshall–Lerner condition’ which states that a depreciation’s ultimate impact on the trade balance depends on imports’ and exports’ exchange rate elasticity. A third possible transmission mechanism is embodied in the bank lending or credit view. Banks here play a direct role in the transmission mechanism of monetary policy: a lower money supply decreases bank deposits, which in turn lowers bank loans, which works by reducing investment and output.

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  The Monetary Transmission Process

  Recent Developments and Lessons for Europe

  • D. Bundesbank(Author)
  • 2001(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  1 Analysis of the Monetary Transmission Mechanism: Methodological Issues Bennett T. McCallum 1 1 Introduction The purpose of this chapter is to consider several methodological issues relevant for study of the monetary transmission process. These issues involve relative emphasis on monetary shocks as opposed to systematic policy adjustments; vector autoregression versus structural modelling research strategies; impulse response versus vector autocorrelation functions as diagnostic tools; and an evaluation of the so-called `narrative approach'. But while these methodological issues are stressed, the chapter's approach is signi®cantly substantive, in the sense that the issues will be considered in the context of a non-trivial quantitative analysis that is intended to be of interest on its own. As a preliminary matter, it may be useful to outline what meaning is here being given to the term `Monetary Transmission Mechanism'. That this term evokes different responses from different scholars is well illustrated by a symposium on `The Monetary Transmission Mechanism' featured in the Fall 1995 issue of the Journal of Economic Perspectives. In the papers of that symposium, Bernanke and Gertler (1995) focus on the credit channel; Meltzer (1995) promotes monetarist emphasis on the importance of recognising multiple assets; 2 Taylor (1995) outlines a particular econometric framework for studying the transmission mechanism; Obstfeld and Rogoff (1995) discuss foreign exchange rate policy and ®nancial crises; and Mishkin (1995) provides a brief overview. More generally, many writers on the subject restrict their attention to the effects of monetary policy shocks, 3 while some are concerned only with effects on real variables. In the present chapter, however, the concept of the transmission process to be considered includes effects on both real and nominal variables of shocks and more especially the regular, systematic component of monetary policy.

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  Developing Sustainable Balance of Payments in Small Countries

  Lessons from Macroeconomic Deadlock in Jamaica

  • Andre Haughton(Author)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  In light of this model, which captures the transmission mechanism of monetary policy as well as the dynamics of the economy, the results showed that monetary policy had a major impact on inflation. The results also revealed that the stabilization of inflation is mainly achieved through the exchange rate. Output gap had a minor impact on inflation and is affected by monetary policy through both the credit and the real exchange rate channel. All in all, the debate on the effectiveness of the Monetary Transmission Mechanism has been ongoing – since before the global financial crisis – and has continued as central bankers and academics look for evidence of its existence in different countries across the world. The global crisis in the 154 9 COMMERCIAL BANKS AND THE Monetary Transmission Mechanism 2000s, which had a devastating impact on prices, output and the stability of the financial system, also highlighted the shortcomings of the micro- prudential framework. Taking into consideration the aforementioned, Betty (2011) examined the conduct of monetary policy in Jamaica by giving alternative monetary policies in the case of dysfunctional mechan- ism transmission. Her study examined substitutes to supplement the traditional interest rate tool with the perspective of enhancing the trans- mission of lower interest rates to the private sector. The findings assert that there is some advantage in using macroprudential policy tools and quanti- tative easing and a mixture of monetary and administrative measures to augment the traditional interest rate tool. Macro-prudential policies seem to focus on financial stability or containing systemic risks, rather than risks to individual financial institutions (Moreno 2011). Shirakawa (2009) argues that the current regulatory framework does not have the effective mechanisms and tools necessary to control innate procyclicality of the financial system.

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  Handbook of Monetary Economics vols 3A+3B Set

  • Benjamin M. Friedman, Michael Woodford(Authors)
  • 2010(Publication Date)
  • North Holland

    (Publisher)

  Monetary Economics , Vol. Suppl., No. 2011

  ISSN: 1573-4498

  doi: 10.1016/B978-0-444-53238-1.00008-9

  * We thank Dalibor Stevanovic and Dane Vrabac for excellent research assistance. Our analysis benefited substantially from the comments of Ray Fair, Ben Friedman, and participants in the Key Developments in Monetary Economics conference held at the Federal Reserve Board in October 2009. Jean Boivin acknowledges financial support from the National Science Foundation (SES-0518770) and the Social Sciences and Humanities Research Council of Canada. The views expressed are those of the authors and do not reflect the views of any institutions with which they are affiliated.

  Chapter 8 How Has the Monetary Transmission Mechanism Evolved Over Time?

  Jean Boivin* , Michael T. Kiley** , Frederic S. Mishkin†

  * Bank of Canada, HEC Montréal and National Bureau of Economic Research

  ** Board of Governors of the Federal Reserve System

  † Graduate School of Business, Columbia University and National Bureau of Economic Research

  Abstract

  We discuss the evolution in macroeconomic thought on the monetary policy transmission mechanism and present related empirical evidence. The core channels of policy transmission — the neoclassical links between short-term policy interest rates, other asset prices such as long-term interest rates, equity prices, and the exchange rate, and the consequent effects on household and business demand — have remained steady from early policy-oriented models (like the Penn-MIT-SSRC MPS model) to modern dynamic, stochastic general equilibrium (DSGE) models. In contrast, non-neoclassical channels, such as credit-based channels, have remained outside the core models. In conjunction with this evolution in theory and modeling, there have been notable changes in policy behavior (with policy more focused on price stability) and in the reduced form correlations of policy interest rates with activity in the United States. Regulatory effects on credit provision have also changed significantly. As a result, we review the empirical evidence on the changes in the effect of monetary policy actions on real activity and inflation and present new evidence, using both a relatively unrestricted factor-augmented vector autoregression (FAVAR) and a DSGE model. Both approaches yield similar results: Monetary policy innovations have a more muted effect on real activity and inflation in recent decades as compared to the effects before 1980. Our analysis suggests that these shifts are accounted for by changes in policy behavior and the effect of these changes on expectations, leaving little role for changes in underlying private-sector behavior (outside shifts related to monetary policy changes).

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  Handbook of Monetary Economics 3A

  • (Author)
  • 2010(Publication Date)
  • North Holland

    (Publisher)

  CHAPTER 8

  How Has the Monetary Transmission Mechanism Evolved Over Time? *

  Jean Boivin * , Michael T. Kiley ** and Frederic S. Mishkin † ,     

  * Bank of Canada, HEC Montréal and National Bureau of Economic Research

  ;

  ** Board of Governors of the Federal Reserve System

  ;

  † Graduate School of Business, Columbia University and National Bureau of Economic Research

  Abstract

  We discuss the evolution in macroeconomic thought on the monetary policy transmission mechanism and present related empirical evidence. The core channels of policy transmission — the neoclassical links between short-term policy interest rates, other asset prices such as long-term interest rates, equity prices, and the exchange rate, and the consequent effects on household and business demand — have remained steady from early policy-oriented models (like the Penn-MIT-SSRC MPS model) to modern dynamic, stochastic general equilibrium (DSGE) models. In contrast, non-neoclassical channels, such as credit-based channels, have remained outside the core models. In conjunction with this evolution in theory and modeling, there have been notable changes in policy behavior (with policy more focused on price stability) and in the reduced form correlations of policy interest rates with activity in the United States. Regulatory effects on credit provision have also changed significantly. As a result, we review the empirical evidence on the changes in the effect of monetary policy actions on real activity and inflation and present new evidence, using both a relatively unrestricted factor-augmented vector autoregression (FAVAR) and a DSGE model. Both approaches yield similar results: Monetary policy innovations have a more muted effect on real activity and inflation in recent decades as compared to the effects before 1980. Our analysis suggests that these shifts are accounted for by changes in policy behavior and the effect of these changes on expectations, leaving little role for changes in underlying private-sector behavior (outside shifts related to monetary policy changes).JEL classification

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  Japanese Monetary Policy

  • Kenneth J. Singleton(Author)
  • 2007(Publication Date)
  • University of Chicago Press

    (Publisher)

  The authors benefited from the comments of formal discussants as well as discussion with other participants. 6 Kenneth J. Singleton References Bernanke, Ben, and Alan Blinder. 1990. The federal funds rate and the channel of monetary transmission. NBER Working Paper No. 3487. Cambridge, MA: National Bureau of Economic Research, October. Romer, Cristina D., and David H. Romer. 1990. New evidence on the monetary trans- mission mechanism. bookings Papers on Economic Activity, no. 1: 149-2 13. Suzuki, Yoshio. 1987. The Japanese Financial System. Oxford: Clarendon Press. 1 A Comparative Perspective on Japanese Monetary Policy: Short-Run Monetary Control and the Transmission Mechanism Kazuo Ueda Three major building blocks of the analysis of a country’s monetary policy are the reaction function of the central bank, or the ultimate targets of policy; short-run monetary control; and the transmission mechanism. Japanese mon- etary policy has been unique in all three aspects. This paper analyzes the spe- cial features of the second and third of these building blocks of Japanese mon- etary policy, but not the first. That is, it discusses the daily monetary control of interest rates and the mechanism by which interest rate changes affect the real economy, but does not address the question of what causes a change in policy instruments. In my analysis of short-run monetary control and the transmission mecha- nism, I try to relate the discussion, to a maximum extent, to current research on the same topics in the United States. A perspective relevant for both aspects is that Japanese monetary policy has been moving very rapidly over the past few years from old-fashioned direct control through moral suasion of interest rates and quantities of transactions to one with heavier reliance on the price mechanism in money and capital markets.

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  Macroeconomic Analysis and Policy

  A Systematic Approach

  • Joshua E Greene(Author)
  • 2017(Publication Date)
  • WSPC

    (Publisher)

  II. THE TRANSMISSION MECHANISM FOR MONETARY POLICY

  Monetary policy works in various ways when reducing inflation or combatting recession is the broad policy objective. Figure 8.2 summarizes the main channels through which monetary policy operates.

  A change in the operating target (e.g., policy interest rate) can affect inflation, for example, in at least four ways: through its impact on lending rates and the amount of credit; through its effect on asset prices; through its impact on inflation expectations; and through its influence on the exchange rate. The latter impact, in turn, can affect inflation in two ways: indirectly, through its influence on aggregate demand and, thus the output gap; and more directly, through its impact on import prices.

  FIGURE 8.2. MAIN CHANNELS OF MONETARY POLICY TRANSMISSION

  Source: Developed from Bank of England, Monetary Policy Committee, “The transmission mechanism of monetary policy.” Available at www.bankofengland.co.uk/publications/Documents/other/monetary/montrans.pdf . Accessed July 16, 2017.

  One way monetary policy can affect inflation is by changing bank interest rates, particularly loan rates. A rise in the policy interest rate, in most economies, causes banks to raise their lending rates, since it raises the cost of funds through the interbank market, even if deposit rates do not change. With a higher cost of funds, banks in turn generally raise lending rates, which should reduce the demand for loans as some investment projects become unprofitable. Higher lending rates may also leave banks with a less attractive set of potential borrowers, as those with less risky projects drop out of the lending queue. In either case, the volume of loans will likely decrease, thereby reducing aggregate demand and inflationary pressures.

  A second way monetary policy can affect inflation is by altering asset prices. Because the prices of many assets — particularly stocks and bonds — are believed to depend on the ratio of expected earnings to the rate of return on similar assets, changing the policy interest rate can affect asset prices by changing market interest rates in the same direction. A rise in the policy interest rate, by raising other interest rates, will reduce the value of many financial assets, which in turn will have two effects. One is to reduce demand, because their decline in wealth causes asset owners to spend somewhat less. The other is to reduce the value of collateral available to support loans, which will reduce lending. Both effects will reduce aggregate demand, thereby helping diminish inflationary pressures.

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  Economic Analysis in Historical Perspective

  Butterworths Advanced Economics Texts

  • J. Creedy, D.P. O'Brien(Authors)
  • 2014(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  The idea of a direct mechanism is for him a mere curiosity 108 . Marshall's analysis of the transmission mechanism was passed on to writers like Robertson and Keynes. The importance of the rate of interest was also stressed by Hawtrey 109 . Of course, it was not only Marshall who enjoyed this classical inheritance. In particular, Wicksell made the indirect mechanism the centrepiece of his analysis of an upward cumulative inflationary process. Amongst Wicksell's successors was Hayek, who blended this analysis with an Austrian theory of production, arguing that, as new money filters in, it affects the relative profitability of different stages of production, with producer's goods becoming initially more profitable. Then wages rise and the relative profitability of consumption goods is restored while the banks refuse further credit to the investment goods sector, which has thus to free resources. Unemployment results 110 . There was also an extensive American literature, of which Sprague's statistical investigation of the indirect mechanism is parti-cularly noteworthy. (Friedman's work is in a long United States tradition of statistical studies in the quantity theory 111 .) Also written Transmission mechanisms and the effects of money 3 1 under American influence was the work of Martin (1931), who has a detailed analysis of the circular flow involving both direct and indirect mechanisms 112 . Indeed, it is interesting to note that even the semantic classification of the literature into direct and indirect mechanisms dates from at least ten years before Keynes's General Theory (Angell, 1926, p. 120). 2.7.2 THE CREDIT CYCLE Monetary writers coupled their concern with transmission mechan-isms with the identification and analysis of a credit cycle. Amongst the classical writers are McCulloch, Overstone (whose concept of a cycle much influenced Marshall), Tooke, Fullarton and Bagehot.

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  Reforms in China's Monetary Policy

  A Frontbencher's Perspective

  • Sun Guofeng(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  With the develop- ment of money market and the progress in market-based interest rate reform, a transmission path of “the central bank—money market—financial insti- tutions—enterprises(households)” was taking shape, and indirect transmis- sion mechanism “featuring policy tools—operational targets—intermediate targets—ultimate goals had been in place for the first time. Major Reforms Affecting Monetary Policy Transmission Mechanism: Market-based Interest Rate Reform Great Progress Has Been Made in the Market-based Interest Rate Reform In 1993, the 3rd Plenary Session of the 14th CPC Central Committee proposed the basic idea of market-based interest rate reform in The Decision on Issues Concerning the Building of the Socialist Market Economic System. In 2003, the 3rd Plenary Session of 16th CPC Central Committee adopted The Decision on Issues Concerning the Improvement of the Socialist Market Economic System, which sketched the roadmap for market-based interest rate reform, that said “market-based interest rate reform should be steadily advanced to establish and improve the mechanism for market supply and demand to determine interest rates. The central bank should use monetary instruments to guide market interest rates.” At present, the PBC only keeps the ceiling for RMB deposit rates. The interest rates in money market and bond market, as well as deposit and lend- ing rates of foreign currency in China have been fully liberalized. On July 20, 2013, the PBC removed the floor for lending rates, which were 70 percent of benchmark rates, lifted restrictions on discount rates, and abolished the ceiling for Rural Credit Cooperatives (RCC) lending rate. By then, lend- ing rates had been fully liberalized, and the PBC only retained the ceiling for RenMinBi (Chinese Yuan, RMB) deposit rates, indicating that interest rate control has gradually been replaced by the market-oriented regime that determines interest rates.

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  How Monetary Policy Works

  • Lavan Mahadeva, Peter J N Sinclair(Authors)
  • 2004(Publication Date)
  • Routledge

    (Publisher)

  In conclusion, a tightening of monetary policy should cut asset values and, at least temporarily, reduce investment. These effects should be stronger, and more easily discerned, in real-estate prices and construction activity than in equity prices and non-construction investment. Yet monetary factors form only one of several influences affecting all these variables. Furthermore, since interest rates are normally changed for a reason—to try to offset the inflation effects of some shock—it is hard in practice to disentangle the consequences of interest rate changes from those of the shock that precipitated them. This applies to investment no less than to consumption.

  2.7 Conclusion

  This chapter has examined how and why policy interest rates changed, and then turned to key initial aspects of the transmission mechanism for policy rates—their impact on other interest rates, other asset prices, and the major components of aggregate demand, consumption and investment. The next stages of the transmission mechanism concern how a change in the level of aggregate demand translates into changes in output and prices, and labour markets. These questions, together with the special features of the open economy, statistical features of inflation, and evidence on interest rates and disinflation, are examined in Chapter 3 .

  Appendix

  This Appendix begins with the short run econometric results tracing the links from central banks’ policy rates to retail deposit rates (Table 2.3 ) and retail lending rates (Table 2.4 ). This is followed by regression statistics for changes in real consumption growth against changes in nominal rates, levels of real rates, and other regressors (Table 2.5 ).

  Table 2.3

  Dynamic regressions of short-run adjustment from central bank rates through to deposit rates.

  Notes Regression of the change in deposit rates on a constant, ECM-1, change in the central bank rate (non-lagged and one lag), the change in deposit rates (one lag and two lags).

  Monthly data. Sample period is 1980. 1 to 2000. 12 unless adjusted to match that of quarterly estimate; long run equilibrium correction mechanism (ECM) series constructed using co-efficient from quarterly data estimate. ***, **, *: significance of estimate at 1%, 5%, and 10% respectively; t-statistics in brackets; data source: International Financial Statistics.

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