Wicksell on the Classical Theories of Money, Credit, Interest and the Price Level:

ABSTRACT Knut Wicksell occupies a significant place in the history of monetary economics as the developer of the "cumulative process" by which deviations between the market and "natural" rates of interest cause the price level to change persistently. A more accurate version of the same argument is a part of classical monetary analysis but there the process originates from a change in base money or central bank credit while Wicksell's version may be initiated by banks capriciously setting their lending rates. Wicksell's version arises from his difficulties in correctly interpreting the classical quantity theory of money and interest rate determination from Hume down to Marshall, but has not been so noted in the literature.     

On the Analytics of Wicksell: A Comment on Abiakpor

Three essential concepts of Wicksell's contributions are probed. (1) Wicksell's commingling of a barter economy with a money economy led to a logical pitfall in his cumulative-process paradigm. (2) Wicksell sought to deduce a cumulative process involving price-level movements from an economy without money and, therefore, without a general price level. (3) Wicksell's idealized pure credit system can be logically reconciled with his law of the demand for money creating its own supply.     

Between Wicksell and Hayek

A bstract Mises' Theory is grounded on the "ultra-Wicksellian" idea that the pure credit system represents the working of a modern monetary economy, and that forcing banks to raise the rate of money interest does not need to operate through some binding bank-liquidity constraint. It is the rise in the relative price of consumption goods against production goods that accounts for the end of inflation. According to Mises, it is in the power of the banks to resist this readjustment; in this event, the only end to hyperinflation comes from the breaking of the monetary system. Hayek develops the second side of Mises'argument, the capital-allocation effect, while the first side, the ultra-Wicksellian picture of the monetary economy, is either weakened or taken for granted. Wicksell's 1914 reaction to Mises'book is recalled. Some criticism of Mises'readjustment mechanism from a Keynesian-Schumpeterian point of view is offered in the concluding remarks.     

Does transparency of central banks communication affect credit market? Empirical evidence for advanced and emerging markets

This study examines the effect of the transparency of central banks communication on credit market. In particular, this study investigates how central banks’ effort to provide more detailed information about their objectives regarding the price stability (monetary policy transparency) and financial stability (financial stability transparency) policies are able to mitigate information asymmetry on credit market, through the net interest margin charged by the banks to engage in financial intermediation (credit spread). The findings denote central bank transparency is able to reduce the credit spread. Additionally, the evidence suggests the effect of central bank transparency on the credit spread is greater in emerging markets, where there is less information available on credit market. In brief, transparency in central banks communication is an important tool to mitigate the information asymmetry in the credit market.     

The Evolution of the Sophisticated Quantity Theory: Marshall vs.Wicksell on Transaction Demand

When the money supply increased exogenously, Marshall's vs. Wicksell's versions of short run inflation transmission are shown to be different because of their ideas on money demand. During the approach to monetary equilibrium, the implication was that the demand for transactions cash balances would have to increase in order for inflation to stop. Marshall focused on the real, while Wicksell focused on the nominal, demand for such balances; Marshall assumed velocity of money was constant, while Wicksell assumed it to be pro-cyclic. These assumptions about money demand caused them to make different predictions on how much prices would eventually rise: Marshall described a price-undershoot, while Wicksell described a price-overshoot mechanism.     

On the Evolution of Money and its Implications for Price Stability

This review identifies in the literature three distinct conceptual frameworks for analysing money, in which the means of settlement is provided by (i) a special commodity used in exchange, (ii) all generally accepted media of exchange including some bank deposits, and (iii) a book‐keeping system recording changes in ownership of financial assets within a pure credit economy. All three sections consider the implications for monetary policy aimed at maintaining price stability. The paper concludes that future theoretical developments are likely to take place within finance theory rather than being based on the quantity theory of money.     

Heterogeneity in bank pricing policies: The Czech evidence

We estimate the pass-through from market interest rates to bank interest rates using heterogeneous panel cointegration techniques to address heterogeneity at the bank level in the Czech Republic. The results indicate heterogeneity in bank pricing in the short, but not in the long term. Mortgage rates and firm rates typically adjust to money market changes, but often less than fully in the long run. Large corporate loans have a smaller mark-up than small loans. Consumer rates have a high mark-up and do not exhibit a cointegration relationship with money market rates even in the long run. Next, we examine how bank characteristics determine the nature of interest rate pass-through in a cross-section of Czech banks. We find evidence for relationship lending, as banks with a stable pool of deposits smooth interest rates and require a higher spread as compensation. Large banks are not found to price their products less competitively. Greater credit risk increases vulnerability to money market shocks.     

Monetary policy and bank performance: The role of business models

This paper examines the relationship between monetary policy and bank performance in a multiple-instrument environment, particularly highlighting the conditioning role of bank business models. Employing a unique dataset of Vietnamese commercial banks from 2007 to 2019, we display that banks react to monetary policy changes, either when the central bank increases policy rates or injects money into the economy through open market operations, by decreasing overall returns and increasing financial instability. Additionally, we document that the accumulation of foreign exchange reserves benefits bank outcomes, contrasting to open market operations, albeit the central bank uses both of these policy instruments to alter money supply in the economy. Our key analysis of interest reveals that business models considerably matter in the effects of monetary policy on bank performance. Collectively, our findings demonstrate that banks’ business models that yield more non-interest income or diversify more into different income sources may mitigate the pass-through of monetary policy to bank performance. This finding holds across all interest- and quantitative-based monetary policy indicators and across all the functions of risk-taking behavior, earning-profit capacity, and financial stability. Furthermore, while plotting the marginal effects of monetary policy, we realize that they are insignificant for banks whose business models heavily rely on non-traditional segments.     

How does the money market development impact the bank lending channel of emerging Countries? A case from China

Transforming from quantitative-based instruments to price-based instruments is the primary goal of the monetary policy transformation in emerging economies. In essence, this process is gradually replacing the interest rate channel with the credit channel from the perspective of the monetary policy transmission mechanism, which is mainly achieved by promoting financial development to reduce the financial friction. However, there are opposite effects of financial development on the bank lending channel; thus, the topic is controversial. Using banks’ data from 2010 to 2018, this paper studies whether and how the money market development weakens the effect of the bank lending channel in China. The result shows that the mechanism through which the money market development influences the bank lending channel is realized by affecting the substitution elasticity of the asset and liability structure of banks’ balance sheets. Different from the theoretical expectation, the effect of the money market development on the bank lending channel is nonsignificant in China but appears to be weakened when the interest rate market-oriented reform is considered. However, further research based on structural analysis demonstrates that the money market development exerts heterogeneous effects on the bank lending channel under different types of sub-markets and different characteristics of the banks considered.     

Central bank disclosure as a macroprudential tool for financial stability

The Basel Capital Accord (pillar 3) states that disclosure of information (transparency) is essential to financial stability. This study analyzes, through inflation reports, the disclosure of information from the Central Bank of Brazil concerning the credit market. We consider credit risk and capital buffers as measures of financial stability in this analysis. Furthermore, in order to measure the perception of the monetary authority on the credit market, we built two indices based on the central bank’s communication on credit development. We performed a panel data analysis based on a sample of 125 banks for the period from June 1999 to September 2014 (7000 observations). The findings suggest that central bank communication regarding expectations concerning the credit market contributes to financial stability. Therefore, this kind of communication of central banks (about credit development) may constitute an important macroprudential tool to improve financial stability.     

商业银行经营决策对我国货币供给的影响及建议

商业银行经营行为对我国货币供给的影响作用于基础货币投放和存款货币创造两个阶段。国有控股商业银行因其垄断性地位使得信贷投放过于集中、流动性管理水平低,其他股份制商业银行不受风险约束的盲目扩张倾向,都可能造成我国货币供给和调控政策实施效果偏离预期。针对以上问题,本文建议,国有控股商业银行应加强股份制改革,建立现代企业制度;其他股份制商业银行根据自身的条件确定发展方向,有序竞争。     

Knut Wicksell and the Classical Economists on Money, Credit, Interest and Price Level: A Comment on Ahiakpor

ABSTRACT This is an invited response to James C. W. Ahiakpor, "Wicksell on the Classical Theories on Money, Credit, Interest and the Price Level." American Journal of Economics and Sociology 58 (July); 435-457. Wicksell's contribution was to introduce Böhm-Bawerk's theory of capital into a monetary setting.     

Economies of scale and organization efficiency in banking

Previous studies attempting to assess economies of scale in banking firms have largely relied upon cost functions. The profit-function approach enjoys several important advantages over the cost-function method, consequently that is the approach used in this study. A risk-adjusted profit function estimates economies of scale of unit and branch banks; and the effects of bank holding-company affiliation on the level of bank profits is also examined. The results indicate larger economies of scale for branch banks than for unit banks; and bank holding-company affiliates were found to be more efficient than independent banks.     

The impact of government intervention on the stabilization of domestic financial markets and on U.S. banks’ asset composition

The 2007–2009 financial crisis that evolved from various factors including the housing boom, aggressive lending activity, financial innovation, and increased access to money and capital markets prompted unprecedented U.S. government intervention in the financial sector. We examine changes in banks’ balance sheet composition associated with U.S. government intervention during the crisis. We find that the initial round of quantitative easing positively impacts bank liquidity across all bank samples. Our results show a positive impact of repurchase agreement market rates on bank liquidity for small and medium banks. We conclude that banks have become more liquid in the post-crisis period, especially the larger banks (large and money center banks). We show that real estate loan portfolio exposures have reverted to pre-crisis levels for money center banks and remained flat for all other bank samples.     

Fed Credit Policy: What is a Lender of Last Resort?

Discussions of the Fed׳s financial crisis lending – and its role as “Lender of Last Resort” more generally – often overlook the distinction between monetary policy and credit policy. Central bank actions constitute monetary policy if they alter the quantity of the bank׳s monetary liabilities, but constitute credit policy if they alter the composition of the bank׳s portfolio without affecting the outstanding amount of monetary liabilities. In the 19th century, Henry Thornton and Walter Bagehot advocated Lender of Last Resort policies as a means of expanding the money supply when the demand for money surged in a crisis. In contrast, the Fed׳s recent crisis lending for the most part left its outstanding monetary liabilities unaffected, and thus represented credit policy, not Lender of Last Resort activity. Credit allocation in a crisis is potentially costly because it affects market participants׳ beliefs about the likelihood of future central bank rescues, which in turn reduces their incentive to protect themselves against financial distress and thus exacerbates financial instability. Credible limits on credit policy thus are critical to central banks׳ core policy mission. One path to establishing such limits is to create “living wills” that detail how to resolve large, complex financial firms without government support.     

通货膨胀背景下的中国经济增长

当前我国物价水平仍然较高,与改革开放以来的前几次通货膨胀有所类似.本次通货膨胀的原因也可归结为中国传统增长模式中常出现的“两难困境”,即长期以来,中国经济增长过度依赖于政府投资,银行信贷与货币的发放难以受到控制,经济高增长的同时始终存在着高通货膨胀的风险,而高通货膨胀所带来的企业生产成本的上升反过来又挤压企业经营利润,从而降低经济增长率.可以预计的是,在货币政策作用空间有限的背景下,此次通货膨胀的压力将持续一段时间.能否处理好总量和结构、抑制通货膨胀和促进经济增长的关系,关键取决于货币政策与财政政策的有机配合.     

Measures to tame credit growth: Are they effective?

This paper focuses on policy measures taken to curb bank credit growth in the private sector in the pre-crisis period 2003–2007. Our analysis is based on an original survey conducted in 2010 on eleven central banks in Central and Eastern Europe (CEE). The findings reveal substantial policy intervention: a total of 82 measures were implemented in CEE during the period considered. The paper presents a panel data analysis of the effectiveness of the policy measures adopted in the region. The overall results indicate that certain measures – particularly asset classification and provisioning rules and loan eligibility criteria – might have been effective in taming bank credit growth, especially if applied in the context of more general policy measures featuring a combination of various instruments. However, in countries in which the authorities managed to somewhat decrease the flows of bank credit into the economy, the measures were often circumvented via direct, cross-border credit from foreign banks and credit provided by domestic, non-bank financial companies.     

新常态下我国商业银行贷款利率定价机制探讨

我国经济进入新一轮非均衡运行的新常态,商业银行发展模式将逐步向“讲质量”转变。2013年7月央行贷款利率管制放开后,商业银行迎来信贷资产自主定价的新时代,如何适应新常态下银行贷款利率定价机制,是商业银行转型发展永恒的主题。本文简要介绍了商业银行贷款定价机制的现状,揭示了商业银行贷款定价机制存在的问题,提出了新常态下优化贷款定价的建议。     

Interbank credit and the money manufacturing process: a systemic perspective on financial stability

Interbank lending and borrowing occur when financial institutions seek to settle and refinance their mutual positions over time and circumstances. This interactive process involves money creation at the aggregate level. Coordination mismatch on interbank credit may trigger systemic crises. This happened when, since summer 2007, interbank credit coordination did not longer work smoothly across financial institutions, eventually requiring exceptional monetary policies by central banks, and guarantee and bailout interventions by governments. Our article develops an interacting heterogeneous agent-based model of interbank credit coordination under minimal institutions. First, we explore the link between interbank credit coordination and the money generation process. Contrary to received wisdom, interbank credit has the capacity to remove the inner limits of monetary system capacitance. Second, we develop simulation analysis on imperfect interbank credit coordination, studying impact of interbank dynamics on financial stability and resilience at individual and aggregate levels. Systemically destabilizing forces prove to be related to the working of the banking system over time, especially interbank coordination conditions and circumstances.

     

Prices,debt and market structure in an agent-based model of the financial market

We develop an agent-based model in which heterogeneous and boundedly rational agents interact by trading a risky asset at an endogenously set price. Agents are endowed with balance sheets comprising the risky asset as well as cash on the asset side and equity capital as well as debt on the liabilities side. A number of findings emerge when simulating the model: we find that the empirically observable log-normal distribution of bank balance sheet size naturally emerges and that higher levels of leverage lead to a greater inequality among agents. Furthermore, greater leverage increases the frequency of bankruptcies and systemic events. Credit frictions, which we define as the stickiness of debt adjustments, are able to explain a key difference in the relation between leverage and assets observed for different bank types. Lowering credit frictions leads to an increasingly procyclical behavior of leverage, which is typical for investment banks. Nevertheless, the impact of credit frictions on the fragility of the model financial system is complex. Lower frictions do increase the stability of the system most of the time, while systemic events become more probable. In particular, we observe an increasing frequency of severe liquidity crises that can lead to the collapse of the entire model financial system.