Completing China's Interest Rate Liberalization

China's recent removal of the last ceiling restriction on deposit rates in October 2015 is a milestone in interest rate liberalization, but not the end of it. International experience suggests that, without structural and quantitative reforms, simply freeing interest rates can result in major financial stress. Before China's central bank can completely relinquish implicit or explicit guidance for commercial banks' interest rate determination, it needs to accomplish two tasks: improvement of commercial banks' pricing capability as well as the monetary policy transmission mechanism. Both tasks require significant reform measures to be initiated, such as enforcing market discipline, forming a new monetary policy framework, developing money and capital markets, abandoning quantitative restrictions on credit and reforming the financial regulatory system.     

The New CFS Divisia Monetary Aggregates: Design, Construction, and Data Sources

The Center for Financial Stability (CFS) has initiated a new Divisia monetary aggregates database, maintained within the CFS program called Advances in Monetary and Financial Measurement (AMFM). The Director of the program is William A. Barnett, who is the originator of Divisia monetary aggregation and more broadly of the associated field of aggregation-theoretic monetary aggregation. The international section of the AMFM web site is a centralized source for Divisia monetary aggregates data and research for over 40 countries throughout the world. The components of the CFS Divisia monetary aggregates for the United States reflect closely those of the current and former simple-sum monetary aggregates provided by the Federal Reserve. The first five levels, M1, M2, M2M, MZM, and ALL, are composed of currency, deposit accounts, and money market accounts. The liquid asset extensions to M3, M4-, and M4 resemble in spirit the now discontinued M3 and L aggregates, including repurchase agreements, large denomination time deposits, commercial paper, and Treasury bills. When the Federal Reserve discontinued publishing M3 and L, the Fed stopped providing the consolidated, seasonally adjusted components. Also the Fed no longer provides the interest rates on the components. With so much of the needed component quantity and interest-rate data no longer available from the Federal Reserve, decisions about data sources needed in construction of the CFS aggregates have been far from easy and sometimes required regression interpolation. This paper documents the decisions of the CFS regarding United States data sources at the present time, with particular emphasis on Divisia M3 and M4.     

The liquidity trap: Japan, 1996–2001 versus the United States, 1933–1940

Keynes’ “liquidity trap” rarely occurs. But when it does, it has a tremendously adverse effect on the economy concerned. Such was the case of the United States in the 1930s and now that of contemporary Japan. In a liquidity trap, monetary policy pushes the money interest rate to the zero level while expanding the money supply (M1) at a faster rate than nominal GDP. Conventional theory explains this phenomenon as the result of money demand that becomes infinitely interest-elastic at the zero rate, rendering ineffective the rapidly expanding money supply established by the monetary authorities.In this paper, we show that the liquidity trap is a multifaceted phenomenon not limited to the money market. It involves the bank loan market, the bank deposit market, and the bond market interacting together. Of these, the most important is the bank loan market and the least important is the bank deposit market, whose deposit supply becomes horizontal at the zero rate. They are met by relatively interest-inelastic bank loan demand and bank deposit demand. Hence, the causality is completely reversed from the conventional understanding.We give empirical evidence in support of our theory based on data from the United States, 1933–1940 and Japan, 1996–2001. Far apart in time and space, the two cases are remarkably alike and, hence, provide strong supporting evidence.     

Does bank competition affect the transmission mechanism of monetary policy through bank lending channel? Evidence from India

This paper empirically investigates how intensified competition in the Indian banking affects the transmission of monetary policy through bank lending channel over the period 1997–2017. Additionally, this study examines the impact of deposit and loan market channels on bank’s credit growth. Results obtained through two-step system-GMM reveal that a higher degree of market power weakens the monetary policy transmission mechanism for the entire banking industry and across ownerships. Results show that higher market power in the deposit and loan markets weakens the impact of monetary policy on bank loan supply. The findings of this study extend important policy measures that can strengthen the transmission mechanism of monetary policy by reducing the adverse effects of changes in bank competition.     

On the microeconomic foundations of bank behaviour in macroeconomic models

Summary In this paper some microeconomic foundations of bank behaviour are analysed. Topics discussed are bank objective functions, competition and bank behaviour in the deposit and loan market, some static microeconomic bank models, and bank-customer relationships. It is investigated whether explicit consideration of some features of microeconomic bank behaviour affects the specification and interpretation of macroeconomic monetary sector models.I am grateful to H. Booy, J. van Daal, P. Korteweg, B. J. Kruimel, J. Ooms, R. E. Wessels and an anonymous referee for valuable remarks on earlier drafts. Responsibility for errors is mine.     

数量型还是价格型货币政策比较——基于利率市场化角度的分析

利率市场化进程中,数量型还是价格型货币政策合适?文章考虑金融市场上的金融加速器特征,将其引入DSGE模型,通过校准、模拟,从宏观经济波动幅度、不同货币政策下冲击效应以及福利损失函数三方面综合分析了利率市场化过程中数量型和价格型货币政策有效性问题。研究结果显示,随着存款利率的上升,在熨平经济波动方面,价格型货币政策更有优势;在促进经济增长方面,数量型货币政策更有优势;对央行损失而言,价格型货币政策的损失更小。因此,中央银行应根据需要灵活的运用数量型和货币型搭配使用,做好数量型向价格型转变。     

Responding to a Monetary Superpower: Investigating the Behavioral Spillovers of U.S. Monetary Policy

Between 2002 and 2006, the Federal Reserve set interest rates significantly below the rates suggested by well-known monetary policy rules. There is a growing body of research suggesting that this helped fuel an excess of liquidity in the U.S. that contributed to the 2008 worldwide financial crash. It is less well known that a number of other central banks also lowered interest rates during this period. An important question, then, is what role the Federal Reserve played in influencing other central banks to alter their own monetary policies, which could have magnified the Fed’s actions in creating global liquidity. This paper addresses the issue by showing how spillovers in central bank behavior occur in theoretical rational expectations models. It then establishes empirically how U.S. monetary policy actions affect the actions of other major central banks, particularly in terms of interest rates and currency interventions. The models and data suggest that the U.S. lowering its policy rate, either in general or in reference to a monetary policy rule, influences other central banks to lower their own policy rates and intervene in currency markets, even when controlling for worldwide macroeconomic trends. It thus appears that U.S. actions were a factor in the worldwide lowering of interest rates and the increase in currency reserves in the early 2000s that may have contributed to the subsequent global liquidity boom.     

Dual-track interest rates and the conduct of monetary policy in China

China has a dual-track interest-rate system: bank deposit and lending rates are regulated while money and bond rates are market-determined. The central bank also imposes an indicative target, which may not be binding at all times, for total credit in the banking system. We develop and calibrate a theoretical model to illustrate the conduct of monetary policy within the framework of dual-track interest rates and a juxtaposition of price- and quantity-based policy instruments. We show the transmission of monetary policy instruments to market interest rates, which, together with the indicative credit target in the banking system, ultimately are the means by which monetary policy affects the real economy. The model shows that market interest rates are most sensitive to changes in the benchmark deposit interest rates, significantly responsive to changes in the reserve requirements, but not particularly reactive to open market operations. These theoretical results are verified and supported by both linear and GARCH models using daily money and bond market data. Overall, the findings of this study help us to understand why the central bank conducts monetary policy in China the way it does, using a combination of price and quantitative instruments with differing degrees of potency in terms of their influence on the cost of credit.     

美联储货币政策对中国货币政策的溢出效应研究

文章主要研究了美国货币政策对中国货币政策的溢出效应,理论部分分析了在开放经济条件下两国模型关于货币政策跨国传输等相关问题。货币供给分为国内供给和外部输入,通过中央银行资产负债表中资产负债的变化可以分析外部货币的输入影响到基础货币的被动投放,在流通过程中由于乘数效应影响了货币供给量。外部货币的输入影响央行调控独立性的发挥,外部货币的输入容易形成对国内货币市场和产品市场某种程度的冲击,央行货币政策调控的难度增加。经验分析发现,美元输入对中国货币政策存在溢出效应,影响到中国的基础货币投放,影响到中国的货币政策的独立性以及执行的效果。     

Bank deposit interest rate pass-through and geographical segmentation in Japanese banking markets

This paper estimates the pass-through from market interest rates to deposit interest rates to investigate whether the Japanese bank deposit markets are geographically segmented. A unique feature of this paper is the use of monthly deposit interest rates posted by 106 regional banks from March 1999 to March 2010. Following the theoretical results from a simple banking activity model with Cournot competition, I estimate the long run pass-through of each regional bank utilizing the panel cointegration method. The empirical results of this paper show a significant negative correlation between regional market concentration and pass-through, which implies the existence of geographical market segmentation.     

The Monetary Transmission Mechanism, Non-residential Fixed Investment and Housing

We specify a vector autoregression (VAR) model for the U.S. for 1980–2008 to investigate the statistical causal relationships between private non-residential fixed investment, the effective Federal funds rate, personal consumption expenditures, nonfinancial corporate profits, and the nonfinancial corporate credit market debt to test the validity of macroeconomic relationships in a macro model. The VAR utilizes the Toda-Yamamote procedure to test for Granger causality. Our preliminary results show that the transmission mechanism does not work as expected; we find that fixed investment depends on the level of demand in the economy and profits but not on the interest rate. This casts doubt on the usual assumptions about how the monetary transmission mechanism is expected to work. The second part of the paper investigates the effects of the change in the monetary regime towards low and stable interest rates, a policy pursued by the U.S. Fed since the beginning of the 1990s. We find that the new monetary policy regime has the following effects: (1) our VAR model does not support the hypothesis that low interest rates lead to higher fixed nonresidential investment; (2) low interest rates led to a search for higher yields through increasing risk, and (3) they led to an increase in the demand for securitized assets, especially mortgage-backed securities, which eventually resulted in a housing bubble. The overall results therefore raise doubts about the effectiveness of low interest rates as a policy regime designed as a component of a counter-cyclical policy.     

Borrowed reserves and deposit variation: The risks to monetary policy

A theory of bank reserves is presented with emphasis on the behavior of borrowed reserves, the Federal Reserve's operating instrument. The theory explains the observed nonlinear relationship between borrowing and the spread between the federal funds rate and the discount rate. The theory shows that borrowed reserves are also a function of deposit variation. A shift in bankers' perceptions of deposit variation can cause borrowed reserves demand to shift so that the level of borrowing is not a reliable indicator of the degree of reserve pressure. Since borrowed reserves are used as the Federal Reserve's operating instrument, problems such as these pose substantial risks to the implementation of monetary policy.     

Monetary Policy and Risk-Based Asset Allocation

This paper focuses on the effects of the Fed’s monetary policy on stock and bond returns co-movement and their implications to risk-based asset allocation. Using a regime-switching model that controls for the economic effects of monetary policy we identify three co-movement regimes. We document that risk-based portfolio strategies poorly perform in the low correlation regime which features inflation shocks. We find outperformance evidence under the negative correlation regime with a high stock market risk and a very accommodating Fed policy. Less effectiveness is demonstrated under the positive correlation regime where bonds are regarded as risky assets and interest rate volatility is fueled by monetary policy.     

利率管制、LPR与完全市场化下的货币政策传导机制:理论对比与实证检验

2019年8月,中国人民银行正式启用修订后的贷款基础利率（LPR）,标志着中国利率市场化改革步入收官阶段。这使得有关利率市场化能否保障货币政策有效性并从根本上改善货币政策传导效率的探讨再度成为焦点。鉴于此,文章构建了DSGE模型和TVP-VAR模型,详细对比了不同市场化程度下利率政策的有效性和传导效率,主要得出以下三点结论：第一,随着市场化程度的不断加深,产出、通胀与企业价值对利率调控的反应愈加敏感,表明利率市场化改革能够优化利率的宏微观传导效率;第二,模拟分析显示,完全市场化将会大幅降低利率政策的宏观传导效率,同时还可能诱发逆向选择并导致微观传导渠道失灵,因此货币当局仍应对利率完全市场化持必要谨慎;最后,实证检验结果表明,LPR的推出进一步提高了利率传导效率,这说明在完全市场化的初级阶段,采取LPR等过渡元素逐渐加强市场定价主导地位不失为双轨合一过程中的有益尝试。     

浅议我国公开市场业务的拓展

随着积极财政政策的逐渐淡出,稳健的货币政策吸引了众多关注,作为货币政策的日常操作工具———公开市场业务已成为观察货币政策走向的风向标。市场已注意到,央行越来越注重发挥公开市场业务引导利率的作用,其在金融市场上对有价证券等的公开买卖,向市场发出利率走向的信号,其     

Worldwide Inflation and International Monetary Reform： Exchange Rates or Interest Rates？

The international dollar standard is malfunctioning. Near‐zero US short‐term interest rates launch massive hot money outflows into emerging markets (EM) in Asia and Latin America. Each EM central bank buys dollars to prevent its currency from appreciating but loses monetary control. Despite some appreciation, average inflation in EMs is now much higher than in the old industrial economies and world commodity prices are bid up sharply. This inflation on the dollar's periphery only registers in the US CPI with a long lag. However, the more immediate effect of the Fed's zero interest rate is to upset the process of bank intermediation within the American economy. Bank credit continues to decline while employment languishes. Therefore, constructive international monetary reform calls for the Fed to abandon its zero‐interest rate policy, which is best done in cooperation with the European Central Bank, the Bank of Japan, and the Bank of England also abandoning their ultra low interest rates.     

存款保险、市场约束与国有商业银行对策选择

立足于真实银行市场是不完全竞争市场的实际,采集1999～2010年国内15家主要商业银行的数据,通过改进Salop模型,构建不完全竞争市场条件下市场约束与存款保险理论模型,并对其相互关系和影响进行实证分析。结果表明,由于国有商业银行在隐性存款保险下,放贷冲动更强烈,吸收存款力度大,存款利率高,使得居民不会过于关注银行本身的风险水平,从而削弱了市场约束的力量。     

Interest Rate Pass‐Through in Mongolia

This study empirically examines the interest rate pass‐through of the money market interest rate to bank lending and bank deposit interest rates in Mongolia using both linear and nonlinear autoregressive distributed lag (ARDL) models. The results from the empirical analysis using data from December 2002 to September 2015 suggest that interest rate pass‐through is generally weaker, slower, and asymmetric in Mongolia. The new findings provide evidence that: (i) interest rate pass‐through has improved over time; (ii) the bank deposit rate has a higher long‐run interest rate pass‐through and slower adjustment than the bank lending rate; and (iii) there is a negative long‐run asymmetric pass‐through with respect to the bank lending rate and a positive long‐run asymmetric pass‐through with respect to the bank deposit rate.     

Analysing disequilibrium interest-rate systems in developing countries

Under equilibrium conditions, monetary policy measures to raise institutional interest rates are contractionary. When interest rates are held below their free-market equilibrium levels, however, an increase can be expansionary. Higher institutional interest rates may deter savings in the form of unproductive inflation hedges and encourage savings in the form of financial claims issued to finance productive investment. In most developing countries, money is the predominant financial repository of savings and bank loans are a major source of investible funds. Hence, attention is focused here on models which analyse the effects of binding interest-rate ceilings on financial intermediation. Empirical evidence reported in this paper is consistent with the view that binding institutional interest-rate ceilings can have a substantial growth-reducing impact.     

Implications of a negatively sloped LM curve

Conclusion This paper has shown that the LM curve could be downward sloped if the rate of interest on money (specifically liquid deposits) is sufficiently flexible. If so, the momentary equilibrium could be unstable, especially if the LM curve is far from the vertical (i.e., if the interest rate on money is very flexible). Prospects for instability are enhanced if output adjusts slowly or if the central bank varies the money supply strongly over time in response to the general interest rate. If stability obtains with a downward sloped LM curve, fiscal policy has an unconventional direction of effect on income. Three policy implications follow directly. (1) The rate of interest on deposits which are part of the money supply used as the central bank control tool, should not be allowed to be too flexible (to avoid instability). (2) If the monetary deposit rate is quite flexible, the central bank should not have the money supply react too strongly to the general interest rate—i.e., should not come too close to a pure interest rate policy (again, to avoid instability). (3) If the monetary deposit rate is very flexible, fiscal policy should be used with caution (due to the unconventional direction of effect in the event LM is downward sloped).