The transmission of euro area monetary policy to financially euroized countries

This paper provides a comprehensive analysis of the interest rate pass-through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroization and on the transmission channels of monetary policy spillovers. The results suggest that in the long run, more than the one-third of all euro retail rates in euroized countries of central, eastern, and south-eastern Europe is linked to the euro area shadow rate. Compared with euro area monetary policy, the share of cointegration of the domestic monetary policy rate is on average lower, suggesting that domestic central banks in euroized countries with independent monetary policy can only partially control the “euro part” of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission.     

Evidence on the cross-country transmission of monetary shocks

The international transmission of monetary shocks between the US and Canada is explored. Focusing on real variables such as consumption, investment, employment, and the bilateral trade balance, along with measures of US and Canadian money, the empirical analysis examines the impact of a monetary shock in one country on real activity in both countries. The long-run analysis provides evidence of cointegration among the variables and suggests that money plays an important role in the equilibrium relationships between the two countries. Variance decompositions and impulse response functions reveal interesting avenues of real transmission in the short run. The short-run analysis provides strong evidence that US monetary shocks affect real activity in both the USA and Canada. The analysis also indicates that Canadian monetary disturbances affect Canadian and US real activity, and that many of these effects are similar in magnitude to the effects of US monetary shocks. The importance of the nominal exchange-rate regime is also discussed.     

Credibility and commitment of monetary policy in open economies

We study the delegation of monetary policy to independent central bankers in a two-country world with monetary spillovers. It is shown that, under the hypotheses of imperfect commitment and private information, the equilibrium degree of commitment depends on the correlation structure of the shocks hitting the economies. When the correlation is negative (as when the variance of output depends mainly on shocks to the terms of trade) there is strategic complementarity in the degree of commitment in the two countries. When the correlation is positive (common technological or demand shocks) there is strategic substitutability. In this latter case, the degree of commitment is shown to be increasing in the correlation among shocks. Common components in the international business cycle have been shown in several studies to be relatively more relevant in developed countries. Therefore, our results may contribute to explaining why the institutional solution to the inflationary bias has been adopted in the most advanced countries.     

Trade effects of monetary agreements: Evidence for OECD countries

This paper analyses the effects of monetary agreements on trade flows using a sample of 25 OECD countries over the period 1950-2004. We find that these agreements have boosted intra-bloc trade. This result especially applies to the case of the euro. More importantly, in contrast to regional trade agreements, all monetary agreements analysed show evidence of trade-creating effects with third countries. Finally, only the euro shows a symmetric impact for the trade-creating effect with non-members, that is, using the euro promotes both the Eurozone's exports and its imports to non-Eurozone markets to a similar extent.     

The changing international transmission of U.S. monetary policy shocks: Is there evidence of contagion effect on OECD countries

We study the changing international transmission of U.S. monetary policy shocks to 14 OECD countries over the period 1981Q1–2010Q4. The U.S. monetary policy shock is defined as unexpected change in Effective Federal Funds Rate (FFR). We use a time varying parameter factor augmented VAR approach (TVP-FAVAR) to study the EFFR shocks together with a large data set of 265, major financial, macroeconomic and trade variables for U.S., Canada, France, Germany, Italy, UK, Japan, Australia, Spain, Norway, Sweden, Switzerland, Finland and New Zealand. Our main findings are as follows. First, negative U.S. monetary policy shocks have considerable negative impact on GDP growth in the U.S., Canada, Japan and Sweden while most of the other member countries benefits. Second, the transmission to GDP growth has increased in OECD countries since the early 1980s. We also detect a more depressed GDP over medium term in the U.S., Canada, Japan, Australia, Norway and Sweden over the recent global financial crisis. Third, the size of U.S. monetary policy shocks during financial turmoil periods were unusual than normal periods and varies overtime. The financial crisis (2008–2009) is evidenced by decline in residential investment in the U.S. and propagation of this shock to Canada, Germany, Japan, Switzerland and New Zealand over the recent period. U.S. monetary policy shocks reduce share prices in most of the OECD countries; this impact is more pronounced over the turmoil period. Asset prices, interest rates and trade channel seem to play major role in propagation of monetary policy shocks.     

Vertically Integrated North–South Trade and the Redux Model

The paper uses the framework of Obstfeld and Rogoff's Redux model to study the impact of monetary shocks on exchange rate, terms of trade, and welfare in the context of a North–South trade. The authors show that a relative Northern monetary expansion can depreciate or appreciate its currency depending on whether the consumption elasticity of money demand and the degree of monopolistic distortion are low or high enough. This shock has asymmetric effects on welfare in such a way that “beggar‐thyself” or “beggar‐thy‐neighbor” effects always occur.     

International monetary policy coordination under asymmetric shocks

This paper analyzes whether international monetary policy coordination is the best response to economic interdependence. The paper develops a macroeconomic model in which countries show different preferences regarding objectives when faced with asymmetric disturbances and analyzes in strategic terms how monetary policy can deal with real, monetary, and supply-side shocks. It further shows how the desirability of monetary policy coordination depends on the presence of asymmetric shocks and also on the nature of disturbances, the channel of transmission, and the asymmetry of preferences. Finally, the paper derives the conditions under which monetary policy coordination proves to be desirable.     

Trade credit, bank lending and monetary policy transmission

This paper investigates the role of trade credit in the transmission of monetary policy. Most models of the transmission mechanism allow firms to access only financial markets or bank lending according to some net worth criterion. In our model we consider external finance from trade credit as an additional source of funding for firms that cannot obtain credit from banks. We predict that when monetary policy tightens there will be a reduction in bank lending relative to trade credit. This is confirmed with an empirical investigation of 16,000 UK manufacturing firms.     

International monetary policy coordination in a new Keynesian model with NICE features

The authors provide a static two-country new Keynesian model to teach two related questions in international macroeconomics: the international transmission of unilateral monetary policy decisions and the gains coming from the coordination monetary rules. They concentrate on “normal times” and use a thoroughly graphical approach to analyze the questions at hand. In this setting monetary policy is conducted using interest rates rules and economic integration between nations does not necessarily create the case for the coordination of monetary policy. In particular, they show that the conduct of optimal national monetary policies does not make any difference with the coordination of national policies, as this creates a situation where the international monetary system operates “Near an International Cooperative Equilibrium” (NICE).     

The effects of monetary policy in the Czech Republic: an empirical study

In this paper, we examine the effects of Czech monetary policy on the economy within the vector auto regression (VAR), structural VAR, Bayesian VAR with sign restrictions, and factor-augmented VAR, frameworks. We document a well-functioning transmission mechanism similar to the euro area countries, especially in terms of persistence of monetary policy shocks. Subject to various sensitivity tests, we find that a contractionary monetary policy shock has a negative effect on the degree of economic activity and the price level, both with a peak response after one year or so. Regarding prices at the sectoral level, tradables adjust faster than non-tradables, which is in line with microeconomic evidence on price stickiness. There is no price puzzle, as our data come from a single monetary policy regime. There is a rationale in using the real-time output gap instead of current GDP growth, as using the former results in much more precise estimates. The results indicate a rather persistent appreciation of the domestic currency after a monetary tightening, with a gradual depreciation afterwards.     

International interdependence and the welfare effects of monetary policy

A vertical chain of production and trade along this chain have been found to be a characteristic feature of globalized markets. This paper examines how a multistage production process that involves more than one country affects the transmission of monetary policy changes. We assume that imported and domestic inputs are required to produce final consumption goods. Monetary policy may have adverse beggar-thyself effects if the mutual dependence between countries is considerably high. The foreign country benefits from a home monetary expansion unless the competitiveness of markets is too low.     

International capital flows,liquidity risk,and monetary policy

In recent years, there has been a large amount of lending coming from the public sector of many developing countries. At the same time, the financial sectors in many advanced countries have issued a large share of portfolio debt to other countries. What are the implications of these events for the global financial system and overall economic activity? Do they have an impact on the transmission channels of monetary policy across countries at different stages of economic development? We investigate these important issues using a micro-founded model of money and banking so that the effects of monetary policy across countries can be meaningfully studied. Notably, the increase in capital outflows to the advanced economy renders monetary policy in developing countries to be less effective, while the effects of monetary policy in advanced economies are more pronounced. Yet, our results indicate that it can indeed be optimal for lower income countries to lend to the advanced world. Importantly, we find that the optimal amount of lending to advanced countries critically depends on the degree of liquidity risk — if it is sufficiently high, then public sector lending to advanced economies is not warranted. Consequently, our results indicate that governments in developing countries should carefully consider how much capital they send abroad to foreign countries.     

Do natural disasters affect monetary policy? A quasi-experiment of earthquakes

This study explores whether the economic consequences of earthquakes affect the policy interest rate set by the central bank. The direction of this effect is not immediately clear beforehand since earthquakes create a classic monetary policy dilemma: how to accommodate the real shock in the short-run with the objective of anchoring inflation when these two competing objectives demand opposite policy actions. One can therefore argue that the question of whether, and if so, in which direction natural disasters influence monetary policy is ultimately an empirical one. For this purpose, I estimate a dynamic panel model including about 400 major earthquakes from about 85 countries that occurred between 1960 and 2015. The key findings of this study clearly point out that on average the short-run policy interest rate falls in the first year after the earthquake. This result implies that monetary authorities prioritize short-run economic recovery above price stability. However, this interest rate effect is not the same across countries. It turns out that central banks that have a specific policy target, such as a fixed exchange rate, are more likely to raise the interest rate in the period following a disaster to fight the inflationary pressure. In turn, monetary authorities that have much freedom in their policy decisions are more inclined to lower the interest rate to stimulate economic recovery.     

Transmission of monetary policy in times of high household debt

This paper explores whether the degree of household indebtedness can affect the effectiveness of monetary policy. We take an interacted panel VAR approach, using a panel of 23 countries, thereby obtaining several interesting findings, such as the responses of consumption and investment to monetary shocks are stronger in high levels of household debt. Furthermore, such responses become larger in a contractionary monetary policy stance rather than in an expansionary one, which suggests that monetary policy shocks have asymmetric effects. We have also found that monetary policy has a relatively larger impact in countries with higher share of adjustable-rate loans. Finally, we have found that when a country is in a high-debt state and in a contractionary policy stance, monetary policy is more powerful in countries with a higher share of adjustable-rate loans. We conjecture that these findings support the presence of a cash-flow channel with respect to the transmission of monetary policy in a high household debt state.     

Tipping the scale? The workings of monetary policy through trade

The monetary policy entails demand‐augmenting and diverting effects, and its impact on the trade balance—and on other countries—depends on the magnitude of these opposing effects. Using U.S. data and a sign‐restricted structural vector autoregressive identification, we investigate the importance of these effects. Overall, the results indicate that a monetary loosening (tightening) leads to a strengthening (weakening) of the overall trade balance, indicating that demand diversion dominates. The paper also explores changes in the effects following the global financial crisis, reflecting the impaired monetary transmission mechanism.     

The monetary transmission mechanism: evidence and implications for European Monetary Union

We provide some evidence consistent with a heterogeneous credit channel of monetary policy transmission in the European Union. Using the techniques of cointegration and Error Correction Models, we have shown that the external finance premium is one important leading indicator of real economic activity in Germany and Italy. No evidence is found for France and the UK. Therefore, a common monetary policy implemented by the European Central Bank might be transmitted in different ways across the member countries of the monetary union, thus exacerbating existing regional disparities among the member countries.     

Monetary transmission in three central European economies: evidence from time-varying coefficient vector autoregressions

We study the transmission of monetary policy to macroeconomic variables with structural time-varying coefficient vector autoregressions in the Czech Republic, Hungary and Poland, in comparison with that in the euro area. These three countries have experienced changes in monetary policy regimes and went through substantial structural changes, which call for the use of a time-varying parameter analysis. Our results indicate that the impact on output of a monetary shock changed over time. At the point of the last observation of our sample, the fourth quarter of 2011, among the three countries, monetary policy was most powerful in Poland and not much less strong than the transmission in the euro area. We discuss various factors that can contribute to differences in monetary transmission, such as financial structure, labour market rigidities, industry composition, exchange rate regime, credibility of monetary policy and trade openness.     

Has the transmission mechanism of European monetary policy changed in the run-up to EMU?

This paper studies empirically the transmission mechanism of European monetary policy by means of time-varying, heterogeneous coefficient models estimated in a numerical Bayesian fashion. Based on pre-European Monetary Union evidence from Germany, France, Italy, and Spain, we find that (i) the long-run cumulative impact on output of a common, homoskedastic monetary policy shock has decreased in all countries after 1991. These declines are statistically significant and accompanied by some changes in the conduct of monetary policy over the same period. At the same time, we also find that (ii) cross-country differences in the effects of this shock have not decreased over time.     

The interaction between macroprudential policy and monetary policy: Overview

This paper presents the main findings of an International Banking Research Network initiative examining the interaction between monetary policy and macroprudential policy in determining international bank lending. We give an overview on the data, empirical specifications and results of the seven papers from the initiative. The papers are from a range of core and smaller advanced economies, and emerging markets . The main findings are as follows. First, there is evidence that macroprudential policy in recipient countries can partly offset the spillover effects of monetary policy conducted in core countries. Meanwhile, domestic macroprudential policy in core countries can also affect the cross‐border transmission of domestic monetary policy via lending abroad, by limiting the increase in lending by less strongly capitalized banks. Second, the findings highlight that studying heterogeneities across banks provides complementary insights to studies using more aggregate data and focusing on average effects. In particular, we find that individual bank characteristics such as bank size or GSIB status play a first‐order role in the transmission of these policies. Finally, the impacts differ considerably across prudential policy instruments, which also suggests the importance of more granular analysis.     

Measuring monetary policy with empirically grounded identifying restrictions

This article reevaluates the impulse response functions (IRFs) to a monetary policy shock of the structural vector autoregression (SVAR). Identifying restrictions are specified and justified based on empirical evidence,i.e., conditional independence relations of variables, which is an important dimension that a good model must be able to mimic. The empirical-based approach is able to significant narrow down the set of admissible causal orders to identify the IRFs to a monetary policy shock (from 2,482 to 8). I find that most of the qualitative “stylized” features reported in the literature remain intact. However, the quantitative predictions are much less certain than what is commonly perceived.