Macroprudential policy and the inward transmission of monetary policy: The case of Chile,Mexico, and Russia

This paper studies whether domestic macroprudential policy may attenuate the inward transmission of monetary policy shocks from the United States to domestic bank lending growth in three emerging market economies—Chile, Mexico, and Russia. Identification relies on banks’ heterogeneous exposure to prudential policies and the fact that foreign monetary policy shocks are exogenous from the perspective of these economies. After analyzing the effects of the aggregate domestic prudential policy stance, we focus on specific prudential policies targeting mortgage and consumer loans, as well as foreign‐currency deposits. Although our overall results are mixed, we find evidence that the strength of international monetary policy spillovers varies depending on the stance of domestic macroprudential policy. In particular, a tighter reserve requirement stance over foreign‐currency deposits in Chile dampens the effect of an international monetary policy shock on domestic local‐currency lending, but reinforces that on foreign‐currency lending, whereas in Russia, it dampens the effect on both local‐currency and foreign‐currency lending, although to different degrees. Prudential policies targeting the asset side of banks’ balance sheets, such as mortgage loans or consumer credit, are found to amplify international monetary policy spillovers in some cases and attenuate it in others, depending on the country context.     

Monetary and macroprudential policy with foreign currency loans

In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents’ welfare. To this end we construct a small open economy model with financial frictions, where housing loans can be denominated in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that the presence of FCLs negatively affects the transmission of monetary policy and deteriorates the output-inflation volatility trade-off it faces. The trade-off can be improved with macroprudential policy but the outcomes are still worse than under this same policy mix applied to an economy with domestic currency debt. We also demonstrate that a high share of FCLs is harmful for social welfare, even if financial stability considerations are not taken into account. Finally, we show that regulatory policies that discriminate against FCLs may have a negative impact on economic activity and discuss the redistributive consequences of forced currency conversion of household debt.     

A corporate balance-sheet approach to currency crises

This paper presents a general equilibrium currency crisis model of the ‘third generation’, in which the possibility of currency crises is driven by the interplay between private firms’ credit-constraints and nominal price rigidities. Despite our emphasis on microfoundations, the model remains sufficiently simple that the policy analysis can be conducted graphically. The analysis hinges on four main features (i) ex post deviations from purchasing power parity; (ii) credit constraints a la Bernanke-Gertler; (iii) foreign currency borrowing by domestic firms; (iv) a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short-term lending facilities. We derive sufficient conditions for the existence of a sunspot equilibrium with currency crises. We show that an interest rate increase intended to support the currency in a crisis may not be effective, but that a relaxation of short-term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms.     

The role of banks in the Czech monetary policy transmission mechanism

With this work, I aim to enrich the knowledge about the monetary policy transmission mechanism in the Czech Republic with empirical evidence on the impact of monetary policy on bank lending. Using a panel of quarterly time series for Czech commercial banks for the period 1996–2001, I study the overall effect of monetary policy changes on the growth rate of loans and the characteristics of the supply of loans. The characterization of the credit market's supply side allows us to make inferences on the operativeness of the credit channel (the bank lending channel and the broad credit channel) of the monetary transmission mechanism. I find that changes in monetary policy alter the growth rate of loans, with considerably stronger magnitude in the period 1999–2001 than in the period 1996–1998. From the analysis intended to capture the characteristics of the supply of loans, I conclude that the lending channel was operative in the period 1996–1998: I find cross‐sectional differences in the lending reactions to monetary policy shocks due to the degree of capitalization and to liquidity. For the subsequent period 1999–2001, the results also show distributional effects of monetary policy due to bank size and its bank's proportion of classified loans. In the context of steadily decreasing interest rates, this can bolster the supposition of financial frictions between borrowers and lenders and hence, that of an operative broad credit channel.     

Capital Inflows,Exchange Rate Flexibility and Credit Booms

Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, this paper analyzes the impact of exchange rate flexibility on credit markets during periods of large capital inflows. It is shown that bank credit is larger and its composition tilts to foreign currency in economies with less flexible exchange rate regimes, and that these results are not explained entirely by the fact that the latter attract more capital inflows than economies with more flexible regimes. The findings thus suggest countries with less flexible exchange rate regimes may stand to benefit the most from regulatory policies that reduce banks' incentives to tap external markets and to lend/borrow in foreign currency; these policies include marginal reserve requirements on foreign lending, currency‐dependent liquidity requirements and higher capital requirement and/or dynamic provisioning on foreign exchange loans.     

How important is the credit channel in the transmission of monetary policy in Mexico?

This article empirically examines the importance of the credit channel of monetary policy in Mexico for the period 2004–2013. We estimate a vector autoregressive (VAR) model to analyse the effects of a monetary policy shock on real output, and we also use a threshold VAR model to investigate asymmetric effects of contractionary and expansionary policies. The empirical results suggest that a contractionary monetary policy results in a fall in the supply of loans together with an increase in the spread between the lending and deposit rate. To the extent that some borrowers are dependent on bank loans for credit, the reduced supply of loans amplifies the effects of monetary policy on output associated with the traditional interest rate channel. Our results also suggest that the importance of the credit channel is larger for contractionary shocks than for expansionary shocks.     

The Effects of Foreign Currency Derivatives on the Monetary Policy Exchange Rate Channel in China

This paper examines changes in the monetary policy exchange rate channel in the presence of foreign currency derivatives (FCD) markets in China. Initially a theoretical macroeconomics model incorporating the exchange rate risk hedging is presented, and this is followed by an empirical test. A theoretical model implies that with more firms using foreign currency derivatives to hedge the exchange rate risk, the effect of the exchange rate on the net exports will be weaker and may even be reversed. The empirical section uses Structure Vector Autoregression (SVAR) models with China's monthly macro data over the 2000–2013 period to assess the impact of the FCD market on the exchange rate channel. Empirical support for the changes in the exchange rate channel transmission is found. By impulse response function (IRF) analysis, with the emergence of the domestic FCD market in China, in the long run the probability becomes higher that the negative effect of RMB appreciation on China's net exports to the US is reversed; meanwhile the negative effects of RMB appreciation on the overall net exports and the net exports to the EU become gradually weaker on average.     

Globalization,Financial Liberalization and the Behavior of the Long Run Money Demand in the Bangladesh Economy

ABSTRACT

The paper estimates the long run demand for money function in the Bangladesh economy using cointegration and the Vector Error Correction Modeling (VECM) technique. The cointegration results suggest that although the process of globalization has shown no significant impact on money demand by the fact that the foreign interest rate is seen as statistically not significant, the financial liberalization has an important impact, reflected in the statistically significant role of domestic interest rate, in influencing both M1 and M2 money demand. An estimate of VECMs also reveals the fact that the short run speed of adjustment is moderately influenced by the financial reform measures to establish the long run relation between money balances, income and domestic interest rates. The phenomenon of credit constraint in the context of a developing country has shown no significant role in influencing money demand, which may imply that the stage of financial development is getting higher level in the Bangladesh economy. The existence of exchange rate depreciation in the cointegration relation with the expected sign suggests that currency substitution is now effective in the monetary sector and, therefore, its impact should be considered in the Bangladesh monetary policy matrix.     

Exchange Rate Dynamics with Foreign Reserves: Revisiting the Dornbusch Overshooting Model

The purpose of this study is to shed light on the management of foreign reserves that possibly have contradictory policy intentions and impacts, for instance, (1) to defend the domestic currency, (2) to depreciate the domestic currency. With this Möbius's strip‐like nature in mind, we extend the Dornbusch (1976) exchange rate overshooting model with the foreign reserves. Depending on financial vulnerability, the presence of foreign reserves could amplify or alleviate monetary policy shocks on the exchange rate.     

The Monetary Transmission Mechanism: Evidence from Eight Economies in Transition

Abstract

We examine in this paper the importance of banks’ behavior in the transmission of the monetary policy to the real economy. Monthly data from eight economies in transition that recently became members of the European Union and the techniques of cointegration and Error Correction models are used, in order to investigate the relationship between intermediation margin spread (IMS, official lending rate minus deposit rate) and industrial production. Given the low development of corporate bond market and the dependence of non-financial agents on banking credits, we find that in many countries the IMS is an important leading indicator of industrial production. However, in countries characterized by credit access constraints (Estonia and Latvia) evidence for the traditional money channel is found. Evidence for both money and credit channels is found in Poland and Hungary. These results imply that a common monetary policy implemented by the European Central Bank may be transmitted in different ways across the new members of the enlarged European Union with different effects on real output in each country.     

The international business cycle as intertemporal coordination failure

Where investments are irreversible and the future is uncertain, people in two countries can make investment decisions that turn out to be mutually inconsistent. I argue that this intertemporal coordination failure explains international business cycles in a two-currency-area setting with a floating foreign exchange rate. The sequence of events starts with an expansionary domestic monetary shock, which decreases the domestic real interest rate. Facing low transactions costs, people spend the new money relatively early in the foreign exchange market and in the foreign market for loanable funds. Domestic monetary expansion thereby changes the relative prices of domestic and foreign goods and also of goods of earlier and later stages of production. The relative price changes lead to intertemporal and international coordination failures once the monetary expansion ends and relative prices change. Domestic monetary policy thereby causes the comovement across different currency areas we observe of business cycles.     

The demand for money and the real exchange rate misalignments in emerging European countries: A nonlinear approach

This paper investigates the extent to which domestic and foreign money balances in emerging European countries are influenced by foreign exchange considerations. A well-specified and stable relationship between real money demand and the exchange rate can be perceived as an important part of a successful monetary policy. This study examines the long-run determinants of real exchange rates (RERs) associated with the behavioral equilibrium exchange rate (BEER) approach and identifies currency misalignments in these countries. The misalignment is later used to test the nonlinear behavior of the demand for money. The results indicate that the RER misalignments have a significant impact on domestic money demand. When the currencies are overvalued, there is a reduction in domestic money demand, and when they are undervalued, there is an increase in domestic money demand. Furthermore, it can be concluded that overvaluation causes an increase in foreign money demand indicating a shift of preference from domestic to foreign currency.     

Empirical evaluation of nominal convergence in Czech Republic, Poland and Hungary (CPH)

We estimate a four variable structural vector auto regression (SVAR) model of the Czech Republic, Poland and Hungary economies in order to evaluate the links between the instruments of monetary policy and inflation outcomes. We find that the linkages between the interest rates and price levels are weak. However, the exchange rate constitutes the most important channel of monetary policy transmission for Poland and Hungary. For the Czech Republic, the link between interest rate rise and price level is rather indirect.     

Currency Options and Export-Flexible Firms

This paper examines the production and hedging decisions of a globally competitive firm under exchange rate uncertainty. The firm is risk averse and possesses export flexibility in that it can distribute its output to either the domestic market or a foreign market after observing the realized spot exchange rate. To hedge against its exchange rate risk exposure, the firm can trade fairly priced currency call options of an arbitrary strike price. We show that both the separation and the full‐hedging results hold if the strike price of the currency call options is set equal to the ratio of the domestic and foreign selling prices. Otherwise, neither result holds. Specifically, we show that the optimal level of output is always less than that of an otherwise identical firm that is risk neutral. Furthermore, an under‐hedge (over‐hedge) is optimal whenever the strike price of the currency call options is below (above) the ratio of the domestic and foreign selling prices.     

Monetary policy and exchange market pressure–evidence from sub-Saharan Africa

The purpose of this study was to assess the impact of monetary policy on foreign exchange market pressure (EMP) in developing country contexts for some selected countries in sub-Saharan Africa (SSA) and to measure the ability of monetary policy to significantly address currency pressures that arise from trading on the global market. This study was motivated by the fact that most of the SSA countries are developing economies that have negative net export positions and stand to lose significantly from consistently deteriorating foreign exchange position. The study, therefore, employs a dynamic panel model to test the hypothesis that a tighter monetary policy stance lends strength to a currency and vice versa, using 20 SSA economies for the period from 1991 to 2010. This study finds a negative and significant relationship between monetary policy and EMP, implying an easing of EMP in the face of contractionary monetary policy. The findings also point to significant relations between aggregate output, levels of public debt, the current account balance, terms of trade and EMP. Findings of this study have important implications as regards the policy direction on exchange rate and currency management.     

In search of stabilization and recovery: macro policy and reforms in Venezuela

Venezuela is currently immersed in a severe economic crisis as a result of years of domestic mismanagement and the recent reversal in oil prices. This article attempts to formulate a proposal for stabilization and recovery that includes upfront key policy actions to deal with the drastic foreign exchange constraint. We consider the recovery of foreign currency liquidity to be of paramount importance. This will allow not only the lifting of exchange control and the implementation of a stable and competitive real exchange rate, but also the removal of shortages across the board and output recovery. The recovery of domestic activity will also require supply-side relief in the form of broad deregulation, institutional changes, and a sensible policy to lift price controls. To maintain a stable and competitive exchange rate, we propose a whole set of policy measures for rapid suppression of inflation and the causal mechanisms that have formed over the years. A monetary reform and the support of monetary and fiscal policy for successful stabilization and recovery efforts are also discussed.     

FLOATING WITH A LARGE LIFE JACKET: MONETARY AND EXCHANGE RATE POLICIES IN CROATIA UNDER DOLLARIZATION

Even after more than a decade of low inflation, Croatia remains highly dollarized. Commercial banks avoid currency mismatch by indexing loans to the exchange rate. Although this eliminates direct currency risk, it creates credit risk, because any larger depreciation might induce borrower defaults. Monetary and exchange rate policies focus on exchange rate smoothing to safeguard financial stability. Dollarization has prevented the use of monetary policy to stabilize output. Given Croatia's likely entry into the EU and adoption of the Euro, dedollarization seems unfeasible. Rather than attempting to reverse dollarization, the central bank has taken measures to make the banking system more robust to shocks. (JEL E52, E58, F31, G21, P24 )     

我国外汇存款准备金问题研究

2007年美国次贷危机爆发后,全球性的流动性过剩被流动性不足所替代,美国政府采取了扩张性的政策组合,即以降息和提供紧急流动性援助方式为代表的扩张性货币政策、以减税为代表的扩张性财政政策以及纵容美元贬值的汇率政策,以对中国经济政策的调整空间形成制约.我国中央银行上调外汇存款准备金率以及要求用外汇缴存新增人民币存款准备金的做法,并不能从根本上缓解人民币汇率的升值压力,相关的外汇存款准备金制度设计还有待改进.     

美元化与区域货币的合作关系

美元化是区域化在国际货币体系方面的一个重要体现,而作为一种事实、一种过程或政策,在各国民间或官方活动中,美元化已成为区域货币合作的一种重要方式.美元化既是区域货币合作发展的产物,另一方面它的发展也是区域货币合作的新实践,推动着区域货币合作的发展.各国在实施美元化的过程中应该注意强化本位货币作用和计价货币作用、外汇储备应保持适度规模和多样性以及发挥在区域经济合作中的作用.     

INTERNATIONAL CREDIT CHANNEL OF MONETARY POLICY: AN EMPIRICAL NOTE

A longstanding macroeconomic issue is how monetary policy affects the real economy. There are economists placing an emphasis on the role of bank lending in monetary transmission. Their view, called the credit view, is that a monetary tightening shifts the supply schedule of bank loans left, thereby forcing bank‐dependent borrowers to cut back on expenditures. In the literature, the credit view is typically studied in a closed‐economy context. In reality, however, banks make international loans through their overseas branches and subsidiaries. This suggests that the credit view should be studied in an open‐economy context. This paper proposes the international credit view: a monetary‐policy shock originated in one country propagates to another through banks’ reallocation of funds between the two countries. For testing the hypothesis, Australia and New Zealand provide an excellent case to study. This is because Australian‐owned banks dominate the banking market in New Zealand. This paper aims to test the international credit view within a framework of vector auto‐regression models. A significant and robust finding is that the supply schedule of loans shifts left in New Zealand after a monetary tightening in Australia.