The Differential Regional Effects of Monetary Policy

This dissertation consists of four essays, focusing on the relationship between financial risks, financial market uncertainty and macroeconomic conditions. The first essay estimates the effects of anticipated and unanticipated monetary policy changes on jump variation by employing high frequency non-parametric jump detection methods. We use an event study approach and a structural VAR framework in examining stock price jump variation for the aggregate economy, the financial, health, energy and telecommunication-information technology sectors (Tel-Info). We find that anticipated changes in the Fed funds have no significant effect on jumps. In contrast, jump variation in the price of financial market data increases with monetary policy surprises. We document evidence of asymmetries in the response of jumps to monetary policy changes. Monetary policy surprises and positive changes in the Fed target rate induce increment in jumps. Similar results exist in the sector analysis. In addition, this study uncovers no evidence of endogenous response between jumps and monetary policy surprises. The second essay estimates the response of uncertainty/risk aversion to monetary policy actions in both the financial sector and the aggregate economy using a Structural Vector Autoregressive (SVAR) model. When compared with other sectors, our constructs reveal that financial risk aversion/uncertainty has greater correlation with the aggregate risk aversion and uncertainty. Our analysis reveals that financial risk aversion and uncertainty exhibit stronger interdependence with monetary policy actions than aggregate uncertainty and risk aversion. The third essay provides the dynamic characterization of the link between ex-ante financial distress risk and the real economy. Using 219, 990 firm-year observations, an ex-ante measure of financial distress is generated at sector level. By employing simultaneous equation model, we provide a comprehensive set-up for predicting ex-ante financial distress risk and examining its effect on GDP growth. Over the period of 1970-2012, the results from the US firms reveal that ex-ante financial distress strongly relate to GDP growth. Ex-ante distress risk contracts GDP growth by up to 10%. Similar contractions in the growth of GDP are uncovered when a single equation approach is used in establishing the relationship between financial distress and growth in GDP. In addition, the results remain consistent when a confirmatory analysis is generated by using a weighted sector index of financial distress. The fourth essay examines liquidity risk and financial integration using bank level flows for 95 countries. The results suggest that global banking network influences liquidity risk. The more the banks are connected to each other the more they are prone to liquidity risk and the result is the same for intermediaries in the network formation. Borrowers that connect to important lenders are not at an advantage, but banks that have independent access to finance in the financial network are at an advantage. On a regional basis, banks in Europe, Africa and Asia and Pacific that have strong connections are prone to liquidity risk. American banks that function as intermediary in the network are prone to liquidity risk. Banks in the American region that have independent access to financing in the financial network are able to reduce liquidity creation, but their degree of connectivity worsens net stable funding.

This article examines the response of consumer and business confidence to five measures of change in Australian monetary policy. Actual, expected and surprise increases in the official cash rate target and related interest rates are shown to negatively impact consumer sentiment. Business confidence is less affected by increases in the cash rate target, but is negatively affected by an increase in the 90‐day bank accepted bill rate. Tests for model stability and asymmetries in the response of sentiment to increases and decreases in interest rates otherwise find only limited evidence for monetary policy having a perverse signalling effect on sentiment.

REFORMING THE EXCHANGE-RATE SYSTEM C. Fred Bergsten AN ASSESSING THE DEBATE OVER INTERNATIONAL MONETARY ISSUES, one should carefully distinguish between policies that seek to attain shortterm exchange-rate adjustments and those that seek to sustain long-term balance in the exchange-rate system. The U.S. initiative launched at the 22 September 1985 meeting of finance ministers from France, Great Britain , Japan, West Germany, and the United States — the Group of Five (G-5) — sought to attain a substantial exchange-rate adjustment over the near term. This initiative resulted in the "G-5 Plaza Agreement," reflecting the meeting's location at the Plaza Hotel in New York City. By late May 1986 the G-5 Plaza Agreement had made some progress toward restoring equilibrium in the current- account position of the major industrialized countries, especially the United States andJapan. From its early 1985 peak, the dollar has depreciated on a trade-weighted basis by over 25 percent; during the same period, it depreciated by about 35 percent against the Japanese yen and against the deutsche mark. Nevertheless, the G-5 Plaza Agreement must be carried considerably further to reach its goal of restoring equilibrium in the current-account balances of the United States and the major surplus countries, especially Japan and Germany. The dollar must depreciate on a trade-weighted basis by an additional 15 percent. The yen needs to wind up at approximately 160 yen per dollar; this means that it may initially have to reach 150 yen per dollar, since Japanese investors will increase their dollar purchases when they believe that the official currency target has been achieved and the yen will then depreciate somewhat.1 The deutsche mark must appreciate to about two marks per dollar. 1. See C. Fred Bergsten, "The United States-Japan Economic Problem: The G-5 Plaza Agreement After Six Months," New York: Japan Society, 12 March 1986. C. Fred Bergsten is director of the Institute for International Economics. 2 SAIS REVIEW If the dollar depreciates against the yen and mark in this range, and corrects more generally against all major currencies (including the Canadian dollar, which has not appreciated at all against the U.S. dollar since early 1985), the U.S. current-account deficit would be substantially reduced. Major improvement would begin to show up in late 1986 and especially in 1987. The pressures for trade protection would decline sharply. This substantial correction is needed because the dollar was so overvalued , probably by at least 40 percent, when it began its descent in February 1985. U.S. imports now exceed exports by well over 50 percent , requiring a massive shift in their relative rates of change to even begin pushing the deficit downward. Moreover, the United States has become a debtor country, which means that net interest payments have turned negative. As the net foreign debt rises (to at least $400 billion before leveling off), interest payments will rise sharply. Over the past year, the exchange-rate correction has occurred in four phases. European intervention and market forces reduced the dollar's value by about 15 percent between February andJuly 1985 —but the dollar was rising again in August and early September before the G-5 Plaza Agreement. The initial G-5 "announcement effect" reduced the dollar's value by another 5 percent. Direct intervention accounted for a few more percentage points, and the remainder of the dollar's depreciation is probably due to the relative decline in U.S. interest rates, especially in the long term, which simultaneously reduces capital flows to the United States and the demand for dollars. No one knows whether the further correction of the dollar which is needed can be achieved with the same techniques—jawboning by officials , market intervention, and changes in monetary policy— or even whether the gains to May 1986 can be sustained. The analytical question , to which there is no definitive answer, is the extent to which the exchange-rate pattern represented a speculative bubble and, conversely, the extent to which it was due to economic fundamentals. The announcement effect of the G-5 Plaza Agreement showed that the speculative bubble could be burst without addressing the economic fundamentals, such...

COVID-19 created a situation in which each nation was under pressure to implement strategies in order to stop the spreading of virus and to save human beings life. In the other hand economic activities, financial markets and private sector were collapsing. The lockdown has stopped almost every economic activity, but the nations could not think about healthy economies without healthy people. The end of April and the beginning of May brought the flat curve of COVID-19 infections and the eyes immediately turned up into the monetary policy changes. This study will analyze and will present the monetary policy changes taken from USA and European Union to recover economy from the COVID-19. A focus will be given also to the proposal economic assistance from EU to Western Balkans Countries to combat COVID-19. The study concludes that deflation must be avoided during COVID-19 economic crisis.

Bank Capital, Bank Lending, and Monetary Policy in the Euro Area This paper provides arguments and evidence in favour of the hypothesis that bank capital matters for euro area banks’ loan response to a change in monetary policy. Bank-level panel data estimates for 1991-1999 show that the lending behaviour of the least-capitalised banks in France and Italy is more responsive to a change in monetary policy than that of better capitalised banks. The degree of capitalisation also matters for the monetary policy impact on lending of the key players in the German and euro area banking system. These findings suggest that the new Basle capital requirements can affect the monetary transmission channel through bank capital. (JEL C23, E52, G21)

The objective of this study is to determine the impact of monetary policy on real output in China and its provinces using the vector error correction (VEC) method for the 1980-2004 period. It compares and contrasts two alternative indicators of monetary policy - M2 and interest rates. Our findings indicate that the bank lending rate is a better indicator of the direction of monetary policy in China. Using VEC-generated impulse response functions, we find that coastal provinces respond more to shocks in monetary policy than inland provinces. We also determine that the differential provincial responses to monetary policy changes are positively related to the share of loans accounted by industrial firms and to the primary sector’s GDP share. Finally, the percentage of firms that are stateowned (a proxy for the soft budget constraint) has a negative, albeit statistically insignificant, relationship to a province’s response to monetary policy shocks.

The Bank lending channel and sovereign risk: Effects on significant and less significant banks after the implementation of the Banking Union

How does the expansion of domestic banks in international markets affect the bank lending channel of monetary policy? Using bank-firm loan-level data, we find that loan growth and loan rates from international banks respond less to monetary policy changes than domestic banks and that internationalization partially mitigates the risk-taking channel of monetary policy. Banks with a large international presence tend to tolerate more their credit risk exposition relative to domestic banks. Moreover, international banks tend to rely more on foreign funding when policy rates change, allowing them to insulate better the monetary policy changes from their credit supply than domestic banks. This result is consistent with the predictions of the internal capital markets hypothesis. We also show that macroprudential FX regulation reduces banks with high FX exposition access to foreign funding, ultimately contributing to monetary policy transmission. Overall, our results suggest that the internationalization of banks lowers the potency of the bank lending channel. Furthermore, it diminishes the risk-taking channel of monetary policy within the limit established by macroprudential FX regulations.

The impact of economic news on expected changes in monetary policy

In the present paper fundamental changes in monetary policy strategy, especially in leading industrialized countries, from concentrating on development of the quantity of money to focusing strictly on developments of interest rates and interest rate levels is analysed in the case of the European Central Bank. The goal of research is to show that this change in monetary policy is one important reason for expansions of the European debt crisis since 2010. Within this new monetary policy regime, interest rate levels on the one hand and the transmission of interest rate policy measures to the interest rates of the other financial markets on the other hand, have become a very important role in central banking policies of today. For example to guarantee a sure and strict transmission of interest rate policy measures, which have its starting point on the short-term money market, and which should radiate to long-term interest rates on the capital market the ECB, if necessary, uses outright monetary transactions in secondary markets for sovereign bonds in the euro area. The main reason for acting in that manner is to avoid rising of long-term interest rates and to guarantee low levels of interest rate in the sovereign bonds markets. It is argued in the present paper that in focusing to guarantee low interest rate levels especially to overcome economic crisis you can find one important reason for expansions of the European debt crisis. This is so, because in view of current European economic policy rising interest rates in the European bonds markets above a level of 6 or 7 percent have become an unmistakeable proof of a severe debt problem.

This chapter describes monetary policy. Monetary policy aims at keeping consumer prices stable and the financial system well-functioning. Monetary policy is conducted by central banks. To achieve their goals, central banks use their monetary policy instruments, the most important of which is the monetary policy rate. By changing the short interest rate, central banks influence financial markets, first via its influence over other interest rates (longer interest rates on government bonds, interest rates on commercial debt, mortgage rates, etc.) and then via spill-overs to other asset prices, such as stock prices, exchange rates, house prices, etc. Changes in monetary policy thereby influence the business cycle and its future path. When monetary policy influences the business cycle, and the business cycle influences the stock market, there are good reasons to believe that monetary policy also influences the stock market.

This paper presents evidence on the industry effects of bank lending in Germany and asks whether bank lending to single industries depends on industry-specific bank credit demand or on monetary policy as determinant of bank credit supply. To this end, we estimate individual bank lending functions for 17 manufacturing and non-manufacturing industries and five banking groups using quarterly bank balance sheet and bank lending data for the period 1992:1-2002:4. The evidence from dynamic panel data models illustrates that industry bank lending responds more to changes in industry-specific bank credit demand than to changes in monetary policy. We report evidence in favor of a credit channel through bank lending, but find the bank lending effects of monetary policy to be very sensitive to the choice of industry. The empirical results, hence, lend strong support to the existence of industry effects of bank lending. In view of this finding, we conclude that bank lending growth and monetary policy effectiveness crucially depend on the industry composition of bank credit portfolios.

Monetary policy and bank performance: The role of business models

The article examines modeling the impact of news shocks of US monetary policy on developing countries. The study analyzes the transmission mechanism of the Federal Reserve's interest rate news shock. The authors argue that the volatility of macroeconomic indicators in emerging economies can be explained by changes in monetary policy in other countries, and highlight the main channels of influence: financial sector indicators and trade indicators. In this paper the authors first use the LSDV-estimator of the panel vector autoregression and identify unexpected and news shocks. To achieve this goal, quarterly data was collected from the first quarter of 1998 to the third quarter of 2017 for Russia, along with data starting from the first quarter of 1995 for several developing countries. The results obtained indicate that the expected tightening of US monetary policy leads to a decrease in output, investment, and weakening of exchange rate in Russia. The monetary news regarding an increase in the US Federal Reserve's interest rate in two quarters also results in a short-term increase in trade balance and interest rates. News about future economic developments affects macroeconomic indicators up to two quarters before the implementation of monetary policy changes. Additionally, the news shock accounts for up to 11% of the variation in macroeconomic indicators in Russia. Accordingly, the monetary policy news shock is found to be as significant as an unexpected shock. The paper concludes with the analysis of the role played by various financial and trade channels.

The recent changes in the value of the dollar and the talk of an interest rate ‘war’ demonstrate again that the world finds it difficult to cope with rapid exchange rate movements. In some ways the experience ‐ and the reactions to it ‐ are similar to the events of 1978. As now, the world was in a recession (though on a milder scale) and there were fears that exchange rate problems would obstruct economic recovery. The main difference is that in 1978 it was the strength of the Deutschmark which caused concern whereas this time the problems are associated with the rise in the value of the dollar. In a Briefing Paper in Economic Outlook, February 1978, ‘Monetary Targets and the World Economy’ we suggested that the problem arose from inconsistencies between national monetary policies and exchange rate objectives. In general, countries dislike exchange rate changes ‐ in either direction ‐ and there were problems because countries would not accept the exchange rate consequences of their own or other countries' monetary policies. We estimated the required monetary policies for stable exchange rates and suggested specific national monetary targets for 1978 which would at least move the world economy towards consistent monetary policies. In this Economic Viewpoint we return to those ideas. We consider what happened in 1978 and we also revise the underlying monetary rules. More recent experience suggests that although there has been some progress towards the convergence of monetary policies there will continue to be trend changes in exchange rates. It is also clear that there will be short‐term fluctuations around these trends. We believe that greater convergence of monetary policies would be desirable but failing that it is important that countries should avoid abrupt changes in monetary policy. It is also important that countries should become accustomed to exchange rate changes. They should direct monetary policy towards their objectives for inflation and should not be diverted from it by temporary or permanent changes in their exchange rates.