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An analysis of the monetary policy transmission mechanism in Nigeria

An analysis of the monetary policy transmission mechanism in Nigeria

The monetary transmission mechanism describes the ways by which monetary policy impact aggregate demand and prices by influencing the investment and consumption decisions of firms households and financial intermediaries. The monetary policy decisions of the central bank do not operate in isolation, they steer economic activities in the economy through monetary transmission channels (such as interest rate, bank lending, balance sheet, asset prices, exchange rate and expectation channels). It is worth noting that, the effectiveness of any of these channels depends on the magnitude and speed at which these channels transmit monetary impulses and also depends on factors such as the economic regulation, legal and financial structure of the economy. Thus, the success of a monetary policy strategy largely, depends on a comprehensive undertaking of how these channels work and the relationship between operating instruments of monetary policy and the ultimate goals (Buigut, 2009). The monetary policy transmission process is complex and involves a number of strategies. However, these stage were being summarized by Fauru, (2006) in to six stages. First, a change in the central banks lending rate is transmitted to the private bank to bank interbank market. Second, the private bank to bank interbank market transmits the change to other market interest rates. Third, changes in market interest rates are transmitted to asset prices exchange rates and expectation are then transmitted to
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MONETARY POLICY TRANSMISSION MECHANISM IN NIGERIA: AN OVERVIEW

MONETARY POLICY TRANSMISSION MECHANISM IN NIGERIA: AN OVERVIEW

In this channel of transmission, contractionary interest rate (raising interest rate) makes bonds relatively less profitable to equities forcing equities prices to fall. It can be inferred that reducing equity prices leads to a decline in q (the ratio of market value of firms to the replacement cost). Tobin q theory (1969) refers it (q) as the market value of firms divided by the replacement cost of capital. The equity price channel is sub-divided into two which are investment effect due to Tobin’s quantity theory of money and wealth effect on consumption and Modigliana’s life cycle income hypothesis. So, lowering investment expenditure brings about reaction on asset price channel of monetary transmission mechanism, specifically on wealth effect of consumption. Modigliana (1971) in his life-cycle hypothesis of consumption, points that wealth is the major determinant factor of consumption expenditure in any economy. But financial wealth is an important aspect of stock and so transmission channel is linked to interest rate relationship with asset prices, specifically common stock. A fall in stock prices leads to a decline in financial wealth and consequently lowers the lifetime resources of household, thereby reducing consumption. In other words, when asset price is falling it affects aggregate demand in two ways. One is that long term interest rate and value of housing and financial assets such as stocks and bonds will fall, which in turn reduce financial wealth and adversely affect household consumption. Two is that lower prices of financial assets reduce the market value of firms compared to the replacement cost of capital which retard investment demand. So, the channel of monetary policy transmission is that regulation of interest rate inform of contractionary approach brings a fall in stock prices thereby impacting on the other sub-channel of transmission mechanism in the other assets prices channel (Mishkin 2001; Mukherjee and Bhattacharya, 2011).
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EVIDENCE ON MONETARY POLICY TRANSMISSION DURING TRANQUIL AND TURBULENT PERIODS

EVIDENCE ON MONETARY POLICY TRANSMISSION DURING TRANQUIL AND TURBULENT PERIODS

This study is therefore motivated to explore the interest rate channel of monetary policy transmission in Mexico, Indonesia, Nigeria, and Turkey, the MINT countries. These are emerging economies that either target inflation directly or indirectly via monetary aggregates (Beju and Ciupac-Ulici, 2015; Binici et al., 2019). Further, these economies have a pronounced interest rate channel, since central banks look to macroeconomic stability to drive investment (Wulandari, 2012; Papadamou et al., 2015). As a second contribution, we augment the Taylor rule to account for the role of the exchange rate, especially since the central banks in these economies intervene in the foreign exchange markets and have been shown to react to exchange rate, inflationary pressure, and output fluctuations in setting policy rates (Hutabarat, 2011; Chen et al., 2017; Froyen and Guender, 2017; Ngan, 2018). 1
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Monetary Policy Transmission in India: A Peep Inside the Black Box

Monetary Policy Transmission in India: A Peep Inside the Black Box

In the context of euro area countries, Angeloni et al [2003] found that the interest rate channel completely characterised transmission in a few euro area countries, and was estimated to be substantial in almost all countries. Where the interest rate channel was not found to be dominant, there was some direct evidence supporting the presence of a bank lending channel (or other financial transmission channel). In another study on euro area, Angeloni and Ehrmann [2003] found financial markets channel to be somewhat weaker but suggestive. Examining the transmission of monetary policy in New Zealand by using a Structural VAR approach, Buckle et al [2003] suggested a weak transmission channel from domestic interest rates to domestic demand either indirectly through a reduction in equity returns or directly through a dampening effect on household consumption and firm investment. Recognising the limitations of low dimensional VAR models, Bernanke et al. [2005] suggested using FAVAR which can accommodate a rich data set relevant for explaining the ‘price puzzle’ often found while examining monetary policy transmission to prices under traditional VAR framework. Using a DSGE model with financial frictions, Christiano et al. [2008] found that the ECB's policy actions had a greater stabilising effect than those of the Fed as the former’s policy rule was characterized by greater persistence.
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Monetary Policy Transmission via Financing Channel for Islamic Banks in Malaysia

Monetary Policy Transmission via Financing Channel for Islamic Banks in Malaysia

This paper examines the monetary policy transmission via financing channel of Islamic banks in Malaysia. The cointegration result indicates that a short-run relationship exists among the variables that comprise proxy of monetary policy indicators and channels for monetary policy transmissions. However this is not observed under the long- run model. This is largely in line with recent study by Khaw and Sivabalan (2016). From the author point of view, it is important that the outcome of this study to be in line with those of Khaw and Sivabalan (2016) because their study is recently conducted and as BNM staff they exemplified to a certain extend actual BNM’s experience in formulating monetary policy and this is important because it provide practitioner’s perspective on the subject of the research. The earlier concern by Ooi (2008) about impact of increased prominence of Islamic banks and Islamic finance in general towards the monetary policy transmission process appears to be less significant at this point. As discussed earlier, atleast on short-term basis, the outcome of statistical analysis indicates that the Islamic banks are important conduit for the overall monetary policy transmission process, similar to its conventional counterparts. The outcome of this study also
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Impact of Liquidity Level on the Monetary Policy Transmission Effectiveness of the Moroccan Central Bank (Bank Al Maghrib)

Impact of Liquidity Level on the Monetary Policy Transmission Effectiveness of the Moroccan Central Bank (Bank Al Maghrib)

Excess liquidity situation can cause a loss on the monetary policy transmission efficiency to the real activity via the interest rate, credit and other prices asset channels (exchange rate and stocks prices in particular). According to the quantitative money theory, a money supply excess compared to the economy's need funding could raise prices and thus reducing the monetary policy effectiveness. J. Tobin (1969) and F. Modigliani (1986) analysis are an illustration of this finding. Indeed, following a monetary easing or excess liquidity, the stock prices could appreciates, thereby increasing the wealth of firms and households. Accordingly banks lend them easily and at very favorable conditions. Reassured, these agents increase their spending (investment and consumption). The same reasoning can be applied to real estate prices, but this time with a more comforting effect on banks' balance sheets.
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Output Composition of Monetary Policy Transmission

Output Composition of Monetary Policy Transmission

Monetary policy transmission mechanisms, defined as processes through which monetary policy decisions are transmitted to real GDP and inflation, involve two stages. The first stage relates to monetary-induced changes in the financial markets that serve as the transmission channels and may take the form of changes in the financial market equilibrium prices or quantities (Taylor, 1995). The second stage of the transmission mechanisms - - the subsequently induced changes in aggregate demand -- is associated with responses of each component of aggregate demand. That is, a monetary tightening shock reduces the level of economic activity through a decline in investment, consumption, and the rest of aggregate spending, which in turn alters the price level. The overwhelming majority of empirical studies exclusively deal with the investigation of the first stage of monetary policy transmission and very few investigate the second stage, despite its
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The bank lending channel of monetary policy transmission : Thailand's experience

The bank lending channel of monetary policy transmission : Thailand's experience

The Bank Lending Channel of Monetary Policy Transmission Thailand's experience Paisan Ruphanitkit A thesis submitted for the degree of Doctor of Philosophy at the Au<;~ralian National University Canb~[.]

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Output Composition of Monetary Policy Transmission in Pakistan

Output Composition of Monetary Policy Transmission in Pakistan

It is widely considered that investment, being the more volatile of the two components, reacts more rapidly to a monetary policy shock. Interestingly, both sides of the coin have been examined in the economic literature by utilizing Vector Autoregressive (VAR) and/or Dynamic Stochastic General Equilibrium (DSGE) models. The relative importance of the two channels remains unique to various countries. While the investment channel has been found to be more predominant in countries like Japan (Fujiwara 2004) and Australia (Phan 2014), the United States presents an “Output Composition Puzzle” (Angeloni et al. 2003), as here the effects of monetary policy on output are mainly transmitted by the consumption channel. It is in the above scenario that this paper finds its motivation and purpose, i.e. to investigate which of the two channels, private consumption or private investment, is predominant in transmitting the effects of monetary policy on output in Pakistan. This study is aimed to be an original and unique contribution to the academic literature on this subject, considering that no other research has been published specifically on the output composition of monetary policy transmission in Pakistan, to the best of my knowledge.
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Effect of Banking Concentration on Monetary Policy Transmission Mechanism in Cameroon

Effect of Banking Concentration on Monetary Policy Transmission Mechanism in Cameroon

The aim of this paper is to evaluate the effect of banking concentration on the monetary policy transmission mechanism in Cameroon. To conduct our study, we focus our attention on the bank lending channel. Using bank-level data of 6 commercial banks from 2006-2016 collected from National Credit Council, we estimate our model using the Dynamic Ordinary Least Square (DOLS) method. We find that, banking channel exist in Cameroon. Moreover, it appears that banking concentration weakens bank lending channel of monetary policy transmission in Cameroon. But, its impact is not significant. It also appears that banking concentration negatively and significantly affect credit supply in Cameroon. Therefore, we recommend to the Central Bank authority to reduce the amount of regulatory capital to a reasonable level in order to facilitate the entry of new banks into the sector. This should ultimately lead to the migration of concentrated structure to competitive structure more able to convey monetary policy decisions.
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Examining monetary policy transmission in the People's Republic of China – structural change models with a Monetary Policy Index

Examining monetary policy transmission in the People's Republic of China – structural change models with a Monetary Policy Index

While the estimations in section V.B provide a better insight into the monetary policy transmission process in the PRC than the standard linear model, the breakpoint regression is limited in that it does not allow us to switch between different regimes or states. Many economic time series occasionally exhibit dramatic breaks in their behavior that are associated with events such as financial crises or abrupt changes in government policy (Hamilton 2005). The PRC, in particular, has experienced tremendous structural change in recent decades associated with the gradual opening of the economy. Prices have been liberalized, trade has increased extensively, companies have been privatized, and the economy has been transformed from one that was centrally planned prior to 1978 to a market economy (Brandt and Rawski 2008). The PRC has also experienced several economic shocks, some of which were related to policy measures to liberalize the economy (Gerlach and Peng 2006). The breaks in the time series associated with these events make linear models inappropriate for analyzing macroeconomic variables over time. To fully capture nonlinearity, the PRC’s monetary policy transmission channel is examined using the MS model of Hamilton (1989, 1990, 1994). This technique has been used extensively to examine monetary policy transmission in advanced economies such as the United Kingdom, the US, and the eurozone. Dolado, Maria-Dolores, and Ruge-Murcia (2005); Peersman and Smets (2001); and Arag´on and Portugal (2009) have all carried out similar studies for advanced economies, but the technique has seldom been applied to the PRC or other emerging market economies. This gives us a unique opportunity to examine any asymmetry or nonlinearity in the PRC’s monetary policy transmission channel. The MS model is so called because the switching mechanism is controlled by an unobserved state variable, s t , that follows
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MONETARY POLICY TRANSMISSION AND CREDIT CARDS: EVIDENCE FROM INDONESIA

MONETARY POLICY TRANSMISSION AND CREDIT CARDS: EVIDENCE FROM INDONESIA

It is also argued that inflation in the United States in the 1970s and early 1980s coincided with the introduction of credit cards (Geanakoplos and Dubey, 2010). Credit card usage can stimulate spending, since consumers underestimate or forget credit card purchases, because the act of paying by credit card is less painful than paying by cash or check (Soman, 2001). Moreover, the interest rates charged on credit cards are sticky and do not change with monetary policy, which complicates the implications of monetary policy through the credit card channel (Calem and Mester, 1995). If credit card interest rates were elastic in response to changes in the policy rate, monetary policy would have a multiplier effect on the consumption level through the availability of credit card funds. Further, Yilmazkuday (2011) argues that a contractionary monetary policy forces commercial banks to restrict lending through credit cards, and the credit (or lending) channel of monetary policy transmission would therefore be more effective in the presence of credit cards, compared to other channels of monetary transmission, such as the interest and exchange rates. Moreover, external risk factors, such as fluctuations in oil price and exchange rates, further complicate the mechanism of monetary transmission. Hence, it would be interesting to analyze the role of credit cards in monetary policy transmission, along with other global risk factors, such as exchange rates and oil price shocks.
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Unraveling the Monetary Policy Transmission Mechanism in Sri Lanka

Unraveling the Monetary Policy Transmission Mechanism in Sri Lanka

Prior work on the effectiveness of monetary policy transmission for developing countries in Asia is scarce. Agha and others (2005) investigate the monetary policy in Pakistan by adopting Ramey’s (1993) approach together with their own system of four variable recursive VARs (see Section VI). Later, Alam and Waheed (2006) also used recursive VARs both at the aggregate and sectoral levels for Pakistan. Mallick (2009) investigated monetary policy transmission in India using a five- variable VAR by applying both recursive and structural identification schemes. Ahmad (2008) used a VAR framework with a recursive Sims ordering of monetary policy and macroeconomic variables for Fiji and Papua New Guinea. Yang and others (2011) studied the monetary policy transmission mechanisms in Pacific islands in the context of the global financial crisis using autoregressive distributed lags (ADL) model. Work on Sri Lanka includes Perera and Wickramanayake (2013) and Vinayagathasan (2013). We compare our work with prior investigations done for Sri Lanka in Annex II.
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Essays on Indonesian Banking: Competition, Efficiency, and its Role in Monetary Policy Transmission

Essays on Indonesian Banking: Competition, Efficiency, and its Role in Monetary Policy Transmission

This thesis investigates competitiveness of banking market in Indonesia and monetary policy transmission during the period 2000 to 2009. As has been the case for most previous structure-performance studies, the results using the SCP specification are not very robust. When PR approach is used, as done in other studies, it reveals much evidence of imperfect competition in Indonesian provincial markets. The estimated values of H-statistics for the sample period 2001-2008 are positive ranging between 0.31 - 0.62 which is consistent with the study by Claessens and Laeven (2004). We find that the market in Java and Sumatra is more competitive than metropolitan and the periphery. H-statistic of metropolitan and the periphery are 0.31 and 0.52 respectively while Java and Sumatra is 0.62. However, the weakness of PR modeling is that it does not tell us much about the sources of imperfect competition, what can be done to change matters. The estimation using ES hypothesis specification does not also reveal significant influence of the geography of Indonesia. Although there is a modest impact of the geography of Indonesia on the level of competition, the development that help overcome geographical barriers, e.g. new banking technologies can usefully promote competition in Indonesian deposit markets.
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The Long term Rate and Interest Rate Volatility in Monetary Policy Transmission

The Long term Rate and Interest Rate Volatility in Monetary Policy Transmission

instruments. We construct event studies respectively from movements of the spot-month funds future rate and variation in the implied volatility of 10-year rate around each FOMC announcement. From this construct, we generate two policy instruments which are time series of policy rate surprises and time series of volatility surprises. The SVAR impulse responses show that both policy rate surprises and volatility surprises can significantly stim- ulate fluctuations in the long-term real rate and the price level without incurring the price puzzle put forth by Eichenbaum (1992), but only the latter drives swings of financial fric- tions and output. These findings support the financial accelerator models (Bernanke et al., 1999) in which financial intermediations amplify the policy impact on economic activity. Our results also question the cost-of-capital effect in Neoclassical theory of investment since production seems muted to the policy-rate-induced change in the long-term real rate. In terms of monetary transmission channels, we obtain evidence in support of the risk-taking channel but fail to observe the validity of the conventional Keynesian interest rate channel. This paper extends an SVAR model to examine the validity of different mainstream monetary transmission channels within a comparable framework. Furthermore, we generate the first measure of monetary-policy-induced changes in the expected volatility of monetary policy shocks in the long run. This measure has the potential to be an alternative mone- tary policy surprise to indicate the risk-side impact of monetary policy. Lastly, we observe relatively independent monetary policy transmission mechanisms through the two ends of the yield curve. This finding may open a window for refined monetary policy identifications respectively for short- and long-term interest rates.
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The role of financial intermediaries in monetary policy transmission

The role of financial intermediaries in monetary policy transmission

limits and asset prices is a powerful transmission mechanism through which the e¤ects of shocks persist, amplify, and spread out. In a similar spirit, Iacoviello (2005) intro- duces a collateral constraint in a New Keynesian (NK) DSGE model. In his model households derive utility from housing services. Impatient households and entrepreneurs borrow from patient households in order to purchase housing. The amount they can borrow today is limited to a fraction of the discounted value their housing stock will have tomorrow. Importantly, contracts are expressed in nominal terms. A conditional …nancial accelerator mechanism characterizes models adopting this framework. Shocks that stimulate aggregate demand lead to a higher consumption and asset prices. This positively a¤ects the borrowing capacity of debtors, allowing them to spend and invest more. Since contracts are in nominal terms, the rise of consumer prices reduces the real value of debtors’obligations, positively a¤ecting their net worth. Given borrowers have a higher propensity to spend than lenders, the net e¤ect on demand is positive and acts as an ampli…cation mechanism of demand shocks. On the contrary, it dampens the e¤ects of those shocks that lead to a negative correlation between output and in‡ation, such as aggregate technology shocks. For this reason we label this mechanism as a conditional …nancial accelerator: the ampli…cation depends on the source of uncertainty.
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Monetary Policy Transmission and Bank Lending In South Korea and Policy Implications

Monetary Policy Transmission and Bank Lending In South Korea and Policy Implications

The data were collected from the International Financial Statistics published by the International Monetary Fund and the Bank of Korea. Bank loans are measured in billions of won. Real gross domestic product is selected to represent output and is measured in billions of won. The corporate bond yield is chosen to represent the interest rate on bonds. Bank deposits are measured in billions of won. The central bank policy rate is used as a monetary policy instrument. The exchange rate is measured as units of the Korean won per U.S. dollar (KRW/USD). The 10-year U.S. government bond yield is selected to represent the world interest rate. Bank loans and bank deposits are adjusted by the consumer price index and expressed in real terms. Except for interest rates, all other variables are expressed on a log scale. The sample ranges from 2001.Q4 to 2013.Q1 and has a total of 46 observations. The data for bank loans earlier than 2001.Q4 are not available.
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The role of financial intermediaries in monetary policy transmission

The role of financial intermediaries in monetary policy transmission

Permanent repository link: http://openaccess.city.ac.uk/7986/ Link to published version: http://dx.doi.org/10.1016/j.jedc.2014.04.010 Copyright and reuse: City Research Online aims to ma[r]

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Monetary policy transmission in Morocco: Evidence from borrowers level data

Monetary policy transmission in Morocco: Evidence from borrowers level data

GDP growth rate. We are interested in the significance of interactions of firm-specific variables with the monetary policy measure. If the interaction term 𝛾 ! is significant and the assumption that interest rate supply elasticity is equal across banks maintained, the conclusion is that the given variable systematically influences demand reaction of firms after a monetary policy action. All of our balance-sheet variables (except for “size”) where normalized by firm’s total assets. As dependent variables, we use the liabilities items with different economic meaning. First, equity determines firm leverage and distribution of risk between shareholders and creditors. Higher equity (lower leverage) improves the risk profile of creditors since equity is first in line to absorb any losses. Therefore, a firm with low credit quality or with poor access to external finance (e.g. due to small size or lack of collateral) would be forced to rely mostly on owner-provided funding. For non-equity external finance, we look at financial debt and trade credit. The financial debt category includes bank loans, bonds issued and other financial liabilities, so it reflects mostly the ability and willingness of the firm to obtaining funds from financial intermediaries (in particular banks). On the other hand, trade credit arises from transactions with non-financial firms and reflects both creditworthiness of the firm and its negotiation power with respect to other cooperating firms. To some extent, these funding sources might be treated by a firm as substitutes. Last, we also look at the role of associated debts that, as instruments provided by owners, might be to some extent interpreted as being substitutes to equity.
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Bank market power and monetary policy transmission

Bank market power and monetary policy transmission

More recently, the notion of another channel, namely the risk-taking channel, has been put forward. Elements of this channel can be traced in Gibson (1997), who suggests that monetary policy has a greater effect on banks at times when their balance sheets have a riskier composition of assets. Several dimensions of how the risk-taking channel can work have been proposed. Matsuyama (2007) suggests that expansionary monetary policy reinforces the incentives of intermediaries to finance riskier projects. In a similar vein, Dell’ Ariccia and Marquez (2006) and Rajan (2006) provide evidence that during lending booms loan quality deteriorates, as both lenders and borrowers are willing to take on higher risks. Further, in addition to this effect working through the risk-taking of banks, it has been argued that the monetary policy of low interest rates followed in recent years, by affecting asset prices has led some institutional investors to invest increasingly in credit-related assets in search for higher yield (ECB, 2008). This has allowed banks to increasingly fund themselves by selling loans in the secondary market, thus potentially boosting
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