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Purpose: This paper aims to provide fresh empirical evidence on how Federal Open Market Committee (FOMC) monetary policy decisions from a benchmark monetary policy rule affect the profitability of US banking institutions. Design/m...
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Purpose: This paper aims to provide fresh empirical evidence on how Federal Open Market Committee (FOMC) monetary policy decisions from a benchmark monetary policy rule affect the profitability of US banking institutions. Design/methodology/approach: It thereby provides a link between the literature on central bank monetary policy implementation through monetary rules and banks’ profitability. It uses a novel data set from 11,894 US banks, spanning the period 1990 to 2013. Findings: The empirical findings show that deviations of FOMC monetary policy decisions from a number of benchmark linear and non-linear monetary (Taylor type) rules exert a negative and statistically significant impact on banks’ profitability. Originality/value: The results are expected to have substantial implications for the capacity of banking institutions to more readily interpret monetary policy information and accordingly to reshape and hedge their lending behaviour. This would make the monetary policy decision process less noisy and, thus, enhance their capability to attach the correct weight to this information.
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Though the monetary policy transmission and financial intermediation literature have highlighted the role of the "bank credit channel" and relationship banking, respectively, the effect of relationship banking on the transmission ...
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Though the monetary policy transmission and financial intermediation literature have highlighted the role of the "bank credit channel" and relationship banking, respectively, the effect of relationship banking on the transmission of monetary policy has not been investigated. In this paper, we study the impact of relationship banking on the transmission of monetary policy. Theoretically, relationship banking could ameliorate or exacerbate the effects of monetary policy shocks. Using unique and comprehensive data on bank-borrower relationships in India, we find that firms that enjoy an exclusive banking relationship are less susceptible to monetary policy shocks than firms that bank with multiple banks.
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We analyse the effects of announcements of changes in the Eurosystem's balance sheet size, duration and composition on inflation expectations, the exchange rate, the 10-year euro area government bond yield and stock returns, using...
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We analyse the effects of announcements of changes in the Eurosystem's balance sheet size, duration and composition on inflation expectations, the exchange rate, the 10-year euro area government bond yield and stock returns, using local projections. We explicitly take into account interaction effects between the three balance sheet dimensions. We provide evidence for the duration extraction channel of monetary policy transmission as we find that the bond yield is sensitive to the combined impact of shocks to balance sheet size and duration. The exchange rate is also affected by a joint size-duration shock. Moreover, the bond yield and exchange rate are sensitive to the joint effect of changes in size and composition. The results indicate that interactions between balance sheet dimensions matter.
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We analyse the empirical effects of credit easing and quantitative easing on inflation expectations and exchange rates. Both monetary policy strategies are summarised in measures for composition and size of the central bank balanc...
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We analyse the empirical effects of credit easing and quantitative easing on inflation expectations and exchange rates. Both monetary policy strategies are summarised in measures for composition and size of the central bank balance sheet and are included in a VAR model. The results show that changes in balance sheet size had positive, albeit weak effects on inflation expectations in Japan, while the effects were negligible in the euro area. By contrast, an increasing balance sheet size is associated with reduced short-term inflation expectations in the US and UK, pointing at negative signalling effects. Shocks to balance sheet size or composition have no substantial effects on long-term inflation expectations in the euro area, US and UK. An expanding balance sheet size is associated with a depreciation of the euro, pound sterling and Japanese yen.
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We examine inflation and uncertainty in the UK with a version of the Markov Switching model, which allows for changes in the variance as well as in the mean and persistence of a series. We find that the UK's attempts at exchange r...
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We examine inflation and uncertainty in the UK with a version of the Markov Switching model, which allows for changes in the variance as well as in the mean and persistence of a series. We find that the UK's attempts at exchange rate pegs in the formof shadowing the deutschmark and entering the ERM were ineffective, and in the latter case counterproductive in lowering inflation uncertainty. The 1981 budget, however, greatly lowered uncertainty, and the adoption of a formal inflation target also hada palpable, negative impact on inflation uncertainty. As a suggestive exercise, we examine inflation uncertainty in the US, and find that, over 2005-2008, in the absence of an inflation target, uncertainty rose in the US, while uncertainty remained low in the UK over this period of rising commodity prices and financial turmoil.
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Purpose - This paper aims to provides an example of how government and central bank policies that promote market liquidity (e.g., quantitative easing programs) can change the structure of the banking system. Design/methodology/app...
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Purpose - This paper aims to provides an example of how government and central bank policies that promote market liquidity (e.g., quantitative easing programs) can change the structure of the banking system. Design/methodology/approach - The nexus between liquidity policies and financial networks is addressed through an example that captures stylized features of the interbank market. In the example discussed, two scenarios are considered: one with and another without central bank/government liquidity provision, leading to two different network structures that are then used to study the likelihood of contagion. Findings - The example provided shows that government and central bank policies that promote market liquidity can lead to financial networks that are better capitalized (net worth of the banking system is higher) but, at the same time, more fragile (higher likelihood of bank failures). Originality/value - To the best of the author's knowledge, this is the first attempt to model the formation of a financial network with an explicit mechanism accounting for government and central bank policies that affect market liquidity, which, in turn, could be interpreted as a quantitative easing program.
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The objective of this study is to investigate the impact of bank capital on monetary policy transmission mechanism during the period from 2010 to 2016 for 20 Emerging Market Economics (EMEs) by using the two-step system generalize...
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The objective of this study is to investigate the impact of bank capital on monetary policy transmission mechanism during the period from 2010 to 2016 for 20 Emerging Market Economics (EMEs) by using the two-step system generalized method of moments (GMM). The coefficient of excess capital in low-asset countries is found to be negative which reveals the importance of excess capital for the effectiveness of monetary transmission. However, the study could not find the significance of excess capital for high-asset countries as they may afford the risky way to generate their income by increasing the loan supply.
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In the long history of rising and persistent unemployment in Europe, almost all welfare-state institutions-employment protection legislation, unions, wages, wage structure, unemployment insurance, etc.-have been alleged to have ca...
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In the long history of rising and persistent unemployment in Europe, almost all welfare-state institutions-employment protection legislation, unions, wages, wage structure, unemployment insurance, etc.-have been alleged to have caused and found guilty of causing this tragic development at some point in time. Later, welfare-state institutions in interaction with external shocks were identified as more plausible causes of rising equilibrium unemployment in Europe. Monetary policy has managed to be regarded as innocent. Based on the assertion of the neutrality of money in the medium and long run, the search for causes of European unemployment has shied away from the policy of central banks. But actually the institutional setup regarding monetary policy is very different between the Federal Reserve System (Fed) and the Bundesbank and its successor, The European Central Bank (ECB). We argue that the interaction of adverse shocks and tight monetary policies may have been the major-although probably not the only-cause of unemployment in Europe remaining at ever higher levels after each recession. We identify the monetary policy of the Bundesbank as asymmetrical, in the sense that the Bank did not actively fight against recessions, but it dampened recovery periods. Less constraint on growth would have kept German unemployment at lower levels.
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Purpose - While central bankers have widely discussed the trade-offs of negative interest rates on monetary policy, the consequences of negative rates on financial stability are less well understood. The purpose of this paper is t...
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Purpose - While central bankers have widely discussed the trade-offs of negative interest rates on monetary policy, the consequences of negative rates on financial stability are less well understood. The purpose of this paper is to examine the likely and possible financial stability consequences of a negative rates policy with particular focus on banks, short-term funding markets, foreign exchange markets, asset managers, pension funds and insurers. Design/methodology/approach - It draws from international experience with negative interest rates to identify financial stability threats posed to any economy by negative interest rates, and it also highlights where the US experience is likely to differ. Findings - In time, financial market threats and other logistical issues of a negative interest rate policy can be managed or overcome. Even cumulatively, these threats are likely to be small as long as the rates remain only modestly negative. However, if the rates remain negative for long periods or they become more sharply negative, the rewards of avoiding negative rates increase. Originality/value - Does the negative interest rate policy directly or through these challenges of implementation present a substantial obstacle to achieving financial stability objectives? As policy rates go negative in a greater share of the global economy, the financial stability consequences remain poorly understood and under discussed.
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Central Bank Digital Currencies (CBDC) are considered 'digital flat currencies' that do not have a physical form, which is a key distinction from conventional fiat money. This study aims to identify factors that influence central ...
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Central Bank Digital Currencies (CBDC) are considered 'digital flat currencies' that do not have a physical form, which is a key distinction from conventional fiat money. This study aims to identify factors that influence central banks' decisions in taking advanced actions to issue CBDC, namely, the economic, market, demographic and technical factors. Data is collected from the CBDC Tracker and the WB database for the period 2013-2021. We applied the Pooled OLS estimations to examine the impact of the key factors on being in an advanced stage for issuing CBDC; moreover, probit and logistic regression are employed to robust our results and overcome the limitations of Pooled OLS. The findings demonstrate that underdeveloped economies are more engaged in issuing CBDC. Besides, better regulations, FDI inflow, young populations, and more urban societies would increase the probability of CBDC issuance. Nevertheless, results show the impact of technical factors is heterogeneous across countries.
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