•Studies China’s reserve requirements (RR) policy in two-sector DSGE model.•SOEs financed by on-balance sheet bank loans, subject to RR regulations.•Private firms rely on off-balance sheet loans, ...facing credit spread.•Raising RR reallocates capital to productive private firms and improves TFP.•RR policy is complementary to money supply policy for macro stabilization.
China’s central bank frequently adjusts reserve requirements for macroeconomic stabilization. We evaluate the effectiveness of such policy in a two-sector DSGE model. A heavy-industry sector—proxied as state-owned enterprises (SOEs)—is financed through government-guaranteed bank loans subject to reserve requirements, while more productive private firms rely on unregulated off-balance sheet financing. Increasing reserve requirements reallocates resources towards private firms, raising both aggregate productivity and SOE bankruptcies. Optimal reserve requirement adjustments complement money supply adjustments in improving macroeconomic stability and welfare. However, gains are greater under sector-specific shocks, which call for resource reallocation, than under aggregate shocks.
We provide empirical estimates of the effect of large-scale asset purchases (LSAPs) on longer term US Treasury yields within a framework that allows for several transmission channels including the ...scarcity channel associated with the preferred-habitat literature and the duration channel associated with interest-rate risk. We also clarify LSAPs' role in the broader context of historical monetary policy strategy. Results indicate that LSAP-style operations mainly impact longer term rates via the nominal term premium; within that premium, the response is predominantly embodied in the real term premium. The scarcity and duration channels both seem to be of considerable importance.
The global financial crisis hit hard in the euro area, the United Kingdom, and Japan. Real GDP from peak to trough contracted by about 6 percent in the euro area and the United Kingdom and by 9 ...percent in Japan. In all three cases, central banks cut interest rates aggressively and then, as policy rates approached zero, deployed a variety of untested and unconventional monetary policies. In doing so, they hoped to restore the functioning of financial markets, and also to provide further monetary policy accommodation once the policy rate reached the zero lower bound. In all three jurisdictions, the strategy entailed generous liquidity support for banks and other financial intermediaries and large-scale purchases of public (and in some cases private) assets. As a result, central banks’ balance sheets expanded to unprecedented levels. This paper examines the experience with unconventional monetary policies in the euro zone, the United Kingdom, and Japan. The paper starts with a discussion of how quantitative easing, forward guidance, and negative interest rate policies work in theory, and some of their potential side effects. It then reviews the implementation of unconventional monetary policy by the European Central Bank, the Bank of England, and the Bank of Japan, including a narrative of how central banks responded to the crisis and the evidence on the effects of unconventional monetary policy actions.
This paper studies the nonlinear response of the term structure of interest rates to monetary policy shocks and presents a new stylized fact. We show that uncertainty about monetary policy changes ...the way the term structure responds to monetary policy. A policy tightening leads to a significantly smaller increase in long‐term bond yields if policy uncertainty is high at the time of the shock. We also look at the decomposition of bond yields into expectations about future policy and the term premium. The weaker response of yields is driven by the fall in term premia, which fall more strongly if uncertainty about policy is high. Conditional on a monetary policy shock, higher uncertainty about monetary policy tends to make securities with longer maturities relatively more attractive to investors. As a consequence, investors demand even lower term premia. These findings are robust to the measurement of monetary policy uncertainty, the definition of the monetary policy shock, and to changing the model specification.
We propose a “dominant currency paradigm” with three key features: dominant currency pricing, pricing complementarities, and imported inputs in production. We test this paradigm using a new dataset ...of bilateral price and volume indices for more than 2,500 country pairs that covers 91 percent of world trade, as well as detailed firm-product-country data for Colombian exports and imports. In strong support of the paradigm we find that (i) noncommodities terms-of-trade are uncorrelated with exchange rates; (ii) the dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions, and this effect is increasing in the share of imports invoiced in dollars; (iii) US import volumes are significantly less sensitive to bilateral exchange rates, compared to other countries’ imports; (iv) a 1 percent US dollar appreciation against all other currencies predicts a 0.6 percent decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. We characterize the transmission of, and spillovers from, monetary policy shocks in this environment.
We show that negative monetary policy rates induce systemic banks to reach‐for‐yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June ...2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private‐sector (financial and nonfinancial) securities and dollar‐denominated securities. Affected banks also take higher risk in loans.
Adjustments in bank leverage act as the linchpin in the monetary transmission mechanism that works through fluctuations in risk-taking. In the international context, we find evidence of monetary ...policy spillovers on cross-border bank capital flows and the US dollar exchange rate through the banking sector. A contractionary shock to US monetary policy leads to a decrease in cross-border banking capital flows and a decline in the leverage of international banks. Such a decrease in bank capital flows is associated with an appreciation of the US dollar.
•The operation of the risk-taking channel through the banking sector.•How monetary policy impacts bank leverage, cross border flows and the exchange rate.•The role played by the US dollar for global financial conditions.•The transmission of global liquidity conditions across borders.
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