We investigate 1-year interest rate swaps on USD, EUR, JPY and GBP between 2005 and 2020 utilising a quantile connectedness model. This approach allows for a nuanced investigation of connectedness ...and adds to understanding the monetary policy transmission mechanism within a highly integrated international financial system. Substantial interest rate changes (in either direction) matter for connectedness in financial markets. The results also indicate which currency drives developments depending on the direction of the change in interest rates. The full implementation and replication code — based on R, is available at: https://github.com/GabauerDavid/ConnectednessApproach.
•We study connectedness in IRS markets and include a magnitude dimension.•Large positive or negative interest rate changes increase connectedness.•Substantial variations are observed across major markets and over time.•The results have implications for the monetary transmission mechanism.
We propose a theory of monetary policy and macroprudential interventions in financial markets. We focus on economies with nominal rigidities in goods and labor markets and subject to constraints on ...monetary policy, such as the zero lower bound or fixed exchange rates. We identify an aggregate demand externality that can be corrected by macroprudential interventions in financial markets. Ex post, the distribution of wealth across agents affects aggregate demand and output. Ex ante, however, these effects are not internalized in private financial decisions. We provide a simple formula for the required financial interventions that depends on a small number of measurable sufficient statistics. We also characterize optimal monetary policy. We extend our framework to incorporate pecuniary externalities, providing a unified approach to both externalities. Finally, we provide a number of applications which illustrate the relevance of our theory.
This paper investigates the effects of various monetary policy instruments in China with the structural vector autoregression model. Empirical results are as follows. The effects of benchmark lending ...rate and short‐term interest rate shocks are larger than those of reserve requirement ratio shocks. Nonpolicy shocks exert substantial effects on intermediate targets under a quantity‐based policy framework. The size and effects of short‐term interest rate shocks in recent years are large. Short‐term interest rate shocks have strong effects on property prices. These results suggest that the new interest rate‐based policy framework is more effective than the previous quantity‐based policy framework.
We identify the international credit channel by exploiting Mexican supervisory data sets and foreign monetary policy shocks in a country with a large presence of European and U.S. banks. A softening ...of foreign monetary policy expands credit supply of foreign banks (e.g., U.K. policy affects credit supply in Mexico via U.K. banks), inducing strong firm-level real effects. Results support an international risk-taking channel and spill overs of core countries’ monetary policies to emerging markets, both in the foreign monetary softening part (with higher credit and liquidity risk-taking by foreign banks) and in the tightening part (with negative local firm-level real effects).
Using bank-level data from India, we examine the impact of ownership on the reaction of banks to monetary policy, and also test whether the reaction of different types of banks to monetary policy ...changes is different in easy and tight policy regimes. Our results suggest that there are considerable differences in the reactions of different types of banks to monetary policy initiatives of the central bank, and that the bank lending channel of monetary policy is likely to be much more effective in a tight money period than in an easy money period. We also find differences in impact of monetary policy changes on less risky short-term and more risky medium-term lending. We discuss the policy implications of the findings.
Recent studies of monetary policy in developing countries document a weak bank lending channel based on aggregate data. In this paper, we bring new evidence using Uganda's supervisory credit ...register, with microdata on loan applications, volumes and rates, coupled with unanticipated variation in monetary policy. We show that a monetary contraction reduces bank credit supply—increasing loan application rejections and tightening loan volume and rates—especially for banks with more leverage and sovereign debt exposure. There are associated spillovers on inflation and economic activity—including construction permits and trade—and even social unrest.
We investigate the effects of U.S. unconventional monetary policies on sovereign yields, foreign exchange rates, and stock prices in emerging market economies (EMEs), and we analyze how these effects ...depend on country-specific characteristics. We find that, although EME asset prices, mainly those of sovereign bonds, responded strongly to U.S. unconventional monetary policy announcements, these responses were not outsized with respect to a model that takes into account each country's currency regime and vulnerability to U.S. financial conditions.
•We investigate the effects of U.S. unconventional monetary policies on asset prices in emerging market economies.•U.S. monetary policy shocks have a significant effect on sovereign yields in most emerging market economies.•Country-specific characteristics drive the response of asset prices in the emerging market economies to changes in U.S. financial conditions.•The response of sovereign yields in emerging market economies to U.S. unconventional monetary policies are not outsized.
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