Three Essays on Monetary Policy Transmission and Banking Crises PDF Download

Author: Dongping Xie
Publisher:
ISBN: 9780355883299
Category : Banks and banking
Languages : en
Pages : 149

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This dissertation aims to increase understanding of financial fragility and to support good responses by monetary policymakers. It is composed of three essays. Chapter 2 studies how the supply of bank loans affected balance sheets and bankruptcies of businesses under various regulatory structures in the early twentieth century. I find that a contraction in the supply of bank loans deteriorated businesses' balance sheets. As a result, courts saw more bankruptcies among businesses with high exposure to bank debt. Tight bank credit also reduced trade credit extended among businesses. I also show that the Glass-Steagall Act mitigated the impact of bank loans on businesses. Chapter 3, co-authored with Alan G. Isaac, develops a network model of financial contagion and demonstrates with agent-based simulations that the interactions between banks and firms can generate and propagate financial fragility and business cycles. We also show that timely monetary policy intervention has effects on both financial and economic stabilization. Active use of discount window proves a useful response to idiosyncratic shocks, but intervention in the repo market is more powerful against cyclical fluctuations. Chapter 4 uses an event study approach to examine how Fed's credit easing policy in the recent crisis affected different sectors. I show that, early on, emergency lending programs only benefited financial firms, while quantitative easing improved the fundamentals of all firms, although the financial sector still benefited more than other sectors.

Author: Lea Steininger
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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Englische Version: This thesis includes three chapters that inform the debate about central bank policies, especially with respect to trans-national dimensions. Thereby, the project aims at complementing the existing literature by fostering a better understanding of international monetary policy under the use of micro-economic data. The first chapter investigates how monetary policy conducted by the European Central Bank (ECB) affects the labor share at the firm-level, and suggests that the effectiveness of monetary policy may depend on the labor intensity of production. The results inform the policy debate on transmission and redistribution effects of monetary policy. The second chapter provides empirical evidence that euro-area wide monetary policy affects industrial competition in local markets. The findings suggest that tightening the policy stance is associated with a decline in competition (and vice versa), and this effect is sizeable and significant. This chapter highlights that low interest rates may support market competition and anti-monopolistic tendencies in an environment of bank-based lending. The third chapter sheds light on central bank cooperation in the shape of swap lines opened between the six major centrals banks (These are: The US Federal Reserve, ECB, Bank of England, Swiss National Bank, Bank of Canada, and the Bank of Japan.) during the Global Financial Crisis 2007/08. This facility ultimately developed into a permanent international lender of last resort facility, and acts a public liquidity backstop to Eurodollar markets. Building an interpretative framework of political economic analysis, we contrast rationalist approaches by showing that central bankers eventually institutionalize their crisis inventions. We answer the question of how the public backstop for the largest financial market - the eurodollar market - emerged in 2013.[...].

Author: Qiao Zhang
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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In this dissertation, my research aims at dwelling on the questions, at understanding and explaining -- as a follow of current strand of literature on financial frictions -- the mechanisms that allowed the imperfect and perfect credit intermediation to affect the dynamics of economy and the transmission of monetary policy, and providing a new theoretical formulation for evaluating the unconventional monetary policy. To do this, I first considered the impact of financial intermediation on the analysis of central bank transparency issue (Chapter 2). ln Chapter 3, I focused on the role played by the imperfect financial intermediation/financial frictions in the transmission of shocks : through which mechanisms, do the presence of balance-sheet constraint financial intermediaries affect the effect of shocks on the macroeconomy? Finally, in Chapter 4, 1 construct an theoreticalmodel to analyze an important issue which have net been carried out in existing literature: the transmission mechanism of the central bank's large-scale purchase of mortgage-backed securities. ln this chapter, I first simulated a financial crisis to see if the model is able to replicate some of the most important stylized facts of the Great Recession. Then, basing on the simulated crisis, I examine the efficacy and transmission mechanism of large scale purchases of MBS through comparing these purchases to the purchases of corporate bonds. This experiment is conducted in two credit market configurations, i.e., a partially and a totally segmented credit market. The latter case of market condition is considered by many economists as main obstacle that impedes the nominal functioning of the financial markets. ln this work, we have obtained rich and important findings for guiding the use of unconventional monetary policy. The following parts briefly present the findinqs of the thesis.

Author: Olivier Accominotti
Publisher:
ISBN:
Category :
Languages : en
Pages :

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This dissertation is a collection of three essays, all dealing with unexplored aspects of international financial instability during the 1920s and 1930s. The research included in these papers aims to provide a better understanding of the destabilizing monetary policies of the interwar years, and of the spread of financial crises, as well as to bring new historical perspectives to current policy issues in international finance. The first chapter revisits the French international reserves policy of the interwar years. Based on original data documenting the currency composition of the foreign reserves, the chapter identifies the motivations behind the Bank of France's disastrous policy of this period. The second chapter deals with the international transmission of the 1931 global financial crisis. Relying on bank balance sheet data collected in the archives, it explores the precise transmission channel through which the Central European crisis of the spring 1931 propagated to the most important financial center of the period, London, endangered the British banking system and eventually led to the sterling crisis of September. Last, the third chapter identifies the main factors of international financial crisis propagation during the 1930s, based on an extensive dataset documenting exchange markets, bond markets and stock markets. The statistical analysis in this chapter reveals that the 1931 crisis was the most global financial shock of the Great Depression and that net importers of capital were hit first.

Author: Bruno De Menna
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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The thesis contributes to recurrent debates in the macroeconomics of banking regarding the risk-taking channel of monetary policy. As the unifying theme of the present essays, I tackle this issue from three different angles with a special focus on the euro area. I rely on available data and different identification strategies to deliver up-to-date empirical evidence contributing to a deeper understanding of the monetary policy impacts on credit risk. In the first chapter of the thesis, I investigate how the risk-taking channel of monetary policy interacts with the degree of leverage in banks' balance sheets after the Global Financial Crisis of 2008 (GFC). Using dynamic panel techniques, I first find significant statistical evidence that credit risk is negatively associated with variations in interest rates, while competition in national banking industries tends to enhance this effect. I also suggest that this negative relationship is most pronounced for banks with relatively high levels of leverage, which is consistent with a ''search for yield'' effect. These results for the euro area are strikingly different from the U.S. banking industry, confirming that time, geographical circumstances, and local banking market conditions are key in understanding the impact of monetary policy on credit risk. The second chapter investigates the joint impact of bank capital and funding liquidity on the monetary policy's risk-taking channel. Using data on the euro area from 1999 to 2018 and triple interactions between monetary policy, bank equity, and funding liquidity, I shed light on a ''crowding-out of deposits'' effect prior to the GFC, which supports the need for simultaneous capital and funding liquidity ratios to mitigate the monetary transmission to bank credit risk. Interestingly, the analysis also highlights a missing crowding-out of deposits effect among low-efficiency banks in the aftermath of the GFC. Consequently, a trade-off arises between financial stability and increased funding liquidity, requiring a special treatment for inefficient banks operating in a low interest rate environment. These results challenge the implementation of uniform funding liquidity requirements across the euro area as by the Basel III framework suggests. The third and last chapter extends the analysis to the special case of cooperative banks and relationship lending in the euro area. These financial intermediaries tell a different story between countries and therefore imply different responses to a common monetary policy. Accordingly, I find no evidence of the presence of a risk-taking channel of monetary policy for consolidated (i.e., less committed to relationship lending) cooperative banks, whereas the results indicate extensive evidence of a risk-taking channel in the euro area for non-cooperative banks (see also the previous chapters of the thesis). Therefore, consolidated cooperative banks seem not to raise their credit risk significantly when monetary policy is eased. Further, I highlight that the profitability of cooperative banks preserving their relationship lending model is more severely hit by a low interest rate environment compared to cooperative banks opting for consolidation. This finding raises issues on the mid-term durability of relationship lending as interest rates have been low for an extended period in the European banking industry. I ultimately find that both non-cooperative banks and relationship-based cooperative banks are concerned about the risk-taking channel of monetary policy transmission, which results in an increase in their credit risk under accommodating monetary conditions. Nevertheless, I suggest that such similarities do not exist for the same reasons, as relationship lending is associated with a fundamentally different lending process than transactions-based lending technologies, which devote significantly lower proportions of their assets to lending to small businesses.

Author: Russell H. Rollow
Publisher:
ISBN:
Category : Banks and banking
Languages : en
Pages : 0

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In my first chapter, I study how the dollar funding fragility of non-US banks amplifies cyclical patterns in their appetite for credit risk. Global banks outside of the United States finance a significant portion of their dollar-denominated lending with uninsured wholesale dollar funding, the price of which rises with the perceived riskiness of the bank. Using data from the syndicated lending market, I examine the risk appetite of non-US global banks when a broad appreciation of the US dollar expands portfolio tail risk and activates value-at-risk constraints. By orthogonalizing errors in professional forecasts of the broad dollar index to other macroeconomic indicators, I show that following such a dollar appreciation, global banks with a heavy dependence on wholesale dollar funding contract cross-border dollar lending to firms with high credit risk, as measured with loan-specific spreads and borrower-specific characteristics. Based on this evidence, I argue that instability in non-US bank funding structures amplifies cyclical patterns in their appetite for credit risk.In my second chapter, I explore how traditional modeling techniques can be applied to produce density forecasts of interest rates. As spikes in economic uncertainty have grown in prevalence, the projection of financial data has become a more arduous task, which has sharpened the focus of investors and policymakers on forecast risk. By integrating a dynamic factor model into a Bayesian framework, I develop a density forecasting model that projects the predictive density of interest rates. Unlike point forecasts, density forecasts produce probability estimates for the full distribution of potential future outcomes of interest rates, as opposed to solely their central tendency. To assess the viability of my forecasting model, I conduct a robust out-of-sample evaluation of the model's performance, finding the model significantly outperforms a competing benchmark autoregressive model, especially when economic uncertainty is high. By examining density forecasts of Treasury yields during the COVID-19 pandemic and the term spread prior to the financial crisis of 2008, I demonstrate the value of the dynamic factor model in expanding the information set available to forward-looking investors and policymakers.In my third chapter, I analyze the impact of the Federal Reserve's adoption of a floor system of monetary policy implementation on the transmission mechanism of changes in the policy rate to US bank balance sheets. Since 2008, in part due to easy monetary policy, United States interest rates have remained at historically low levels. Using US commercial bank call report data, I examine the response of bank profitability and investment to a rise in the rate of interest on reserve balances (IORB). Specifically analyzing the 2015-18 Federal Reserve monetary tightening cycle, I show that, following a rise in the IORB, holding more reserves buffers bank NII growth and asset growth against the adverse effects of a rise in the IORB. Taken together, these results imply that a rise in the policy rate raise profitability for banks with substantial reserve holdings and, when capital constraints bind, expand investment capacity.

Author: Zhengyang Chen
Publisher:
ISBN:
Category : Capital market
Languages : en
Pages :

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The federal funds rate became uninformative about the stance of monetary policy from December 2008 to November 2015. During the same period, unconventional monetary policy actions, like forward guidance and large-scale asset purchases, show the Federal Reserve’s intention to depress longer-term interest rates. My research question is whether, after the 2007-2009 financial crisis, monetary policy still effectively influences or adjusts the real economy. The critical challenges are to indicate the impacts of increasingly diversified monetary policy actions and empirically identify monetary policy shocks more comprehensively than exclusively focusing on variation in the policy rate. Chapter 2 considers a long-term real interest rate as an alternative monetary policy indicator in a structural VAR framework. Based on an event study of FOMC announcements, I advance a novel measure of long-term interest rate volatility with important implications for monetary policy identification. I find that monetary policy shocks identified with this volatility measure drive significant swings in credit market sentiments and real output. In contrast, monetary policy shocks identified by otherwise standard unexpected policy rate changes lead to muted responses of financial frictions and production. These finding supports the validity of the risk-taking channel and suggests an indispensable role of financial markets in monetary policy transmission. Chapter 3 documents the pass-through of the short-term interest rate onto the components of Divisia monetary aggregates. The information factors extracted from real balances of monetary assets alleviate the price puzzle, which is commonly seen in conventional monetary VAR analysis of the transmission mechanism. We also show that financial and monetary markets reacted strongly to the Federal Reserve policy after 2007. The strong monetary response varies not only quantitatively over time, but qualitatively across asset classes. Although far from a one-to-one relationship, balances of assets more closely associated with household demand, such as currency and savings, tend to move in the opposite direction of short-term rates—indicative of a liquidity effect. Whereas balances more closely associated with firms returns are mixed, where institutional money markets also show a liquidity effect, large time deposits or commercial paper exhibit a strong Fisher effect post 2007. In summary, this dissertation sets the foundation for future research in the measurement of monetary policy and the investigation of monetary policy transmission to the real economy post the financial crisis.

Author: Tumisang Bertha Loate
Publisher:
ISBN:
Category :
Languages : en
Pages :

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The size of the nancial sector in South Africa has grown signi cantly over the past fi fteen years to now almost three times the size of the economy. Parallel to that growth is the growth of the banking sector, speci cally the six commercial banks that dominate the sector. This expansion has both monetary policy and financial stability implications. The objectives of this PhD are to: (1) study the importance of internal and external variables for nancial stability; (2) determine the role of the structure of the banking sector in the transmission of monetary policy and macroeconomic shocks; and (3) understand financial stability in the context of both the South African financial system structure and demographic dynamics. We start with a cross-sectional analysis of how external and internal variables affect local fi nancial stability. We fi nd that local variables such as credit, stock market capitalisation and real exchange rate growth are better candidates for understanding local fi nancial stability for both the high and the upper middle income countries. Next we explore monetary policy and financial stability in the context of the South African banking system structure and socio-economic dynamics. An empirical analysis of the bank lending channel indicate that the effect of monetary policy is asymmetric - small banks are more affected by a contractionary monetary policy, whereas the big banks can adjust their loan portfolios to cushion the effects. However, these results (as well as the current South African literature) assume that the transmission of monetary policy and the way the exogenous shocks are generated have remained constant over time. We show that following the 2008 fi nancial crisis, both the big banks and small banks became more responsive to a monetary policy shock. We then develop a dynamic stochastic general equilibrium model to analyse - financial stability for the South African banking sector. The main elements to capture the socio-demographic characteristics include banking and household heterogeneity. We incorporate the relative consumption motive to capture the culture of "keeping up with the Joneses" that has resulted in high consumption driven by debt. The heterogeneity of the banking sector is motivated by the structure of the banking sector, which has enabled the existence of the big and the small banks serving the high-income and low-income households respectively. We calibrate the model using South African data. Our model shows that liquidity injections in the presence of the relative consumption motive increase loan demand whilst adverse shocks to the banks' balance sheets have welfare effects, especially for low-income households.

Author: Itthipong Mahathanaseth
Publisher:
ISBN:
Category :
Languages : en
Pages : 150

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This dissertation consists of three essays. The first essay examines the cost efficiency and production technology in the banking sector of Thailand using a stochastic frontier approach. The empirical results indicate that banks with lower Non-performing-loanto-total-loan ratio, higher equity-to-total-asset ratio, higher liquid-asset-to-total-asset ratio, and more branches are likely to be more efficient. The second essay investigates the degree of competition in the banking industry using the new empirical industrial organization approach. The empirical results indicate that, despite the Thailand government's efforts to increase competition in the banking industry by relaxing restrictions on entry to the market after the financial crisis, the oligopolistic degree of the biggest four banks has intensified. The third essay links the results of the first and second essays, cost efficiency and competition in the banking sector, to the transmission mechanism of monetary policy in Thailand using Vector Autoregression approach. The empirical results indicate that an unexpected tightening monetary policy shock leads to higher financial costs in the banking industry, forcing banks to compete more fiercely and operate more efficiently, significantly helping strengthen the transmission of monetary policy. Hence, the policy implication is that Thai government should exert more effort to enhance efficiency and competition in the banking sector.

Author: Mr.Stijn Claessens
Publisher: International Monetary Fund
ISBN: 1475561008
Category : Business & Economics
Languages : en
Pages : 66

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Book Description
This paper reviews the literature on financial crises focusing on three specific aspects. First, what are the main factors explaining financial crises? Since many theories on the sources of financial crises highlight the importance of sharp fluctuations in asset and credit markets, the paper briefly reviews theoretical and empirical studies on developments in these markets around financial crises. Second, what are the major types of financial crises? The paper focuses on the main theoretical and empirical explanations of four types of financial crises—currency crises, sudden stops, debt crises, and banking crises—and presents a survey of the literature that attempts to identify these episodes. Third, what are the real and financial sector implications of crises? The paper briefly reviews the short- and medium-run implications of crises for the real economy and financial sector. It concludes with a summary of the main lessons from the literature and future research directions.