The mortgage channel of monetary policy transmission Research Papers (original) (raw)

We assess a New Keynesian macro-economic model that is supplemented with a micro-founded role for money in determining aggregate demand and supply in order to better describe monetary policy transmission. In this model welfare is higher... more

- by Jan Berk and +1
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- Monetary Policy, The mortgage channel of monetary policy transmission, Economic Model, Interest Rate
- by Carlotta Rossi and +1
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- Applied Economics, Monetary Policy, The mortgage channel of monetary policy transmission, Euro Area

This paper studies cross-sectional differences in banks interest rates. It adds to the literature in two ways. First, it analyzes systematically the micro and macroeconomic factors that influence the price-setting behaviour of banks. Second, by using banks’ prices (rather than quantities) it provides an alternative way of disentangling loan supply from loan demand shift in the “bank lending channel” literature.

This paper examines the main implications of recently increasing foreign bank penetration on bank lending as a channel of monetary policy transmission in emerging economies. Using a dynamic panel model of loan growth, we investigate the loan granting behavior of 1273 banks in the emerging economies of Asia, Latin America, and Central and Eastern Europe during the period from 1996 to 2003. Applying the pooled OLS, system GMM, and panel VAR estimators, we find consistent evidence that foreign banks are less responsive to monetary shocks in host countries, as they adjust their outstanding loan portfolios and interest rates to a lesser extent than domestic private banks, independent of their liquidity, capitalization, size, efficiency, and credit risk, and although there exists a bank lending channel in the emerging economies, it is declining in strength due to the increased level of foreign bank penetration. We also explore possible driving factors for the different responses of foreign and domestic banks to monetary policy shocks by investigating foreign banks’ different behavior during banking crises and tranquil periods, the effects of mode of entry to host countries, the home-country effects, and the response of foreign banks from OECD countries vs. all foreign countries including non-OECD countries. We suggest the access of foreign banks to funding from parent banks through internal capital markets as the most convincing explanation.► We examine the impact of foreign bank penetration on monetary policy transmission. ► Foreign banks are less responsive to monetary shocks than domestic banks. ► The bank lending channel in emerging economies is weakened due to foreign banks. ► We identify factors for different responses of foreign banks to monetary shocks.

- by Alina Luca
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- Eastern Europe, Emerging Economies, Applied Economics, Panel Data

Abstract: This paper examines possible explanations for observed differences in the transmission of euro area monetary policy in central bank large-scale macroeconomic models. In particular it considers the extent to which these... more

This paper offers a comprehensive comparison of the structure of banking and financial markets in the euro area. Based on this, several hypotheses about the role of banks in monetary policy transmission are developed. Many of the predictions that have been proposed for the U.S. are deemed unlikely to apply in Europe. Testing these hypotheses we find that monetary policy

This paper tests cross-sectional differences in the effectiveness of the bank lending channel of monetary policy in Italy from 1986 to 1998 using a panel approach. After a monetary tightening the decrease in deposits subject to reserve requirements is sharper for those banks that have less incentive to shield the effect of a monetary squeeze: small banks characterized by a

The issue of appraising the transmission process through which monetary policy affects the economy is receiving wider and increasing attention. In Europe, much of the interest in the effects of monetary policy is arguably a reflection of the introduction of the single currency: to the extent that transmission mechanism differ significantly across euro area countries, heterogenous responses of economic activity

- by Nuno Cassola
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- Econometrics, General Relativity, Applied Economics, Policy modeling
- by Ali Kutan
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- Applied Mathematics, Emerging Economies, United Kingdom, Global Financial Crisis

This article analyses the impact of loan market competition on the interest rates applied by euro area banks to loans during the period 1994–2004, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. This

- by Jacob Bikker and +2
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- Applied Economics, Panel Data, Monetary Policy, The mortgage channel of monetary policy transmission

We present a comparable set of results on the monetary transmission channels on firm investment for the four largest euro-area countries (Germany, France, Italy and Spain). With particularly rich micro datasets for each country containing over 215,000 observations from 1985 to 1999, we explore what can be learned about the interest channel and the broad credit channel. For each of those countries, we estimate neo-classical investment relationships, explaining investment by its user cost, sales and cash flow. We find investment to be sensitive to user cost changes in all those four countries. This implies an operative interest channel in these euro-area countries. We also find investment in all countries to be quite sensitive to cash flow movements. However, only in Italy do smaller firms react more to cash flow movements than large firms, implying that a broad credit channel might not be equally pervasive in all countries.

- by Jean-pierre Villetelle and +2
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- The mortgage channel of monetary policy transmission, Euro Area, Cost of Capital, European Central Bank

This paper investigates possible non-linearities in the response of bank lending to monetary policy shocks in the euro area. The credit market is modelled over the period 1985-2005 by means of an Asymmetric Vector Error Correction Model (AVECM) involving four endogenous variables (loans to the private sector, real GDP, lending rate, and consumer price index) and one exogenous variable (money

- by Kim-Leng Goh
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- Econometrics, Applied Econometrics, Applied Economics, Monetary Policy

The purpose of this paper is to identify the ways in which financial factors may alter the transmission mechanism. In the first part, an example drawn from the "US miracle" in the 1990s highlights these financial factors and the way in which they were able to operate in the United States and contributed to amplifying the business cycle and also, possibly, macro-financial imbalances. In the second part, we focus on the euro area. On the one hand, during the last 20 years, this area has undergone changes in its financial structures that have made it more similar to English-speaking countries. However, wealth effects remain difficult to spot in the euro area. On the other hand, and again in contrast with English-speaking countries, financial intermediation is stronger there. Credit market flaws are also probably more important, enabling a priori the broad credit channel to play a more prominent role in the euro area to the detriment of typical bank lending or interest rate ch...

- by Christian Pfister and +1
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- The mortgage channel of monetary policy transmission, Euro Area, United States, BanK Lending

On 11-12 May 2011, SUERF and the Belgian Financial Forum, in association with the Brussels Finance Institute and the Centre for European Policy Studies (CEPS) organized the 29th SUERF Colloquium “New Paradigms in Money and Finance?” All... more

Central bank communication is widely recognised as crucial to the implementation of monetary policy. This communication should enhance a central bankâ€™s management of the inflation expectations of the financial markets as well as the general public â€” the latter being a part of the central bankâ€™s audience that has received relatively little research attention. In this paper, the role of the media in transmitting the SARBâ€™s communication to the general public is explored, with the aim of improving our understanding of its impact on the expectations channel of the monetary policy transmission mechanism. A deliberate evaluation of this channel could aid the design of future strategies to communicate with the general public.

This report analyses the main developments in housing finance in the euro area in the decade, covering the period from 1999 to 2007. It looks at mortgage indebtedness, various characteristics of loans for house purchase, the funding of such loans and the spreads between the interest rates on loans granted by banks and the interest rates banks had to pay on their funding, or the return they made on alternative investments. In addition, the report contains a comparison of key aspects of housing finance in the euro area with those in the United Kingdom and the United States. At the end, the report briefly discusses aspects of the transmission of monetary policy to the economy. JEL Classification: D14, E44, E5, G21, R21.

- by Rodney Strachan
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- Bayesian, Economic Theory, Applied Economics, Monetary Policy

This paper analyzes the relationship between banksâ€™ divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash. We first generate market-based measures of banksâ€™ systemic risk exposures using extreme value analysis. Systemic banking risk is measured as the tail beta, which equals the probability of a sharp decline in a bankâ€™s stock price conditional on a crash in a banking index. Subsequently, the impact of (the correlation between) interest income and the components of non-interest income on this risk measure is assessed. The heterogeneity in extreme bank risk is attributed to differences in the scope of non-traditional banking activities: non-interest generating activities increase banksâ€™ tail beta. In addition, smaller banks and better-capitalized banks are better able to withstand extremely adverse conditions. These relationships are stronger during turbulent times compared to normal econom...