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Estimating the effective lower bound for the Czech National Bank’s policy rate
Kolcunová, Dominika ; Havránek, Tomáš
This paper focuses on the estimation of the effective lower bound on the Czech National Bank’s policy rate. The effective lower bound is determined by the value below which holding and using cash would be preferable to holding deposits with negative yields. This bound is approximated on the basis of the storage, insurance and transport costs of cash and the loss of convenience associated with cashless payments. This estimate is complemented by a calculation based on interest charges reflecting the impact of negative rates on banks’ profitability. Overall, we get a mean of slightly below –1%, approximately in the interval (–2.0%, –0.4%). In addition, by means of a vector autoregression we show that the potential of negative rates is not sufficient to deliver monetary policy easing similar in its effects to the impact of the Czech National Bank’s exchange rate commitment during the years 2013–2017.
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Monetary Transmission: Are Emerging Market and Low-Income Countries Different?
Bulíř, Aleš ; Vlček, Jan
We use two representations of the yield curve, by Litterman and Scheinkman (1991) and by Diebold and Li (2006), to test the functioning of the interest rate transmission mechanism along the yield curve based on government paper in a sample of emerging market and low-income countries. We find a robust link from short-term policy and interbank rates to longer-term bond yields. Two policy implications emerge. First, the presence of well-developed secondary financial markets does not seem to affect transmission of short term rates along the yield curve. Second, the strength of the transmission mechanism seems to be affected by the choice of monetary regime: advanced countries with a credible IT regime seem to have “better behaved” yield curves than those with other monetary regimes.
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Bank Efficiency and Interest Rate Pass-Through: Evidence from Czech Loan Products
Havránek, Tomáš ; Iršová, Zuzana ; Lešanovská, Jitka
An important component of monetary policy transmission is the pass-through from financial market interest rates, directly influenced or targeted by central banks, to the rates that banks charge firms and households. Yet the available evidence on the strength and speed of the pass-through is mixed and varies across countries, time periods, and even individual banks. We examine the pass-through mechanism using a unique data set of Czech loan and deposit products and focus on bank-level determinants of pricing policies, especially cost efficiency, which we estimate employing both stochastic frontier and data envelopment analysis. Our main results are threefold: First, the long-term pass-through was close to complete for most products before the financial crisis, but has weakened considerably afterward. Second, banks that provide high rates for deposits usually charge high loan markups. Third, cost-efficient banks tend to delay responses to changes in the market rate, smoothing loan rates for their clients.
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Explaining the Strength and Efficiency of Monetary Policy Transmission: A Panel of Impulse Responses from a Time-Varying Parameter Model
Matějů, Jakob
This paper analyzes both the cross-sectional and time variation in aggregate monetary policy transmission from nominal short-term interest rates to the price level. Using Bayesian TVP-VAR models where structural monetary policy shocks are identified by a mixture of short-term and sign restrictions, I show that monetary policy transmission has become stronger over the last few decades. This finding is robust across both developed and emerging economies. Monetary policy sacrifice ratios (the output costs of disinflation induced by monetary policy tightening) have decreased over the last four decades. Exploring the cross-country and time variation in monetary policy responses using panel regressions, I show that after a country adopted inflation targeting, monetary transmission became stronger and sacrifice ratios decreased. In periods of banking crises, the transmission from monetary policy interest rate shocks to prices is weaker and the related output costs are higher. Furthermore, countries with higher domestic private credit to GDP feature stronger transmission of interest rate shocks.
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Adverse Effects of Monetary Policy Signalling
Matějů, Jakub ; Filáček, Jan
Assuming information asymmetry between private agents and the central bank about the state of the economy, an unexpected change in interest rates signals the central bank’s perceived state of the economy and facilitates an update of private expectations in an adverse, perhaps unintended way. This “updating channel” might counteract the standard transmission from interest rates to inflation and output. We develop a simple model laying down a theoretical basis for the adverse effects of monetary policy signalling. We also detect the presence of the updating channel in private forecasts of inflation in a cross-country sample of selected OECD countries.
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What We Know About Monetary Policy Transmission in the Czech Republic: Collection of Empirical Results
Babecká Kucharčuková, Oxana ; Franta, Michal ; Hájková, Dana ; Král, Petr ; Kubicová, Ivana ; Podpiera, Anca ; Saxa, Branislav
This paper concentrates on describing the available empirical findings on monetary policy transmission in the Czech Republic. Besides the overall impact of monetary policy on inflation and output, it is useful to study its individual channels, in particular the interest rate channel, the exchange rate channel, and the wealth channel. The results confirm that the transmission of monetary impulses to the real economy works in an intuitive direction and to an intuitive extent. Our analyses show, however, that the global financial and economic crisis might have somewhat slowed and weakened the transmission. We found an indication of such a change in the functioning of the interest rate channel, where elevated risk premiums played a major role.
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Transmission Lags of Monetary Policy: A Meta-Analysis
Havránek, Tomáš ; Rusnák, Marek
The transmission of monetary policy to the economy is generally thought to have long and variable lags. In this paper we quantitatively review the modern literature on monetary transmission to provide stylized facts on the average lag length and the sources of variability. We collect 67 published studies and examine when prices bottom out after a monetary contraction. The average transmission lag is 29 months, and the maximum decrease in prices reaches 0.9% on average after a one-percentage-point hike in the policy rate. Transmission lags are longer in large developed countries (25–50 months) than in new EU member countries (10–20 months). We find that the factor most effective in explaining this heterogeneity is financial development: greater financial development is associated with slower transmission. Moreover, greater trade openness in new EU member countries seems to be associated with faster transmission. Our results also suggest that researchers who use monthly data instead of quarterly data report systematically faster transmission. JEL
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