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The Role of Business Confidence in the Monetary Policy Transmission Mechanism: Evidence from the Euro Area
Liu, Zhaozhi ; Holub, Tomáš (advisor) ; Komárek, Luboš (referee)
Traditional macroeconomics believes that confidence is not the main cause of economic fluctuations, but when faced with financial crises, monetary authorities still emphasize the role of stabilizing confidence. Although people generally agree that confidence is an important part of the transmission of macro-policies to micro- individuals, there is neither empirical evidence support nor corresponding mechanism research. This thesis attempts to answer the following questions: Does business confidence affect the effectiveness of monetary policy? Does business confidence have the same impact on monetary policy in different economic periods? This thesis first constructed a structural vector auto-regression (SVAR) model to test the role of business confidence in the transmission of monetary policy in the euro area. The empirical results show that expansionary monetary policy can effectively boost business confidence while stimulating output growth. In addition, this thesis extends the model by introducing share prices and exchange rates to investigate the role of these two important to the monetary transmission mechanism, concluding that business confidence plays a strong role in interest rate transmission and a weaker role in the transmission of asset prices and exchange rates. Subsequently, in order to...
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The Role of Business Confidence in the Monetary Policy Transmission Mechanism: Evidence from the Euro Area
Liu, Zhaozhi ; Holub, Tomáš (advisor) ; Komárek, Luboš (referee)
Traditional macroeconomics believes that confidence is not the main cause of economic fluctuations, but when faced with financial crises, monetary authorities still emphasize the role of stabilizing confidence. Although people generally agree that confidence is an important part of the transmission of macro-policies to micro- individuals, there is neither empirical evidence support nor corresponding mechanism research. This thesis attempts to answer the following questions: Does business confidence affect the effectiveness of monetary policy? Does business confidence have the same impact on monetary policy in different economic periods? This thesis first constructed a structural vector auto-regression (SVAR) model to test the role of business confidence in the transmission of monetary policy in the euro area. The empirical results show that expansionary monetary policy can effectively boost business confidence while stimulating output growth. In addition, this thesis extends the model by introducing share prices and exchange rates to investigate the role of these two important to the monetary transmission mechanism, concluding that business confidence plays a strong role in interest rate transmission and a weaker role in the transmission of asset prices and exchange rates. Subsequently, in order to...
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Interest rate pass-through in the euro area: The effect of financial crisis
Rybák, Jakub ; Horváth, Roman (advisor) ; Hayat, Arshad (referee)
In this study we analyze the impact of the financial crisis on interest rate pass-through in the euro area. By applying a wide range of econometric techniques, including both univariate and multivariate models to estimate cointegration relationships between retail and policy rates and related short-term adjustment processes we find out that the financial crisis has led to the increased spread between market and policy rates, which has not been corrected by central bank policies so far. We also find evidence of cross-country heterogeneity in both pre-crisis pass-through and crisis effects. In addition to this, for many retail rates we find an evidence of two-way Granger causality with respect to policy rates, indicating the accommodative policy of ECB following the market disruptions. We also estimate the timing of shocks to transmission mechanism and our results suggest that they are not distributed tightly around September 2008, but rather vary widely across the sample.
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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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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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Heterogeneity in bank pricing policies: the Czech evidence
Horváth, Roman ; Podpiera, Anca
In this paper, writers estimate the interest rate pass-through from money market to bank interest rates using various heterogeneous panel cointegration techniques to address bank heterogeneity. Based on micro-level data from the Czech Republic, the results indicate that the nature of interest rate pass-through differs across banks in the short term (rendering estimators that constrain coefficients across groups to be identical inconsistent) and becomes homogeneous across banks only in the long term, supporting the notion of the law of one price.
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