Channels of Monetary Transmission
Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM
- Chair: Anna Korver, Federal Reserve Bank of New York
Lender of Last Resort Versus Buyer of Last Resort — Evidence From the European Sovereign Debt Crisis
AbstractWe document channels of monetary policy transmission to banks following two significant interventions of the European Central Bank (ECB) during the sovereign debt crisis. As a lender of last resort via the long-term refinancing operations (LTROs), the ECB improved the collateral value of short-term sovereign bonds of peripheral countries. Banks in the peripheral countries became excessively dependent on public funds and increased their exposure to domestic debt. An elevated concentration of peripheral sovereign bonds in the portfolios of risky banks increased fire sale risk, increasing the riskiness of both banks and sovereign bonds. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors to the sovereign bond market, reduced concentration and fire sale risk, and permanently improved solvency conditions for eurozone banks.
Financial Development and Monetary Policy: Loan Applications, Rates, and Real Effects
AbstractThe finance-growth literature argues that institutional constraints in developing countries impede financial intermediation and monetary policy transmission. Recent studies using aggregate data document a weak bank lending channel. For identification, we instead exploit Uganda's supervisory credit register, with loan applications and rates, and unanticipated variation in monetary policy. A monetary tightening strongly reduces credit supply--increasing loan application rejections and tightening volume and rates--especially for banks with more leverage and sovereign debt exposure (even within the same borrower-period). There are spillovers on inflation and economic activity, especially in more financially-developed areas, including on commercial building, trade, and social unrest.
Starting From a Blank Page? Semantic Similarity in Central Bank Communication and Market Volatility
AbstractPress releases announcing and explaining monetary policy decisions play a critical role in the communication strategy of central banks. Due to their market-moving potential, it is particularly important how they are drafted. Often, central banks start from the previous statement, and update the earlier text at the margin. This makes it straightforward to compare statements and see how the central bank’s thinking has evolved; however, more substantial changes, which will eventually be required, might then be harder to understand. Using variation in the drafting process at the Bank of Canada, this paper studies the extent to which similarity in central bank statements matters for the reception of their content in financial markets. It shows that similar press releases generate less market volatility, but that more substantial textual changes after a sequence of very similar statements lead to much larger volatility.
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G2 - Financial Institutions and Services