scholarly journals The Role of Monetary Policy in Transmission of Asset Prices into Goods Prices

2020 ◽  
Vol 4 (1) ◽  
pp. 143-167
Author(s):  
Sidra Mariyam ◽  
Wasim Shahid Malik
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Stock Prices ◽  
Asset Prices ◽  
Inflation Rate ◽  
House Prices ◽  
Asset Price ◽  
Price Inflation

Monetary policy in the contemporary world reacts, through short term interest rate, to deviations of inflation rate and output from their respective targets, while asset prices are responded to the extent they contribute to these deviations. This practice significantly affects transmission of asset prices into goods prices, which has serious implications for income distribution. This paper sets the objectives of estimating transmission of asset prices into goods prices and the role of monetary policy in influencing this transmission. In this regard, the paper hypothesizes that inflation rate positively responds to asset prices and this response weakens if interest rate leans against the winds of inflation, output and asset prices. To test these hypotheses, we have estimated different specifications of vector autoregressive (VAR) model and impulse response functions have been found after identifying structural shocks. Data of Pakistan’s economy on inflation rate, large scale manufacturing index, interest rate and asset price index – comprising house prices, stock prices and exchange rate – are used for the time period 2000m01 to 2019m06. We find evidence in support of both hypotheses; asset price inflation positively transmits into goods price inflation and this transmission intensifies if interest rate does not respond to other variables in the model. Moreover, transmission of asset prices into inflation rate, as compared to output, is influenced more by monetary policy. Finally, we find that the transmission of exchange rate and house prices to inflation rate are very much affected by monetary policy while in case of stock prices the influence of policy is moderate.

Sukuk and monetary policy transmission in Indonesia: the role of asset price and exchange rate channels

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Suriani Suriani ◽  
M. Shabri Abd. Majid ◽  
Raja Masbar ◽  
Nazaruddin A. Wahid ◽  
Abdul Ghafar Ismail
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rates ◽  
Asset Price ◽  
Transmission Mechanism ◽  
Monetary Policy Transmission ◽  
Content Type ◽  
Policy Transmission ◽  
Monetary Policy Transmission Mechanism

Purpose The purpose of this study is to empirically analyze the role of sukuk in the monetary policy transmission mechanism through the asset price and exchange rate channels in the Indonesian economy. Design/methodology/approach Using the monthly data from January 2003 to November 2017, this study uses a multivariate vector error correction model causality framework. To examine the role of sukuk in the monetary policy transmission mechanism through the asset price channel, this study uses the variables of consumption, inflation, interest rates, economic growth and the composite stock price index. Meanwhile, to examine the role of sukuk in the monetary policy transmission mechanism through the exchange rate channel, this study used variables of inflation, interest rates, economic growth, foreign investment and exchange rate. Findings This study documented that sukuk has no causal relationship with inflation through asset price and exchange rate channels. Nevertheless, sukuk has a bidirectional causal relationship with economic growth through asset price and exchange rate channels. Sukuk is also documented to have a causal relationship with monetary policy variables of interest rate and stock prices through asset price and exchange rate channels. Finally, a unidirectional causality is recorded running from the exchange rate to sukuk in the exchange rate channel. Research limitations/implications The finding of independence of the sukuk market from interest rates provides evidence that the trading of the sukuk in Indonesia has been in harmony with the Islamic tenets. Practical implications The relevant Indonesian authorities need to enhance both domestic and global sukuk markets as part of efforts to promote the sustainability of Islamic capital market development in Indonesia. Originality/value To the best of the authors’ knowledge, this study is among the first attempts to empirically investigate the role of sukuk in monetary policy transmission through asset price and exchange rate channels in the context of the Indonesian economy.

Stock prices, exchange rate and interest rate: evidence beyond symmetry

2017 ◽  
Vol 9 (1) ◽  
pp. 2-19 ◽  
Author(s):  
Taufeeq Ajaz ◽  
Md Zulquar Nain ◽  
Bandi Kamaiah ◽  
Naresh Kumar Sharma
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Stock Prices ◽  
Asset Price ◽  
Asymmetric Reaction ◽  
Monetary Policies ◽  
Content Type ◽  
Financial Variables ◽  
Distributed Lag ◽  
Indian Context

Purpose This paper aims to examine the dynamic interactions between monetary and financial variables in the Indian context. Design/methodology/approach In this paper, the authors have applied a recently developed asymmetric autoregressive distributed lag (ARDL) model by Shin et al. (2014), for detecting nonlinearities focusing on the long-run and short-run asymmetries among economic variables. Findings The results point toward the presence of asymmetric reaction of stock prices to changes in interest rate and exchange rate in full sample, as well as in pre-crisis. However, no asymmetry was found in the post-crisis period. The results further suggest that tight monetary policies appear to retard the stock prices, more than easy monetary policies that stimulate them. Practical implications The findings of the study can be helpful in understanding the policy transmission mechanism through asset price channel. Originality/value To the best of the authors’ knowledge, this is the first study that examines the interactions between monetary and financial variables in the Indian context in an asymmetric framework. The findings of this study are quite interesting and are different from several existing studies in the literature.

scholarly journals Measuring monetary policy in emerging economies

2020 ◽  
Author(s):  
Bui Thanh Trung
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Emerging Economies ◽  
Condition Index ◽  
Var Model ◽  
Empirical Results ◽  
Implementation Of Monetary Policy ◽  
The Interest Rate

Measuring the stance of monetary policy is of importance for the analysis and implementation of monetary policy. The existence of multiple instrument framework as well as the significance of the interest rate and exchange rate channel in emerging economies imply that monetary condition index can play an important role in evaluating whether monetary policy is restrictive or expansive in these economies. In this paper, we use the VAR model to evaluate the role of monetary condition index as an overall measure of monetary policy in emerging economies. The weight of components of monetary condition index is derived from the inflation equation in the VAR estimation. The empirical results suggest that a contraction in monetary policy causes a reduction in inflation. The finding implies that monetary condition index is a useful indicator that can predict the stance of monetary policy and predict the trend of inflation in emerging economies.

A NOTE ON MONETARY POLICY, ASSET PRICES, AND MODEL UNCERTAINTY

2012 ◽  
Vol 16 (5) ◽  
pp. 777-790 ◽  
Author(s):  
Meixing Dai ◽  
Eleftherios Spyromitros
Keyword(s):  
Monetary Policy ◽  
Financial Markets ◽  
Asset Prices ◽  
Inflation Rate ◽  
Asset Price ◽  
Optimal Monetary Policy ◽  
Macroeconomic Dynamics ◽  
High Preference ◽  
And Performance ◽  
The Cost

Using a macroeconomic model with asset prices, we analyze how optimal monetary policy and macroeconomic dynamics and performance are affected by a central bank's desire to be robust against model misspecifications. We show that a higher central bank preference for robustness implies a more aggressive reaction of the nominal interest rate to the expected future inflation rate and inflation shocks. The dynamic stability of the equilibrium is not modified for a sufficiently high preference for robustness. However, the speed of dynamic convergence is lower under robust control compared to a benchmark case without it and implies supplementary economic costs. Finally, an increase in the preference for robustness comes at the cost of higher macroeconomic and financial volatility in the presence of inflation shocks. It has no effect on the reaction of inflation, output gap, and asset price gap to shocks affecting goods and financial markets.

scholarly journals The Effects of Monetary Policy on House Prices in Spain: the role of the economic and monetary union membership in the housing bubble prior to the great recession

2018 ◽  
Vol 2 (2) ◽  
pp. 5
Author(s):  
Tibor Pál
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
House Prices ◽  
Monetary Transmission ◽  
Interest Rate Policy ◽  
Housing Boom ◽  
Rate Policy ◽  
The Impact

Aim: This paper aims to discover the evolution of monetary transmission in Spain by focusing on the short-term interest rate, credit aggregates and house prices through different stages of economic development and European integration between 1975 and 2008. In addition, the analysis devotes special attention to the interval of the last housing boom, in order to reveal the importance of the interest rate policy of the ECB.Design / Research methods: The study applies a tri-variate autoregressive model assigned to three overlapping periods outlined by regime shifts in the Spanish economy. The estimation output determines the strength and persistency of the links between interest rates, credit aggregates and house prices. Consequently, the results of the econometric analysis provide proper base for comparison in order to identify the dominating channels of monetary transmissions through a prolonged period.Conclusions / findings: It is found that the transmission mechanism in Spain essentially altered over time since 1975. At the beginning of the full analysed interval the role of the credit channel was dominant, then its importance gradually diminished. After the EMU accession the traditional interest rate channel became the leading factor with an intensified and more persistent effect on house prices.Originality / value of the article: While there are numerous researches aimed at estimating the impact of monetary policy on the real economy, empirical studies focusing exclusively on the link between interest rate policy and house prices in Spain are still rare. As the present paper concentrates solely on the Spanish characteristics through extended interval, the study provides country-specific inferences.Implications of the research: Understanding the mechanism of the monetary policy effects on the housing sector is an essential aspect of designing policy interventions aimed at keeping house price development in check.Limitations of the research: Despite the significant results of the empirical analysis, the excessively dynamic increase in the property prices suggests that the factor of irrational expectations also played important role in the latest Spanish housing bubble.Key words: Monetary policy, VAR, ECB, Housing boom, Monetary transmission mechanismJEL: E52, E58.

scholarly journals Monetary Policy Transmission Mechanism in Namibia: A Bayesian VAR Approach

2017 ◽  
Vol 9 (5) ◽  
pp. 169-184
Author(s):  
Johannes PS Sheefeni
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Asset Price ◽  
Transmission Mechanism ◽  
Real Effective Exchange Rate ◽  
Series Data ◽  
Monetary Policy Transmission ◽  
Policy Transmission ◽  
Monetary Policy Transmission Mechanism

This study analyzed the interest rate channel, credit channel, exchange rate channel and asset price channel for monetary policy transmission mechanism in Namibia. The idea behind this study is to have a comprehensive study that covers a variety of channels for monetary policy transmission mechanism. The study utilized a Bayesian vector autoregression (BVAR) technique on quarterly time-series data covering the period 2000:Q1 to 2016:Q4. In particular, the validity of the data used is checked and verified by using two sets of prior distributions suggested by Sims and Zha as well as prior distribution of Koop and Korobilis. The variables used in this study are real output (Yt), real effective exchange rate (Et), inflation rate (P t), repo rate (Rt), housing price index (Ht) and credit extended to private sector (Lt). The findings revealed that interest rate and credit channels remain important in the transmission mechanism to this day. Notably the exchange rate and asset price channels are also slowly gaining prominence in monetary policy transmission mechanism. Therefore, the study provides useful information to the monetary authorities regarding the process of transmission mechanisms. This is quite important especially that the Central Bank (Bank of Namibia) is very serious about financial stability within the financial system, given the fragility of the financial systems in the world due to financial crisis.   

scholarly journals Effects of Monetary Asset- Price Transmission on Investment and Inflation in the Euro Area

2019 ◽  
pp. 279-300
Author(s):  
Leef H. Dierks ◽  
Lars E. Spreng
Keyword(s):  
Monetary Policy ◽  
Financial Markets ◽  
Stock Prices ◽  
Asset Price ◽  
Balance Sheet ◽  
Price Transmission ◽  
Price Inflation ◽  
European Central ◽  
Inflation Rates ◽  
Asset Price Inflation

Since the onset of the financial markets’ crisis in late 2008, the Eurozone has been subject to rather volatile headline inflation, occasionally even turning into (an admittedly modest) deflation. As eventually, conventional monetary policy seemed to be exhausted, the European Central Bank (ECB) resorted to unprece- dented unconventional measures. In 2010, it launched a first gov- ernment bond purchasing programme, which was followed by a series of different programmes, swelling its balance sheet to c. €4.7tn as per May 2019. The induced asset-price-inflation in con- junction with a continuous and persistently low HICP inflation rates inevitably raises the question how effective monetary trans- mission – particularly via asset-prices – (still) is. This contribution will investigate the effects of monetary asset- price transmission on investments and inflation. First, it analyses the reliability of stock markets as an indicator for firms’ investment, while emphasising the importance of uncertainty. Sec- ond, the paper examines how rising stock prices affected firms’ balance sheet and lending. Further, it provides an explanation as to why monetary policy failed to amplify lending in peripheral mem- ber states and why it had a comparatively low effect on borrowing costs in these regions. Third, it scrutinises the implication of an output gap, which monetary policy seeks to create, on different inflation parameters. Thus, the paper illustrates why the effects on HICP-inflation are less pronounced compared to other inflation measures.

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