Micro-level transmission of monetary policy shocks: The trading book channel.

We open the black box of the monetary policy transmission mechanism with a granular model that considers the balance-sheet composition and network relationships of each economic agent. Though there are several well-documented channels through which monetary policy operates, we focus on the overlooked trading book channel, which arises because of adjustments in the accounting value of trading book exposures on banks' balance sheets that have to be marked to market when interest rates change. Variations in banks' net worth due these adjustments are used as input to a network model that incorporates the financial and corporate sectors. The framework permits us to determine the effects of interest rate changes on every bank and firm in the economy and any second-round (contagion) effects in the short run. We apply the model to a comprehensive database of Brazilian banks and firms from 2015 to 2020. We find that interest rate shocks affect more strongly financial stability in periods of monetary policy tightening. We also find notable asymmetric effects of positive and negative interest rate shocks in the Brazilian economy, with positive interest rate shocks affecting more financial stability. Finally, our results also suggest a non-linear relationship between interest rate changes and financial stability, reinforcing the need to mitigate monetary policy shocks through interest rate smoothing and adequate communication and transparency to society.

The Interaction Between Conventional Monetary Policy and Financial Stability: Chile, Colombia, Japan, Portugal and the UK.

The relationship between monetary policy and financial stability has gained importance in recent years as Central Bank policy rates neared the zero-lower bound. We use an SVAR model to study the impact of monetary policy shocks on three proxies for financial stability as well as a proxy for economic growth. Monetary policy is represented by policy rates for the emerging market economies and shadow rates for the advanced economies in our paper. Our main results show that monetary policy may be used to correct asset mispricing, to control fluctuations in the real business cycle and also to tame credit cycles in the majority of cases. Our results also show that for the majority of cases, in line with conventional wisdom, local currencies appreciate following a positive monetary policy shock. Monetary policy intervention may indeed be successful in contributing to or achieving financial stability. The results, however, show that monetary policy may not have the ability to maintain or re-establish financial stability in all cases. Alternative policy choices such as macroprudential policy tool frameworks which are aimed at targeting the financial system as a whole may be implemented as a means of fortifying the economy.

An Evaluation of the Impact of Monetary Easing Policies in Times of a Pandemic.

This article tests five major economies of the world, United Kingdom, Japan, Brazil, Chin and lastly, India, for the changes in the monetary policy decisions that have been implemented following the Covid-19 outbreak. The assessment was undertaken in the form of an event study analysis, further substantiated with a regression analysis conducted for exploring the significance of CPI and real GDP in predicting the policy interest rates in the economy. The results of the event study analysis presented that the abnormal changes in the interest rates were statistically significant in the case of the United Kingdom, Brazil, and China, while the abnormal changes were found to be statistically insignificant in the case of India and Japan.