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A repurchase agreement (repo) is a source of cash and collateral. We document that the money market is more segmented when the collateral motive prevails. Two crucial aspects of the central bank framework lead to this disconnect: banks' access to the central bank's deposit facility and assets' eligibility for quantitative easing (QE). We show that repo rates lent by banks with access to the deposit facility and secured by QE eligible assets are more collateral-driven and disconnected from funding-based money market rates. Our results are relevant for different monetary policies and have suggestive implications for the monetary policy pass-through. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

This article explores the long-term and cyclical effects of the Pasinetti Index (PI) and their implications for income distribution and macroeconomic policy in a post-pandemic environment marked by inflationary pressures and increasingly restrictive central bank policies. It discusses the relevance of adopting a zero PI as monetary policy framework as either a short-term target or a long-term norm. The research underscores the importance of coordinating monetary and fiscal policies to achieve a balanced mix of short-term and long-term macroeconomic goals, as per the Pasinetti rule, aimed at stabilizing income distribution between rentier and non-rentier groups without compromising on a Keynesian full employment commitment. By analyzing historical data and employing a SVAR model for Canada and the United States, the study highlights the significant cyclical impact of PI fluctuations on unemployment and income distribution. The findings challenge the efficacy of rigid monetary policy rules and support a macroeconomic policy that reconciles short-term employment objectives and long-term distributional goals. [ABSTRACT FROM AUTHOR]

Purpose: To investigate the role of domestic and foreign economic policy uncertainty (EPU) in driving the corporate bond yields in emerging markets. Design/methodology/approach: The study utilizes monthly data from January 2008 to June 2023 from the selected emerging economies. The data analysis is conducted using univariate, bivariate and multivariate statistical techniques. The study includes bond market liquidity and global volatility (VIX) as control variables. Findings: Domestic EPU has a significant role in driving corporate bond yields in these markets. The study finds weak evidence to support the role of the USA EPU in influencing corporate bond yields in emerging economies. Domestic EPU holds more weight and influence than the EPU originating from the United States of America. Research limitations/implications: The findings provide useful insights to policymakers about the potential impact of policy uncertainty on corporate bond yields and enable them to make informed decisions regarding economic policies that maintains financial stability. Understanding the relationship between EPU and corporate bond yields enables investors to optimize their investment decisions in emerging market economies, opens the scope for further research on the interaction between EPU and volatility and other attributes of fixed income markets. Originality/value: Focuses specifically on the emerging market economies in Asia, providing an in-depth analysis of the dynamics and challenges faced by these countries, Explores the influence of both domestic and the USA EPU on corporate bond yields in emerging markets, offering valuable insights into the transmission channels and impact of EPU from various sources. [ABSTRACT FROM AUTHOR]

Over the past decade, Lawrence Summers has argued that stagnation cannot be rectified by monetary policy because it is the result of a negative natural rate of interest. This analysis brings together two separate streams of thought: traditions in which stagnation has been connected to excessive saving linked to income distribution, or to diminishing investment demand; and a tradition centred on the natural rate of interest and its relationship to the market rate. However, they remained largely separated until Summers brought them together. Modern discussions of the natural rate stem from Knut Wicksell’s Interest and Prices (1898). However, although he came close to arguing that the natural rate might be negative during cyclical depressions, it was mainly under-consumptionists who argued for the possibility of stagnation. These two strands of thinking came closer in the interwar period but they remained separate. The main advocate of secular stagnation, Alvin Hansen, drew on the American Institutionalist tradition, not Wicksell. Postwar Keynesians did not pursue the idea of a negative natural rate even though Samuelson had provided a theoretical explanation. It was not until Summers that a negative natural rate, income distribution and the possibility of secular stagnation were brought together. [ABSTRACT FROM AUTHOR]

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This paper develops an estimated New Keynesian model of a commodity-exporting economy for an integrated policy framework, integrating the full range of policies used in practice and featuring a range of nominal and real rigidities, macro-financial linkages, and transmission channels of external shocks. We jointly examine the optimal conduct of conventional and unconventional monetary policies, macroprudential policy, foreign exchange intervention, capital flow management, and fiscal policy based on the model. The policy analysis framework is applied empirically to Mongolia, a small open and developing economy highly dependent on imports and commodity exports. We find that an eclectic policy mix improves policy trade-offs and a lack of cooperation among policy authorities may result in conflicting policies, hence suboptimal results for overall economic stability. Our optimal policy analysis shows that policy mix adjustments should differ depending on the type of shocks and the policy objectives. The results suggest that the policy analysis framework can help policymakers choose their policy mix adjustments to deal with external shocks in an integrated and optimal way. [ABSTRACT FROM AUTHOR]

The role of monetary policy has become increasingly important in recent years, as a range of economic challenges have emerged, affecting both developing and economically advanced countries. The aim of this article is to examine the shift in the monetary policy of the EU, which has been expressed through changes in the tools used by the European Central Bank (ECB), and to consider the causes and economic implications of this shift. The descriptive analytical method was used to achieve this goal. The study identified that the aim of the ECB’s interest rate increases was primarily to slow down core inflation rates. The ECB has raised the refinancing rate from 0.5% to 2.5% in 2022 and halted asset purchase programs, such as the Pandemic Emergency Purchase Programme, which had previously stimulated liquidity growth. Despite these changes, forward guidance has been maintained as a useful tool for providing clarity and certainty to financial markets and the public about the future path of monetary policy. It is concluded in the study that the impact of the shift towards contractionary monetary policy is likely to be felt across a range of economic sectors, with higher borrowing costs potentially leading to reduced investment and lower levels of economic growth.

AbstractThis study examines whether conventional bank lending rates influence Islamic bank financing rates in Indonesia and Malaysia that apply the dual-banking system. We employ the ARDL, the non-linear ARDL (NARDL) model, and the Pooled Mean Group (PMG). Evidence of the long-run link between Islamic financing rate and conventional lending rate is found. However, instead of symmetry, the link between them is asymmetry. The asymmetric pricing of the Islamic financing rate and some specific contracts such as Mudharaba and Murabaha rates in Indonesia strongly follow the decrease in conventional lending rate, but it is sticky against the increase in conventional lending rate. The asymmetric pricing of the Islamic financing rate in Malaysia is obviously pegged to the conventional lending rate. The PMG results strengthen the asymmetric findings where the effect of a reduction in the conventional lending rate is larger than the effect of an increase in the conventional lending rate on the Islamic financing rate. These findings imply that Islamic bank borrowers are profit-driven borrowers in a dual-banking system. Accordingly, the Islamic financing rate is pushed to follow the conventional lending rate due to the uncompetitive Islamic financing rate.

AbstractThis paper investigates the consistency of asymmetric interest rate past-trough (IRPT) using a nonlinear autoregressive distributed lag framework. Superior to the previous studies, this study exploits the historical profile of Indonesia to enrich the analysis. Asian Financial Crisis (AFC) which crashed the country in 1998 and several monetary policy changes implemented by the government offer different perspectives to grasp IRPT. The results of this study indicate that there is a consistent upward rigidity in the long-run pass-through in Indonesia. Particularly during the AFC, it is well proven that the asymmetric behavior is fickle whether disappear or bounce back to the downward rigidity. This finding demonstrates the importance of a rolling-window approach in understanding IRPT.

Given the need of transition economies to fund the investments necessary for development partly through borrowing, this paper investigates empirically the economic consequences of the government cost of borrowing for European transition economies during the period 2003-2016. The investigation analyses the impact of sovereign borrowing costs, in turn, on interest rates on loans to businesses and households, on the growth rates of investment and consumption, and, ultimately, on general economic activity. By utilizing a panel VAR technique our results indicate that consequent upon a positive shock to the cost of sovereign borrowing, the cost of borrowing for loans to both Non-Financial Corporations (NFCs) and households increases. We find that the price transmission from government borrowing costs to the private sector is at play with respect not only to borrowing rates but also to macroeconomic activity at large. Following an increase in sovereign borrowing costs, we observe substantial negative responses in the growth rates of investment, household consumption, and GDP growth. Also, while a price of borrowing increase for NFCs is found to negatively affect investment, household consumption is unaffected by an increase in household borrowing rates. These findings have valuable policy implications for policymakers and stakeholders in transition economies. Specifically, the results suggest that efforts to reduce the cost of sovereign borrowing could have a positive impact on the economy by lowering borrowing costs for households and businesses, promoting investment and consumption, and ultimately boosting economic growth. [ABSTRACT FROM AUTHOR]

This paper identifies the natural interest rate for the Macedonian economy using quarterly data for 2001Q4-2019Q3. To this end, the estimation is made by using different types of models, such as the Holston, Laubach, and Williams model and the full-fledged country-specific structural MAKPAM model. The empirical results show that the natural rate of interest in the Macedonian economy has declined over time, which is similar to the findings for other countries. The decomposition of the natural rate suggests that the main driver for the decline is the slowdown of the Macedonian potential GDP growth in the period after the global economic crisis, although there are signs of its recovery at the end of the sample period. In addition, the results indicate that the monetary policy conditions in the Macedonian economy have been broadly accommodative from 2011Q4 onwards. The substantive conclusions are unchanged across the multiple models used in this study. [ABSTRACT FROM AUTHOR]

We study the relationship between monetary policy and long‐term rates in a structural, general equilibrium model estimated on both macro‐ and yield‐data from the United States. Regime shifts in the conditional variance of productivity shocks, or "uncertainty shocks," are a crucial driver of bond risk premia. We highlight three main results. First, our term premia on 10‐year bonds are highly correlated with estimates from the affine literature, even if less markedly volatile. Second, uncertainty shocks also induce an increase in equity premia and exert downward pressure on consumption and inflation. An increase in equity premia will therefore be accompanied by a cut in policy interest rates, even if the policy rule does not directly react to equity prices. This model mechanism is consistent with the empirical evidence on the "Fed put." Third, model‐implied long‐term inflation expectations are less dogmatically anchored than survey‐based measures over the 2000s. [ABSTRACT FROM AUTHOR]

This article examines if professional forecasters form their expectations regarding the policy rate of the European Central Bank (ECB) consistent with the Taylor rule. In doing so, we assess micro-level data including individual forecasts for the ECB main refinancing operations rate as well as inflation and gross domestic product (GDP) growth for the Euro Area. Our results indicate that professionals indeed form their expectations in line with the Taylor rule. However, this connection has diminished over time, especially after the policy rate hit the zero lower bound. In addition, we also find a relationship between forecasters' disagreement regarding the policy rate of the ECB and disagreement on future GDP growth, which disappears when controlling for monetary policy shocks proxied by changes in the policy rate in the quarter the forecasts are made. [ABSTRACT FROM AUTHOR]

This paper investigates the impact of Covid-19 pandemic and monetary policy measures adopted by the European Central Bank (ECB) on the sovereign risk for the European Monetary Union (EMU) countries for the period between March-2020 and November-2020 using daily data. The impact of Covid-19 and monetary policy shocks on the credit default swap rates and bond yields are investigated relying on a fixed effects panel regression model for five core (Germany, France, Austria, Netherlands, Belgium) and three periphery (Italy, Portugal and Spain) countries. To investigate the cross-country differences in responses, the interactions of the independent variables with periphery dummy and other country-specific variables are included in the regressions. The results of the empirical analysis suggest that Covid-19 shock increased the sovereign risk in the periphery EMU countries significantly and monetary policy measures have been effective in easing financial conditions in these countries. The results are insignificant for the core countries. The results also show that financial stability alleviates the negative impact of Covid-19 on the sovereign risk.

We propose and test a new channel that links liquidity risk and interest rates in short-term funding markets. Unlike existing theories that focus on premiums demanded by lenders, the liquidity risk channel postulates that borrowers that are more exposed to urgent liquidity needs are willing to pay a markup for immediate funding. We test and quantify the channel using unique trade-by-trade data and uncover systematic differences across individual banks' funding cost driven by differences in banks' liquidity risk. These differences are persistent over a decade, suggesting that the liquidity risk channel is relevant in general and not only arises during crisis times. [ABSTRACT FROM AUTHOR]

Research purpose. The purpose of this paper is to examine the efficiency of the transmission mechanism of the monetary policy in a banking system with excess liquidity. More specifically, it aims to examine how the interest rates of the central bank bills and inflation rate affect total lending and the overall economic activity in the country. For this purpose, the analysis is based on the case of the Republic of North Macedonia, whose banking system has exhibited excess liquidity in the past decade.

Debido a la incertidumbre al respecto, en este artículo se analiza cuál podría ser la postura de política monetaria más adecuada para México: una que mantenga el objetivo de inflación sin afectar negativamente el crecimiento del producto. Se estima el valor de la tasa de interés neutral en México para los próximos cinco años con base en la regla de Taylor y un modelo vectorial autorregresivo (VAR) cointegrado (CVAR). Los resultados sugieren que la tasa de política monetaria se encuentra por arriba de la tasa neutral de interés, lo que, combinado con el potencial recorte de tasas a escala internacional, podría conceder al banco central durante casi todo el sexenio grados de libertad para mantener su tasa por debajo del nivel actual; en el corto plazo se podría recortar la tasa de política monetaria actual en 25 puntos al menos sin arriesgar la convergencia a la meta de inflación.