E51

Money Supply; Credit; Money Multipliers

The effectiveness of counter-cyclical loan-to-value regulations: generic versus sector-specific rules

This paper considers the implications of the counter-cyclical loan-to-value (CcLTV) regulation in a setting where different types of borrowers from distinct sectors of the credit market co-exist. To identify the optimal policy design, we consider two macro-prudential policy regimes, nanely generic and sector-specfic, and compare their effectiveness in enhancing financial and macroeconomic stability. The results show that both regimes are effective in this regard, especially when the economy is hit by financial and housing demand shocks.

Flow specific capital controls for emerging markets

This paper investigates the impact of capital controls on business cycle fluctuations and welfare. To perform this analysis, we deploy an asymmetric two country model that is subject to negative foreign interest rate shocks. The results show that both an inflow and outflow capital control are able to attenuate capital flow dynamics, but each control bears different implications for macroeconomic outcomes. Whilst the outflow capital control is associated with shock attenuation benefits, the inflow capital control is shown to amplify the impact of shocks.

Credit market heterogeneity, balance sheet (in) dependence, financial shocks

This paper presents a real business cycle model with financial frictions and two credit markets to investigate the qualitative and quantitative relevance of credit market heterogeneity. To address this line of inquiry we contrast the transmission of financial shocks in an economy where loans are the only form of credit to one in which both loans and bonds exist.

The impact of monetary policy on household consumption in South Africa. Evidence from Vector Autoregressive Techniques

This paper investigates the “cost of credit effect” of monetary policy on household consumption of final goods and services in South Africa, testing the hypotheses of the Keynesian interest rate channel of monetary policy transmission. We focus on three periods; post transition from apartheid, during inflation targeting and during the global financial crisis. Quarterly data from 1994Q1 to 2012Q4, constant parameter vector autoregressive techniques (VAR) by Sims (1980) and time varying parameter VAR by Primicieri (1995) are used in this study.

Can currency in circulation predict South African economic activity?

The money supply can be broadly defined as consisting of currency and deposits. While currency forms but a small portion of the total money supply, it can be a crucial determinant of spending behaviour and subsequently economic activity. The ability of the money supply to predict an up- or downswing in economic activity, as measured by a positive or negative output gap, is evaluated over a sample period 1980 – 2012. Two models are estimated, one using only the currency component and a second using the total money supply (M3).

Credit spread variability in U.S. business cycles: The Great Moderation versus the Great Recession

This paper establishes the prevailing financial factors that influence credit spread variability, and its impact on the U.S. business cycle over the Great Moderation and Great Recession periods. To do so, we develop a dynamic general equilibrium framework with a central role of financial intermediation and equity assets. Over the Great Moderation and Great Recession periods, we find an important role for bank market power (sticky rate adjustments and loan rate markups) on credit spread variability in the U.S. business cycle.

A Portrait of Informal Sector Credit and Interest Rates in Malawi: Interpolated Monthly Time Series

Although informal finance forms a large part of their financial sector, nearly all low income countries exclude informal transactions in official monetary data. Usually, informal finance data are nonexistent and occasionally, they are available only from surveys that often occur at irregular intervals and mostly with incomparable data. Using two survey datasets, indigenous knowledge, and elements of Friedman’s data interpolation technique, this study constructs monthly time series of informal credit and interest rates for Malawi.

Disaggregated Credit Extension and Financial Distress in South Africa

This study analyses the relationship between disaggregated credit extension and financial distress in South Africa. It commences by constructing a composite indicator of financial distress and then examines its correlation with components of disaggregated credit extension. Of particular interest is to isolate the components of disaggregated credit extension that show a strong relationship with the measure of financial distress for financial stability purposes.

The Equity Price Channel in a New-Keynesian DSGE Model with Financial Frictions and Banking

This paper studies the role of the equity price channel in business cycle fluctuations, and highlights its systemic risk across all sectors of the economy. We develop a canonical New-Keynesian dynamic stochastic general equilibrium model with a tractable role for the equity market in banking, entrepreneur and household economic interactions. The model is estimated with Bayesian techniques using U.S. data over the sample period 1982Q01 - 2012Q01. We show that a New-Keynesian DSGE model with an equity price channel well mimics the U.S. business cycle.

Currency Crises and Monetary Policy in an Economy with Credit Constraints: The Case for Low Interest Rates Restored

This paper revisits the currency crises model of Aghion, Bacchetta and Banerjeee (2000, 2001, 2004), who show that if there exist nominal price rigidities and private sector credit constraints, and the credit multiplier depends on real interest rates, then the optimal monetary policy response to the threat of a currency crisis is restrictive. We demonstrate that this result is primarily due to the uncovered interest parity assumption. Assuming that the exchange rate is a martingale restores the case for expansionary reaction — even with foreign-currency debt in firms’ balance sheets.

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