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FAVAR approach
I Once policy rates are cut to what used to be known as the zero lower
bound, central banks can employ unconventional monetary policy
measures to provide further stimulus if real interest rates are still above
the levels consistent with price stability and full employment.
I Negative nominal policy interest rates are the latest addition to this
unconventional toolkit.
I Six central banks so far have introduced negative rates that apply to
some amount of the cash balances commercial banks hold with the
central bank (Danish National Bank; European Central Bank; Swiss
National Bank; Swedish Riksbank; Bank of Japan; Hungarian National
Bank).
I Negative rates aim to encourage the private sector to spend more and
support price stability by further easing monetary and financial
conditions.
I For smaller open economies, negative rates can also help discourage
capital inflows and reduce exchange rate appreciation pressures.
Goals of Central Banks
I Negative policy rates have thus far been associated with expanded
central bank balance sheets as a result of quantitative easing or
large-scale foreign exchange purchases. Quantitative easing compresses
yields and term premia.
I Moving policy rates negative aims to lower money market rates and push
down the yield curve further, and boost portfolio substitution effects,
thereby increasing the potency of monetary policy.
I In fact, negative deposit rates tend to have more bite when a large
amount of commercial banks reserves are priced at the negative rate.
NIRP
I Negative real rates have been seen in both advanced and emerging
markets and developing economies when inflation is higher than nominal
interest rates.
I The latter are unlikely to fall below zero as retail depositors could switch
to cash to avoid the negative rate.
Transmission Channels
I Through the banking lending channel, wholesale interest rates have
fallen with central bank deposit rates.
I In addition, lower wholesale interest rates reduce the cost of funds for
those borrowers such as large corporates who can directly finance in
commercial paper and corporate bond markets.
I The impact of negative central bank rates on the exchange rate has
been mixed. Portfolio rebalancing in some cases has led to cross-border
capital outflows and exchange rate depreciation.
I In some cases central bank actions have had the beneficial effect of
reducing capital inflows while elsewhere other factors have driven the
exchange rate.
Research Questions
I Rey (2015), Shin (2012) and Bruno and Shin (2015) show that the
conduct of the US monetary policy can affect banking and capital flow
through the interaction of the US policy rate with the commercial banks
balance sheet. Cerutti, Claessens, and Ratnovski (2014)) study how
monetary policy in the US, the UK, EU and Japan spillover to other
countries through the capital flows.
Literature
Global factor
USCRWTIC Index Bloomberg West Texas Intermediate Crude Oil Spot Price
EUCRBRDT Index Bloomberg European Dated Brent Forties Oseberg Ekofisk Price
PGCRDUBA Index Bloomberg Arabian Gulf Dubai Fateh Crude Oil Spot Price
CESIUSD Index Citigroup Economic Surprise - United States
CESIEUR Index Citigroup Economic Surprise - EU
CESIJPY Index Citigroup Economic Surprise - JP
CESICNY Index Citigroup Economic Surprise Index -China
CESIEM Index Citigroup Economic Surprise Index -Emerging markets
VIX index The Chicago Board Options Exchange Volatility Index
GBIEMCOR Index JPM Government Bond Index: Emerging Markets Global Core
MXEF Index Morgan Stanley Condition Index - Emerging Markets Index
( (a)) Manufacturing Production
Index ( (b)) Inflation
I We identify a negative interest rate in case the policy rate is already into
a positive or negative territory.
0.3 0.2 0.1 0.0 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 0.000 0.005 0.010 0.015
0
0
0
10
10
10
20
20
20
30
30
30
IP
REU > 0
40
40
40
50
50
50
Long Yield
Policy Rate
60
60
60
3.0 2.5 2.0 1.5 1.0 0.5 0.0 5 4 3 2 1 0 1 0.05 0.00 0.05 0.10
0
0
0
10
10
10
20
20
20
30
30
30
IP
REU < 0
40
40
40
50
50
50
Long Yield
Policy Rate
Impulse responses for China
60
60
60
0.8 0.6 0.4 0.2 0.0 1.6 1.4 1.2 1.0 0.8 0.03 0.02 0.01 0.00 0.01 0.02
5
5
5
10
10
10
IP
RJP > 0
15
15
15
Long Yield
Policy Rate
20
20
20
10
10
10
IP
RJP < 0
15
15
15
Long Yield
Policy Rate
20
20
20
Impulse responses for China
0
0.0
0
0.5
1
2
2
1.0
CN.inflation
CN.inflation
1
4
1.5
6
2.0
4
0 10 20 30 40 50 60 0 10 20 30 40 50 60 5 10 15 20 5 10 15 20
0.00
0.00
0.004
0.010
0.05
0.05
0.002
0.005
CN.reer
CN.reer
0.10
0.000
0.000
0.10
0.002
0.15
0.005
0.004
0.15
0 10 20 30 40 50 60 0 10 20 30 40 50 60 5 10 15 20 5 10 15 20
CN.stockprice CN.hoCNeprice
0.00 0.01 0.02 0.03 0.000 0.001 0.002 0.003 0.004 0.005 0.006
0
0
10
10
20
20
30
30
REU > 0
40
40
50
50
60
60
Stock Price
House Price
0
0
10
10
20
20
30
30
REU < 0
40
40
50
50
Impulse responses for China
60
60
Stock Price
House Price
CN.stockprice CN.hoCNeprice
0.10 0.08 0.06 0.04 0.02 0.00 0.02 0.005 0.000 0.005 0.010
5
5
10
10
RJP > 0
15
15
20
20
Stock Price
House Price
10
10
RJP < 0
15
15
20
20
Stock Price
House Price
Impulse responses for India
REU > 0 REU < 0 RJP > 0 RJP < 0
Policy Rate Policy Rate Policy Rate Policy Rate
0.5
0.0
0.5
0.2
0.0
0.0
0.5
0.0
0.5
0.2
IN.policy_rate
IN.policy_rate
1.0
1.0
0.4
0.5
1.5
1.5
0.6
2.0
2.0
1.0
0.8
2.5
2.5
1.0
0 10 20 30 40 50 60 0 10 20 30 40 50 60 5 10 15 20 5 10 15 20
0.2
0.0
0.0
0.0
0.0
0.2
0.5
IN.long_yield
IN.long_yield
0.2
0.4
0.5
1.0
0.6
0.4
0.8
1.5
1.0
0.6
1.0
0 10 20 30 40 50 60 0 10 20 30 40 50 60 5 10 15 20 5 10 15 20
0
0.8
5
0.6
10
2
0
0.4
15
IN.inflation
IN.inflation
0.2
20
0
5
25
0.0
30
2
0.2
35
10
0 10 20 30 40 50 60 0 10 20 30 40 50 60 5 10 15 20 5 10 15 20
IN.equity_net_flow IN.stockprice IN.reer
0.4 0.2 0.0 0.2 0.4 0.6 0.010 0.005 0.000 0.005 0.010 0.015 0.020 0.006 0.004 0.002 0.000 0.002 0.004
0
0
0
10
10
10
20
20
20
30
30
30
REU > 0
40
40
40
REER
50
50
50
60
60
60
Stock Price
Equity Flows
1 0 1 2 3 4 0.0 0.1 0.2 0.3 0.05 0.00 0.05
0
0
0
10
10
10
20
20
20
30
30
30
REU < 0
40
40
40
REER
50
50
50
Impulse responses for India
60
60
60
Stock Price
1.5 1.0
IN.equity_net_flow
5
5
5
10
10
10
RJP > 0
REER
15
15
15
20
20
20
Stock Price
Equity Flows
4 3 2 1 0 1 2 0.1 0.0 0.1 0.2 0.06 0.04 0.02 0.00 0.02 0.04 0.06 0.08
5
5
5
10
10
10
RJP < 0
REER
15
15
15
20
20
20
Stock Price
Equity Flows
Impulse Responses
I The drop is largely amplified when the interest rate lies into a negative
territory (NIRP).
Impulse Responses
Having many results for several countries, in the following we report only
impulse responses where NIRPs have impact.
Impulse responses for Korea
1.0
2
0
1.5
0.5
5
KR.bond_net_flow
KR.bond_net_flow
2.0
2.5
2
10
1.0
3.0
15
4
3.5
1.5
0 10 20 30 40 50 60 0 10 20 30 40 50 60 5 10 15 20 5 10 15 20
MY.inflation MY.long_yield MY.policy_rate
1.0 0.5 0.0 0.5 0.5 0.4 0.3 0.2 0.1 0.0 0.4 0.3 0.2 0.1 0.0
0
0
0
10
10
10
20
20
20
30
30
30
REU > 0
40
40
40
50
50
50
Inflation
Long Yield
Policy Rate
60
60
60
1.5 1.0 0.5 0.0 0.5 1.0 0.6 0.4 0.2 0.0 0.2 0.4 1.0 0.8 0.6 0.4 0.2 0.0 0.2 0.4
0
0
0
10
10
10
20
20
20
30
30
30
REU < 0
40
40
40
50
50
50
Inflation
Long Yield
Policy Rate
60
60
60
Impulse responses for Malaysia
1 0 1 2 0.6 0.4 0.2 0.0 0.2 0.4 0.8 0.6 0.4 0.2 0.0
5
5
5
10
10
10
RJP > 0
15
15
15
Inflation
Long Yield
Policy Rate
20
20
20
1.5 1.0 0.5 0.0 0.5 1.0 0.4 0.2 0.0 0.2 0.4 0.6 0.8 0.0 0.5 1.0 1.5 2.0
5
5
5
10
10
10
RJP < 0
15
15
15
Inflation
Long Yield
Policy Rate
20
20
20
MY.bond_net_flow MY.stockprice
1.0 0.8 0.6 0.4 0.2 0.0 0.2 0.4 0.005 0.000 0.005 0.010
0
0
10
10
20
20
30
30
REU > 0
40
40
50
50
Bond Flow
60
60
Stock Price
1.0 0.5 0.0 0.5 1.0 1.5 2.0 2.5 0.05 0.00 0.05
0
0
10
10
20
20
30
30
REU > 0
40
40
50
50
Bond Flow
60
60
Stock Price
Impulse responses for Malaysia
MY.bond_net_flow MY.stockprice
1.5 1.0 0.5 0.0 0.5 1.0 0.05 0.04 0.03 0.02 0.01 0.00 0.01
5
5
10
10
RJP > 0
15
15
Bond Flow
20
20
Stock Price
10
10
RJP < 0
15
15
Bond Flow
20
20
Stock Price
Conclusions
I We estimate a factor-augumented VAR (FAVAR) model to evaluate the
international implications of conventional and uncoventional monetary
policy adopted in advanced economies.
I Our results show that when policy rates lie into a positive territory, i.e.
conventional monetary policy, then both European and Japanese
expansionary monetary policies lead to easier monetary conditions in
Asian economies.
I On the other hand, when interest rates lie into a negative territory, i.e.
unconventional monetary policy, then Asian economies respond with
stronger easier monetary policy conditions when the Japanese authorities
accommodate their monetary policy.
I The exchange rate channel and portfolio re-balancing work only for few
countries.