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Monetary Transmission and Asset-Liability Management by Financial Institutions in Transitional Economies - Implications for Czech Monetary Policy

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  • Alexis Derviz

Abstract

The paper deals with the transmission of monetary policy within the financial sector. The objective is to link an optimizing stochastic model of portfolio decisions by a representative financial institution with a number of features that this optimizing behavior implies for monetary transmission and credit conditions in a transitional economy. The main example is the intermediation performance of Czech financial sector in the years 1993 to 1999. In the theoretical part, I introduce a discrete time model of portfolio optimizing under uncertainty extended to cover the case of cash flow constraints imposed on a financial intermediary. The current utility is liquidity-dependent. It also depends on a variable that measures the momentary assessment of future cash flows generated by the current items in the balance sheet. This specification has consequences for asset valuation, the term structure of interest rates and the uncovered return parity property of the expected exchange rate. In particular, monetary policy impulses receive different responses than in standard optimizing models, which are reflected either by the term structure of interest rates or by interest rates on new credit. In the empirical part, I analyze a number of observations about the function of the Czech financial intermediation during transition and identify those that are relevant for the transmission mechanism. I undertake some simple comparisons of the effects predicted by the model with the available Czech data. Where possible, I also provide a projection of the models inferences for the Austrian banking sector. The proposed model provides two main lessons for the monetary authorities in transitional economies. First, the credit channel, whose specific evaluation measure is proposed, cannot be ignored. Second, in the pursuit of conventional inflation and quantity-of-money goals, the central bank must tune its key rate decisions to the asset-liability management objectives of the financial sector and the current dynamics of the term structure of interest rates.

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Bibliographic Info

Paper provided by Czech National Bank in its series Archive of Monetary Policy Division Working Papers with number 2000/22.

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Date of creation: Nov 2000
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Handle: RePEc:cnb:mpaper:2000/22

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  1. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 331-351, November.
  2. Bennett T. McCallum, 1992. "A Reconsideration of the Uncovered Interest Parity Relationship," NBER Working Papers 4113, National Bureau of Economic Research, Inc.
  3. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
  4. Guy Meredith & Menzie D. Chinn, 1998. "Long-Horizon Uncovered Interest Rate Parity," NBER Working Papers 6797, National Bureau of Economic Research, Inc.
  5. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  6. Anil Kashyap & Raghuram Rajan & Jeremy S. Stein, 1998. "Banks as liquidity providers: an explanation for the co-existence of lending and deposit-taking," Proceedings 582, Federal Reserve Bank of Chicago.
  7. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May.
  8. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-77, October.
  9. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
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