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Have Long-term Financial Trends Changed the Transmission of Monetary Policy?

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Author Info
Boris Cournède
Rudiger Ahrend
Robert Price

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Abstract

This paper addresses the question of whether and how long-term financial trends may have modified the transmission mechanism from monetary policy decisions to economic activity. The focus is on longterm changes, abstracting from the disruptions created by the 2007-08 financial turmoil which are temporarily affecting the transmission mechanism. The first series of findings is that a number of factors have worked to strengthen the transmission of monetary policy, including more competitive financial markets, higher household indebtedness, greater diversity in the supply of financial products, greater financial integration and more responsive asset pricing mechanisms. However, other factors appear to have simultaneously gone in the direction of weakening transmission of domestic policy, including greater external financial influences, lower exchange-rate pass-through and a broad-based shift towards fixed-rate assets and liabilities. On balance, monetary policy appears to remain a powerful tool for guiding aggregate demand, but a number of changes that have worked to support the strength of transmission have also increased risks to financial stability.

Les tendances de fond des marchés financiers ont-elles modifié la transmission
Cette étude aborde la question de savoir dans quelle mesure les tendances de fond des marchés financiers ont pu modifier la transmission de la politique monétaire. L’accent est porté sur les changements de long-terme en faisant abstraction des modifications temporaires du mécanisme de transmission qui résultent des troubles financiers observés en 2007-08. Une première série de résultats indique que plusieurs facteurs ont joué dans le sens de renforcer la transmission de la politique monétaire. Ces facteurs incluent l’intensification de la concurrence sur les marchés financiers, l’accroissement de l’endettement des ménages, la diversification de l’offre de produits financiers et la plus grande réactivité des prix des actifs. Cependant, d’autres facteurs ont agi de manière concomitante dans le sens de réduire la puissance du mécanisme de transmission de la politique monétaire intérieure. Ces facteurs incluent l’accroissement des influences financières extérieures, la plus faible transmission des mouvements de change et le plus grand recours aux emprunts et titres à taux fixe. Au final, il apparaît que la politique monétaire demeure un outil puissant d’orientation de la demande agrégée, mais une partie des changements qui ont préservé la force du mécanisme de transmission se sont effectués au prix de risques accrus pour la stabilité financière.

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Paper provided by OECD, Economics Department in its series OECD Economics Department Working Papers with number 634.

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Date of creation: 05 Sep 2008
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Handle: RePEc:oec:ecoaaa:634-en

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Related research
Keywords: asset prices; financial development; financial innovation; financial markets; house prices; interest rate; monetary policy; regulation; transmission; développement financier; innovation financière; marchés financiers; politique monétaire; prix des actifs; réglementation; taux d'intérêt; transmission;

Find related papers by JEL classification:
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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