The Asset-Liability Management Aspects of Monetary Transmission in Transitional Economies: the Czech and the Austrian Credit Channels
The paper deals with the transmission of monetary policy inside the fmancial 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 the monetary transmission and credit conditions in a transitional economy. The main example is the intermediation performance of Czech financial sector in the years 1993-99. In the first part, I am going over a number of empirical facts concerning the function of the Czech financial intermediation during transition and identify those that are relevant for the transmission mechanism. In the second part, I introduce a discrete time model of portfolio optimizing under uncertainty extended to cover the case of cash flow constraints imposed upon 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 posts in the balance sheet. This specification has consequences for the asset valuation, term structure of interest rates and the uncovered return parity property of the expected exchange rate. In particular, monetary policy impulses receive different responses compared to standard optimizing models, be it in the term structure of interest rates or interest rates on new credit. 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 model inferences on the Austrian banking sector. Two main lessons are to be learned trom the proposed model by the monetary authority in a transitional economy. 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 shall tune its key rate decisions to the asset-liability management objectives of the fmancial sector and the current dynamics of the term structure of interest rates.
Volume (Year): 7 (2000)
Issue (Month): 11 ()
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