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The Asset-Liability Management Aspects of Monetary Transmission in Transitional Economies: the Czech and the Austrian Credit Channels


  • Alexis Derviz


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.

Suggested Citation

  • Alexis Derviz, 2000. "The Asset-Liability Management Aspects of Monetary Transmission in Transitional Economies: the Czech and the Austrian Credit Channels," Bulletin of the Czech Econometric Society, The Czech Econometric Society, vol. 7(11).
  • Handle: RePEc:czx:journl:v:7:y:2000:i:11:id:85

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    References listed on IDEAS

    1. Dirk Tasche, 2004. "The single risk factor approach to capital charges in case of correlated loss given default rates," Papers cond-mat/0402390,, revised Feb 2004.
    2. Konstantin Belyaev & Aelita Belyaeva & Tomas Konecny & Jakub Seidler & Martin Vojtek, 2012. "Macroeconomic Factors as Drivers of LGD Prediction: Empirical Evidence from the Czech Republic," Working Papers 2012/12, Czech National Bank, Research Department.
    3. Acharya, Viral V. & Bharath, Sreedhar T. & Srinivasan, Anand, 2007. "Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries," Journal of Financial Economics, Elsevier, vol. 85(3), pages 787-821, September.
    4. Jiri Witzany, 2011. "A Two Factor Model for PD and LGD Correlation," Bulletin of the Czech Econometric Society, The Czech Econometric Society, vol. 18(28).
    5. Jon Frye, 2000. "Depressing recoveries," Emerging Issues, Federal Reserve Bank of Chicago, issue Oct.
    6. Stefano Caselli & Stefano Gatti & Francesca Querci, 2008. "The Sensitivity of the Loss Given Default Rate to Systematic Risk: New Empirical Evidence on Bank Loans," Journal of Financial Services Research, Springer;Western Finance Association, vol. 34(1), pages 1-34, August.
    7. Seidler, Jakub & Horvath, Roman & JakubĂ­k, Petr, 2009. "Estimating expected loss given default in an emerging market: the case of Czech Republic," Journal of Financial Transformation, Capco Institute, vol. 27, pages 103-107.
    8. De Graeve, F. & Kick, T. & Koetter, M., 2008. "Monetary policy and financial (in)stability: An integrated micro-macro approach," Journal of Financial Stability, Elsevier, vol. 4(3), pages 205-231, September.
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    More about this item


    Financial institutions; Asset-liability management; Monetary transmission; Lending rates;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates


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