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Monetary Policy and Balance Sheets

Author

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  • Deniz O Igan
  • Alain N. Kabundi
  • Francisco d Nadal De Simone
  • Natalia T. Tamirisa

Abstract

This paper evaluates the strength of the balance sheet channel in the U.S. monetary policy transmission mechanism over the past three decades. Using a Factor-Augmented Vector Autoregression model on an expanded data set, including sectoral balance sheet variables, we show that the balance sheets of various economic agents act as important links in the monetary policy transmission mechanism. Balance sheets of financial intermediaries, such as commercial banks, asset-backed-security issuers and, to a lesser extent, security brokers and dealers, shrink in response to monetary tightening, while money market fund assets grow. The balance sheet effects are comparable in magnitude to the traditional interest rate channel. However, their economic significance in the run-up to the recent financial crisis was small. Large increases in interest rates would have been needed to avert a rapid rise of house prices and an unsustainable expansion of mortgage credit, suggesting an important role for macroprudential policies.

Suggested Citation

  • Deniz O Igan & Alain N. Kabundi & Francisco d Nadal De Simone & Natalia T. Tamirisa, 2013. "Monetary Policy and Balance Sheets," IMF Working Papers 13/158, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/158
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    Cited by:

    1. Punzi, Maria Teresa & Kauko, Karlo, 2015. "Testing the global banking glut hypothesis," Journal of Financial Stability, Elsevier, pages 128-151.

    More about this item

    Keywords

    Balance sheets; Economic models; Interest rates; Monetary policy; Monetary transmission mechanism; United States; monetary policy transmission; FAVAR; generalized dynamic factor models; inflation; money stock; transmission of monetary policy; monetary policy transmission mechanism; Financial Markets and the Macroeconomy; Monetary Policy (Targets; Instruments; and Effects); General;

    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
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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