The Transmission of Monetary Policy in EMEs in a Changing Financial Environment: A Longitudinal Analysis

31 Pages Posted: 1 Apr 2015

See all articles by Emanuel Kohlscheen

Emanuel Kohlscheen

Bank for International Settlements (BIS)

Ken Miyajima

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: March 2015

Abstract

The departure from the Modigliani-Miller conditions, due for instance to market incompleteness, asymmetric information or taxation, tends to increase the importance of indirect channels by which monetary policy affects the level of economic activity in emerging market economies (EMEs). The bank lending channel highlighted by Bernanke and Blinder (1988) is a prominent example of such indirect effect of monetary policy. In this study we investigate how the bank lending channel acts above and beyond the traditional money channel that most macroeconomic models emphasize. We find that, particularly in EMEs with high bank reliance, changes in the volume of bank credit are important drivers of fixed capital formation. Using micro-level bank balance sheet data, we then show how monetary policy and sovereign risk premia affected bank credit growth in EMEs between 2001 and 2013. We find that both, changes in the monetary policy stance and changes in risk premia have had significant effects on credit volumes. Furthermore, we show that these effects tend to affect smaller banks more strongly. Our results suggest that the accommodative monetary policies that have been seen recently were contributing factors to the rapid expansion of credit in many EMEs.

Keywords: monetary policy, bank credit, emerging markets, risk premia

JEL Classification: E40, E50

Suggested Citation

Kohlscheen, Emanuel and Miyajima, Ken, The Transmission of Monetary Policy in EMEs in a Changing Financial Environment: A Longitudinal Analysis (March 2015). BIS Working Paper No. 495, Available at SSRN: https://ssrn.com/abstract=2584582

Emanuel Kohlscheen (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Ken Miyajima

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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