a discussion of the transmission of monetary policy ... · a discussion of "the transmission...
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A Discussion of "The Transmission of MonetaryPolicy through Banks’Balance Sheets"
Anthony Brassil, Jon Cheshire, Joseph Muscatello
Discussant: Aarti Singh (USyd)
April 12, 2018
Briefly summarizing I
I Examining in detail how policy shocks impact different componentsof the balance sheet
I The balance sheet identity
E = ∑iAi −∑
jLj
and
(1+ rE )E = ∑i(1− pi )(1+ rA,i )Ai −∑
j(1+ rL,j )Lj + (f − c)∑
iAi
(1)
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Interesting finding I
I What does it imply for their methodology?
I What does it imply for the DSGE banking model for Australia?
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Interesting finding II
I imperfect competition in the banking sector; no re-pricing friction (asmaturity mismatch doesn’t matter for Australia)
I policy shocks are not attenuated by the banking sector
I are we back in the Gertler and Karadi (2011) world where monetarypolicy shocks are amplified by the banking sector?
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Non-discretionary items on the balance sheet I
I Provisions: incomplete pass through, 100 basis put cut in the cashrate reduces annual provision rates by 7 basis points
I Wholesale debt markets: complete pass through
I No/low interest rate deposits: spreads change one-for-one
I Non-loan assets: full pass through
I Conclusion: almost complete pass-though of cash rate changes todiscretionary components
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Lending rates and deposit rates: incomplete pass-through I
I ROE: not changed much in spite of falling cash rates
I Balance sheet identity implies even incomplete pass through todiscretionary components of the balance sheet
I Main finding: deviation of 7 basis point from full pass through whenoffset by both lending and deposit rate; 11 when offset by lendingrate alone....
I Welfare implication; loss in savings?
I Suggestion: time series analysis
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Spreads I
I Even though the cash rate has declined, the spreads have either notchanged much or even increased in some cases.
I More evidence of incomplete pass-through
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Mark-ups and mark-downs I
I Imperfect competition in the banking sector implies that banks willcharge interest rates that are a mark-up over their marginal cost
rL = µLRL = µLrc
rA = µARA = µA [(1− λ)RL + λrτ ]
I For the 2007-2016 period, µL = 0.92.
I And assuming λ = 0.25, rτ = 8%, µA = 1.47
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Competition in the banking sector I
I "What Drives Bank Competition? Some International Evidence"Claessens, S. and L. Laeven. (2004) Journal of Money, Credit, andBanking
I 50 countries, 1994-2001
I PR H-statistic: H<0 indicates monopoly, H=1 indicates perfectcompetition and 0<H<1indicates monopolistic competition
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Final comment III Cho, Morley and Singh, work-in-progress find new evidence ofdeclining MPC out of permanent shocks to residual income
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