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Monetary Policy and Balance Sheets

Author/Editor: Deniz Igan | Alain N. Kabundi | Francisco Nadal-De Simone | Natalia T. Tamirisa
Authorized for Distribution: July 3, 2013
Electronic Access: Free Full Text (PDF file size is 1,180KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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.
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Series: Working Paper No. 13/158
Subject(s): Monetary transmission mechanism | United States | Monetary policy | Interest rates | Economic models
    Published:   July 3, 2013        
    ISBN/ISSN:   9781484343500/1018-5941   Format:   Paper
    Stock No:   WPIEA2013158   Pages:   38
    Price:   US$18.00
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