Effects of Monetary Asset- Price Transmission on Investment and Inflation in the Euro Area
DOI:
https://doi.org/10.52195/pm.v16i1.43Abstract
Since the onset of the financial markets’ crisis in late 2008, the Eurozone has been subject to rather volatile headline inflation, occasionally even turning into (an admittedly modest) deflation. As eventually, conventional monetary policy seemed to be exhausted, the European Central Bank (ECB) resorted to unprece- dented unconventional measures. In 2010, it launched a first gov- ernment bond purchasing programme, which was followed by a series of different programmes, swelling its balance sheet to c. €4.7tn as per May 2019. The induced asset-price-inflation in con- junction with a continuous and persistently low HICP inflation rates inevitably raises the question how effective monetary trans- mission – particularly via asset-prices – (still) is.
This contribution will investigate the effects of monetary asset- price transmission on investments and inflation. First, it analyses the reliability of stock markets as an indicator for firms’ investment, while emphasising the importance of uncertainty. Sec- ond, the paper examines how rising stock prices affected firms’ balance sheet and lending. Further, it provides an explanation as to why monetary policy failed to amplify lending in peripheral mem- ber states and why it had a comparatively low effect on borrowing costs in these regions. Third, it scrutinises the implication of an output gap, which monetary policy seeks to create, on different inflation parameters. Thus, the paper illustrates why the effects on HICP-inflation are less pronounced compared to other inflation measures.
References
Aiyar, S., Bergthaler, W., Garrido, J., Ilyina, A., Jobst, A., Kang, K., Kovtun, D., Liu, Y., Monaghan, D. and Moretti, M. (2015): “A Strategy for Resolving Europe’s Problem Loans”, IMF Staff Dis- cussion Notes.
Baker, S.R., Bloom, N. and Davis, S.J. (2015): “Measuring Economic Policy Uncertainty”, NBER Working Paper Series, Cambridge, MA. Belke, A. and T. Polleit. (2011): Monetary Economics in Globalised Financial Markets, Heidelberg, Springer.
Borio, C. and Gambacorta, L. (2017): “Monetary policy and bank lending in a low interest rate environment: diminishing effec- tiveness?”, BIS Working Papers.
Borio, C. and Hofmann, B. (2017): “Is Monetary Policy Less Effec- tive When Interest Rates are Persistently Low?”, BIS Papers.
Borio, C. and Zabai, A. (2016): “Unconventional monetary policies: a re-appraisal”, BIS Working Papers.
Byrne, D. and Kelly, R. (2017): Monetary Policy Transmission and Non-Performing Loans, Dublin.
Claessens, S., Coleman, N. and Donnelly, M. (2017): “«Low-For- Long» Interest Rates and Banks’ Interest Margins and Profita- bility: Cross-Country Evidence”, International Finance Discussion Papers.
European Investment Bank. (2013): Investment and Investment Finance in Europe.
Jobst, A. and Lin, H. (2016): “Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area”, IMF Working Paper.
Koo, R. (2003): Balance Sheet Recession: Japan’s Struggle with Uncharted Economics and Its Global Implications, John Wiley and Sons.
Krugman, P. (2015): “Not Invented Here Macroeconomics”, The New York Times.
Pesaran, M.H. and Shin, Y. (1995): “An Autoregressive Distribut- ed-Lag Modelling Approach to Cointegration Analysis”, Econo- metric Society Monographs, Cambridge.
Pesaran, M.H., Shin, Y. and Smith, R.J. (1999): “Bounds Testing Approaches to the Analysis of Long Run Relationships”, Discus- sion Paper Series, Edinburgh.
Shin, H.S. and Gambacorta, L. (2016): “Why Bank Capital Matters for Monetary Policy”, BIS Working Papers.
Tobin, J. (1969): “A General Equilibrium Approach To Monetary Theory”, Journal of Money, Credit and Banking, Vol. 1 No. 1, pp. 15–29.