17. Did the Decline in the Excess Capital Adequacy Ratio Amplify the Monetary Policy Easing and Credit Cycles on Activity in the Manufacturing Sector?

Did the decline in the excess capital adequacy ratio (CAR or the countercyclical capital buffer) amplify the effects of monetary policy easing and credit cycles on activity in the manufacturing sector? Evidence in this chapter shows that gross fixed capital formation (investment) in residential buildings reached the highest level in 2007Q2 and this period falls within the period during which the manufacturing sector employment growth recorded a recent high average level of 1.44 million jobs. The manufacturing sector output growth and sales growth increase in response to a decline excess CAR shock. The accommodative monetary policy stance amplifies the effects of a loose excess CAR shock. The nominal house price growth and mortgage credit growth channels amplify the effects of a loose excess CAR shock on activity in the manufacturing sector. Furthermore, the historical decompositions show that a loose excess CAR shock, positive nominal house price growth and mortgage credit growth shocks made positive contributions to the manufacturing sector output growth and employment growth between 2005Q1 and 2008Q3. In their absence, the manufacturing sector output growth and employment growth would have been much lower. In addition, the varying sizes of loose excess CAR shocks and positive residential investment growth shocks exert varying degrees of increases in the manufacturing sector output growth and employment growth.