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Empirical Economics

Erschienen in:

01.11.2019

Effects of monetary policy and credibility on financial intermediation: evidence from the Brazilian banking sector

verfasst von: Gabriel Caldas Montes, José Américo Pereira Antunes, Alexei Ferreira Araújo

Erschienen in: Empirical Economics | Ausgabe 3/2021

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Abstract

Since, under inflation targeting (IT), the main monetary policy instrument to control inflation is the basic interest rate, an important question that arises is: How do changes in this instrument affect financial intermediation? On the other hand, under IT, one of the main goals of the central bank is to make monetary policy credible. In this sense, how can credibility affect the relation between monetary policy and financial intermediation? Are the transmission mechanism and the effects of credibility the same for state-owned banks and privately owned banks? Using data from the Brazilian banking sector, this paper analyzes the effects of monetary policy on financial intermediation and investigates the existence of the “Paradox of Credibility.” The findings suggest the monetary policy interest rate affects financial intermediation. Moreover, the results show that credibility is able to cushion the effect of monetary policy on financial intermediation. And finally, the results reveal how the different effects analyzed in the paper, and especially the mitigating effect of credibility, differ between privately owned and state-owned banks.

Vorheriger Artikel Is gold a useful hedge against inflation across multiple time horizons?

Nächster Artikel Specification errors, nonlinearities, and structural breaks in the Central Bank of Brazil’s reaction function

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In “Robustness analysis” section, we check the results using another monetary policy credibility index, which is developed by Tejada, Neto and Leal (2013).

The economic growth variable (GROWTH) captures the economic activity based on real GDP growth rate. Real GDP is calculated using cumulative 12-month GDP (BCB series 4382) and the general price index (obtained from the IPEADATA Web site). Following Antunes et al. (2018a), increases in the economic activity are expected to affect the financial intermediation activity positively.

Following the literature (e.g., Cardone-Riportella et al. 2010; Antunes et al. 2018a), the NPL represents the credit risk measure. According to Antunes et al. (2018a, b), it is expected that an increase in NPL reduces financial intermediation, and a decrease in NPL amplifies financial intermediation. The NPL variable is the ratio of non-performing loans (NPLs) to the loan portfolio, i.e., it is the ratio of credit operations with arrears of more than 90 days to the loan portfolio—data obtained from the CBB.

As a solvency risk measure, we use the capital buffer as proxy for the financial stability. In order to improve the systemic resilience and thus to prevent the buildup of financial vulnerabilities of banks, Basel III suggests the use of a countercyclical capital buffer (BCBS 2010; Drehmann et al. 2011). The capital buffer (BUFFER) is measured by the ratio between the capital of financial institutions and the minimum capital required by regulators (Basel index). Data are obtained from the CBB. It is expected that positive variations in the BUFFER cause a reduction in financial intermediation.

The variable “POL_RISK” is constructed from the extraction of the first principal component from three government “negative” evaluation indicators. The three indicators are produced by the National Confederation of Industries (CNI) in partnership with IBOPE from an opinion poll on the federal government and its policies. The National Survey, conducted with voters from the age of 16, seeks to identify opinions on “Governance,” “Trust in the President” and “Government Assessment.” For the purpose of this study, only the series that capture voters’ dissatisfaction with the Government as a proxy for political uncertainty were considered. The idea is that political risk reduces financial intermediation.

The dummy variable (SUBPRIME) reflects the period in which the country was affected by the GFC. The dummy variable takes value 1 from June 2008 to January 2009 and zero otherwise. This dummy variable is in accordance with studies addressing the Brazilian economy (e.g., Montes and Luna 2018; Montes and Souza 2018).

The lags of the variables were determined empirically, following the general-to-specific method, observing the statistical significance of the coefficients and the principle of parsimony—as suggested by Hendry (2001).

As Wooldridge (2001, p. 95) points out: “to obtain a more efficient estimator than two-stage least squares (or ordinary least squares), one must have overriding restrictions.”

Table 13 (“Appendix”) presents the list of instruments used in each GMM estimation.

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Titel: Effects of monetary policy and credibility on financial intermediation: evidence from the Brazilian banking sector
verfasst von: Gabriel Caldas Montes
José Américo Pereira Antunes
Alexei Ferreira Araújo
Publikationsdatum: 01.11.2019
Verlag: Springer Berlin Heidelberg
Erschienen in: Empirical Economics / Ausgabe 3/2021
Print ISSN: 0377-7332
Elektronische ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-019-01790-6

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