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Micro-level transmission of monetary policy shocks: The trading book channel

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  • Silva, Thiago Christiano
  • Guerra, Solange Maria
  • da Silva, Michel Alexandre
  • Tabak, Benjamin Miranda

Abstract

We open the black box of the monetary policy transmission mechanism with a granular model that considers the balance-sheet composition and network relationships of each economic agent. Though there are several well-documented channels through which monetary policy operates, we focus on the overlooked trading book channel, which arises because of adjustments in the accounting value of trading book exposures on banks’ balance sheets that have to be marked to market when interest rates change. Variations in banks’ net worth due these adjustments are used as input to a network model that incorporates the financial and corporate sectors. The framework permits us to determine the effects of interest rate changes on every bank and firm in the economy and any second-round (contagion) effects in the short run. We apply the model to a comprehensive database of Brazilian banks and firms from 2015 to 2020. We find that interest rate shocks affect more strongly financial stability in periods of monetary policy tightening. We also find notable asymmetric effects of positive and negative interest rate shocks in the Brazilian economy, with positive interest rate shocks affecting more financial stability. Finally, our results also suggest a non-linear relationship between interest rate changes and financial stability, reinforcing the need to mitigate monetary policy shocks through interest rate smoothing and adequate communication and transparency to society.

Suggested Citation

  • Silva, Thiago Christiano & Guerra, Solange Maria & da Silva, Michel Alexandre & Tabak, Benjamin Miranda, 2020. "Micro-level transmission of monetary policy shocks: The trading book channel," Journal of Economic Behavior & Organization, Elsevier, vol. 179(C), pages 279-298.
    • Handle: RePEc:eee:jeborg:v:179:y:2020:i:c:p:279-298
    DOI: 10.1016/j.jebo.2020.09.013
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    4. Michel Alexandre & Gilberto Tadeu Lima & Luca Riccetti & Alberto Russo, 2023. "The financial network channel of monetary policy transmission: an agent-based model," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(3), pages 533-571, July.

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    More about this item

    Keywords

    Trading book channel; Monetary policy; Networks; Financial stability; Systemic risk; Contagion;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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