E5 - Monetary Policy, Central Banking, and the Supply of Money and CreditReturn

The central banks of developed countries and those in the region of Central Europe responded to the global financial crisis of 2008 and subsequent economic recession by considerably easing monetary conditions and using new monetary policy tools. One of those tools was the entry into the so far uncharted territory of negative interest rates. The passage of some years after the inception of these new tools has allowed the emergence of new empirical literature, which addresses their effects and effectiveness. The primary objective of this paper is to examine and summarize the empirical literature that deals with the effective lower limit of interest rates, especially in relation to the banking sector and bank interest margins. We then use empirical findings from other countries and apply them to the Czech Republic and draw conclusions for the future monetary policy of the CNB. Our results confirm that the CNB has got enough manoeuvring room even in the area of negative interest rates, which it can take advantage of either for the purpose of price stability, or for more effective management of FX operations.

The latest financial crisis has led to significant changes in the central bank's monetary policies. They have tried to respond by expansionary monetary policy in the different forms. We analyze if commercial and other banks use a higher quantity of reserves in order to increase granting of loans into the economy. Analysis is focused on the tendencies in money and credit multipliers. There are four analysed economics during the period 2008-2014: Czech Republic, European Monetary Union, Great Britain and the USA. No surprise that multipliers had tendencies to decline, especially from high values in the Great Britain and the USA. Development was quite surprising in the EMU, where all multipliers were very stable. We have observed the biggest exceptions in the USA, and the Czech Republic, respectively. Money multiplier of M1 is still less than 1 in the USA. Czech Republic is specific according to the values of credit multiplier. They are lower than values of money multiplier of M2, and even lower than multiplier of M1 since 2012. The most likely reasons for all trends are presented in the article.

The purpose of this paper is to create a financial fragility model for the Czech financial sector. We adapt the Goodhart-Tsomocos model which is based on general equilibrium with incomplete markets, money and default. The calibration of the model is based on publicly available data from the period 2003-2011. Finally, we perform comparative statics to show how the key variables of the model respond to possible events. The model can be used by government institutions to stress-test the banking sector, as well as by banking and other financial institutions to estimate the development of, inter alia, the default rates of their clients. The model also incorporates default of households and may be used, after further extension, in predicting households' default rates with respect to the behaviour of banks in consequence of changes in macroeconomic parameters of the environment.

The recent financial crisis has significantly modified the approach to helping troubled banks. The traditional role of the central bank has shifted toward non-credit forms of assistance, provided mainly by the state, and even toward assisting insolvent banks. State assistance - directly or through specialized institutions - mainly concerned banks too big to fail, i.e. systemically important banks. State aid should be forthcoming only once funds available from shareholders, owners of subordinated debt and uninsured depositors have been exhausted. Credit by a central bank should be granted only to temporarily illiquid banks. Primarily as this credit assistance can have significant monetary implications, in as much as it leads to the growth of reserves in the banking system. The impact on the economy then depends primarily on the credit activity of commercial banks. The author compares theory against practice and, using the U.S. and the EMU as an example, analyses the monetary impact using the development of money multipliers.

The article deals with the role of the central banks in advanced market economies and the theoretical possibility of abolishing these institutions. Central banks have monopolies in some areas, especially regarding monetary policy. In many countries, central banks also have monopolies in other areas, for example in the payment and clearing transactions for banks and the state. In the context of the financial crises, there have been calls for the abolition of central banks and the restoration of money fully-backed by gold and issued by different subjects. The main reasoning behind these requests is connected with the accusation that central banks have been the basic culprits in the current crisis, because of their monopoly of the issuing money. This argument fails to recognize that central banks do not have a monopoly in issuing money as the dominant share of the money creation is attached with the process of multiplication of demand deposits by commercial banks. Restoration of the money backed by gold is furthermore completely unrealistic. The article discusses the shortage of gold stock as one of many reasons why gold is not suitable for monetary purposes.

The government is able to acquire real goods through printing money. Because government does not create wealth through printing money, this revenue, the seigniorage, is at the expense of the public, as the purchasing power of monetary units decreases because of the issue of new money. The authors use the model of auctions to which the public comes with their money and the government with the newly issued money. The value of goods acquired by the government in such an auction equals the newly printed money divided by the sum of the newly printed money and the money spent by the public. Upon this auction model, the authors develop the formula for seigniorage in continuous time. The seigniorage calculated in this way is lower than the seigniorage calculated upon the assumption of discrete changes in economic variables.