...Monetary Policy and Capital Market Development in Bangladesh Policy Note: PN 0708 Shubhasish Barua* and Md. Habibour Rahman* Abstract Bangladesh Bank (BB) adjusted its monetary policy stance during 2005 in order to contain inflationary pressures and facilitate stability in the foreign exchange market. At the end of 2005, interest rates on NSD certificates were also adjusted upward. The latter development, however, raised some concern among different economic agents regarding its possible impact on the country's capital market. In this paper we attempt to closely inspect the evolvement of monetary policy and capital market indicators in recent years and their possible interrelationship to shed some light on the issue. Since prices of stocks are mainly determined by company fundamentals, monetary policy can have only short term effect on stock prices. Even in the short run, effect of interest rates on stock prices is less clear-cut, and in a less developed capital market like Bangladesh, stock prices do tend to respond, for short term, to new reform measures and government incentives. 1. Introduction Bangladesh Bank (BB) adjusted its monetary policy stance during 2005 in order to contain inflationary pressures and facilitate stability in the foreign exchange market. At the end of 2005, interest rates on NSD certificates (government borrowing instruments from the non-bank public) were also adjusted upward. The latter development, however, raised some concern among different...
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...What Explains the Stock Market’s Reaction to Federal Reserve Policy? Ben S. Bernanke Kenneth N. Kuttner∗ February 7, 2003 Abstract This paper analyzes the impact of unanticipated changes in the Federal funds target on equity prices, with the aim of both estimating the size of the typical reaction, and understanding the reasons for the market’s response. On average over the May 1989 to December 2001 sample, a “typical” unanticipated 25 basis point rate cut has been associated with a 1.3 percent increase in the S&P 500 composite index. The estimated response varies considerably across industries, with the greatest sensitivity observed in cyclical industries like construction, and the smallest in mining and utilities. Very little of the market’s reaction can be attributed to policy’s effects on the real rate of interest or future dividends, however. Instead, most of the response of the current excess return on equities can be traced to policy’s impact on expected future excess returns. JEL codes: E44, G12. 1 Introduction The reaction of the stock market to monetary policy is clearly a topic of intense interest both to market participants and policymakers. Those holding equities would obviously like to know how possible Federal Reserve actions might affect the value of their portfolios. Similarly, an estimate of the likely effect of policy on asset prices is an important ingredient in assessing the transmission of monetary policy through the “wealth effect.” The size of and ...
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...different industries and companies. • It involves studying everything, other than the trading on the securities markets, which can have an effect on a security’s value: macroeconomic factors, industry conditions, individual company financial conditions, and qualitative factors such as management performance. • Most important factor: the actual or expected profitability of the issuer, thus fundamental analysis pays attention to: o Debt-equity ratio, profit margins, dividend payout, earnings per share o Interest and asset coverage ratios o Sales penetration, market share, product or marketing innovation, and the quality of its management Technical analysis: • The study of historical stock prices and stock market behaviour to identify recurring patterns in the data. • Study price actions: price movements, trading volumes, and data on the number of rising and falling stock issues to gain insights into the emotions and psychology of investors. Market Theories • The efficient market hypothesis assumes when new information about a stock appears, investors reassess the intrinsic value of the stock and adjust their estimation of its price accordingly. Therefore, at any given time, a stock’s price fully reflects all available information and represents the best estimate of the stock’s true value. • The random walk theory says that new information concerning a stock is disseminated randomly over time. Therefore, price changes are random and bear no relation to previous price...
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...Monetary policy is the use of interest rates or control on the money supply by the government or central bank to influence the economy. The Central Bank of every country is the agency which formulates and implements monetary policy on behalf of the government in an attempt to achieve a set of objectives that are expressed in terms of macroeconomic variables such as the achievement of a desired level or rate of growth in real activity, the exchange rate, the price level or inflation, the balance of payment, real output and employment. Monetary policy works through the effects of the cost and availability of loans on real activity, and through this on inflation, and on international capital movements and thus on the exchange rate. Its actions...
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...analysis of the money supply process in Germany during the period of monetary targeting by the Bundesbank from 1975-1998. While the standard money multiplier approach assumes that the money stock is determined by the money multiplier and the monetary base it is argued here that both the money stock and the monetary base are determined endogenously by the optimizing behavior of commercial banks and private agents like households and firms. An industrial organization style model for the money creating sector that describes the money creation process is developed assuming that the main policy variable of the central bank is the money market interest rate. A vector error correction model for the nominal money stock, the monetary base, nominal income, short-term and long-term interest rates, and the required reserve rate is specified, and the interaction between these variables is analyzed empirically. The evidence contradicts the money multiplier approach and supports the presented model of the money creating sector. JEL Classification: C32, E51, E52 Keywords: Industrial organization approach to banking theory, money multiplier, endogenous money, vector error correction model ∗ This paper is partially based upon the second chapter of the author’s doctoral dissertation (Vector au- toregressive analysis and monetary policy, Aachen: Shaker, 2002). This version will be published with the title “Money Stock, Monetary Base and Bank Behavior in Germany” in Jahrb¨ cher f¨ r National¨...
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...Financial System Brandi Hays Professor Umair Warsi FIN100 February 1, 2015 The impact of the US financial markets on economy is quite high. This is because of all the major companies that are listed in the Stock Market contribute towards the economic growth of the country. When their performance deteriorates, their overall rating in the Stock Market suffers a downward trend. Thus, it produces a negative impact on the US economy. Though, in some cases, the dynamics of the Stock Market has its own issues and does not produces any impact on the economy. When the global financial crisis occurred in the USA in 2008, the overall Stock Market crashed which showed a negative trend of the economy. Therefore, these issues reflect the impact of US financial markets on economy. The impact of the US financial markets on the businesses is even there. When the overall position of the market is favorable, the businesses experience a positive impact. Though, this is not a usual case because some businesses flourish purely on the basis of their performance not on the basis of Stock Market position. When the US financial markets perform well, the individuals in an economy also have confidence in many aspects. They are not hesitant to spend money on the goods and are able to borrow money from the banks in order to have various types of expenditures. In some cases, the negative position of the US markets discourages the consumer to spend money freely in the economy. The example is of the...
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...Financial System Impact of US Financial Markets on Economy In the United States the effect of financial markets on the economy is very high considering the fact that the majority of the main companies listed in the stock exchange play a pivotal role in contributing towards the country’s economic growth. Thus, any depreciation as it pertains to performance plummets the company’s ratings in the stock market impacting negatively on the country’s economy. Nonetheless, sometimes the dynamics evident in the stock market has limited effect on the company particularly when it entails other issues (Evans & Hnatkovska, 2005). For instance, the occurrence of the economic downturn in 2008 led to the crashing of the stock market which lead to negative economic growth; both of these are a reflection of the impact that US financial markets have on the country’s economy. Impact on businesses: US financial markets have some effect on businesses because favorable portions of the financial markets impact on businesses positively, although not always considering that some businesses solely depend on their performance to grow as opposed to the position of the stock market (Chong & Miffre, 2009). Impact on individuals: Good performance of the financial markets means improved confidence of those affected by the economy: hence, they tend to spend their money more willingly and borrow more money from banks to cater for their expenditures. Usually, when the position of the financial market is negative...
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...The Impact of the Federal Reserve Monetary Policies on Businesses Paul C. Batt Liberty University Introduction Important tools that governments use are monetary policies. These policies help regulate economic activity. Marc Labonte (2012) states that the Federal Reserve defines monetary policy “as actions taken to influence the availability and cost of money and credit.” These actions help control the money flow through the policies in which is parallel to the political and economic preferences. Monetary policy can influence the economy regionally and globally. These actions affect prices, employment, growth, and other areas. Through these changes, monetary policy influences consumers and businesses willingness to spend. Goals of Monetary Policy Monetary policy goals are consistent with the policy of the Federal Reserve Act. The Federal Reserve through it’s Board of Governors and Federal Open Market Committee seek certain goals. These goals include stable prices, long-term interest rates, and maximum employment. Stable prices help sustain maximum growth and employment. Stable pricing in the long-term helps control goods, services, and materials from outside influences of inflation. Stable pricing encourages savings and businesses are encouraged to invest more. Stable pricing in the long-run can compromise stability on the short-run. Short-run effects can lessen price pressures, in which this can move to easing in policy. With restrain inflationary...
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...bubbles. But, in their view, monetary policy should respond to asset bubbles in a cautious and moderate manner in order to avoid economic distortions. Some others argue against the role of central bank in bursting bubbles. They say bubbles generally arise out of some combination of irrational exuberance, jumps forward in technology and financial deregulation, for which the connection between monetary conditions and the rise of bubbles is tenuous. However, the central bank is at the centre point in this debate. The recent crash in the stock market in Bangladesh is also associated with some policies of the central bank. The aim of this article is to analyse the following two aspects: (i) whether the monetary policy response was appropriate to the rise and the recent collapse of the bubble, and (ii) whether the behaviour of financial institutions was optimal to the policy response. Commercial banks have been involved heavily in the stock market business in the last few years. Allowing merchant banking has exaggerated the situation. They became the key player in the stock market. Undoubtedly, any policies to control banks' exposure to the stock market could have significant impact on the capital market. Monetary easing during last two or more years (money supply was more than 22 percent during the period) could have helped stock market remain buoyant during these days. Perhaps, Bangladesh Bank (BB) was not much aware about banks' exposure to the stock market. Because, surprisingly...
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...given time frame. The answer to this challenge is in raising India’s potential rate of output growth by removing the binding constraints. We have also estimated the potential growth rate for India during the last decade based on HP filter technique (Hodrick and Prescott, 1997) and found that in the last three years, India had been growing above its potential growth rate. Figure 6: Potential GDP Growth and Output Gap (1997-08 to 2007-08) Note: Based on HP filter technique as proposed by Hodrick and Prescott (1997). Fears of over-heating of the economy prompted the Reserve Bank of India (RBI) to begin monetary tightening as early as September 2004 when the cash-reserve ratio(CRR) for commercial banks was raised. The sharp increase in global fuel and food prices in the first quarter of 2008 aggravated inflationary concerns and resulted in further monetary tightening that saw interest rates being hiked until August...
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...effect of the US financial markets on the economy is considerably high. Part of the reasoning behind this is that all the major companies listed in the Stock Market directly contribute in the economic growth of the U.S. When the individual company performance decreases, their Stock Market rating starts to trend downward. This downward trend develops a negative impact on the U.S. economy. The Stock Market (whose dynamics have their own issues) doesn’t always produce an impact on the economy. In 2008, the U.S. went through a global financial crisis. The Stock Market crashed and negatively impacted the U.S. economy. These issues show the impact of US financial markets on economy (Chong & Miffre, 2009). The U.S. financial markets even have an impact on the companies and business. When the U.S. financial market is in a favorable position, there is a positive impact on the businesses and companies but is not always normal, some businesses flourish solely on their performance and not on their position in the Stock Market (Gai, 2007). When the overall performance of the U.S. financial markets is positive, the consumer that makeup the economy also has a greater self-confidence in regards to the overall health of our country. The consumers are not as hesitant to spend money on their needed items, and the banks are more willing to loan money to the consumers for various types of expenditures. When the overall performance of the U.S. financial markets is negative, it can discourage...
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...Woodrow Wilson signed the Federal Reserve Act into law. Although started in 1913, actual operations of the Reserve began in 1914. In order to provide the country with a safer financial system, Congress created The Federal Reserve System as the central bank of the United States. Today, the Federal Reserve’s responsibility falls into four general areas: conducting the nation’s monetary policy; supervising, regulating and other soundness of the country’s financial system; maintaining the stability of the financial system and providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions. The Federal Reserve can use the following tools to influence the money supply: Open Market Operations, The Required-Reserve Ratio and Discount Rate. The Federal Reserve uses Open Market Operations as its primary tool to influence the supply of bank reserves. This tool consists of Federal Reserve purchases and sales of financial instruments, usually securities issued by the U.S. Treasury, Federal agencies and government-sponsored enterprises. Using Open Market Operations, Federal Reserve can affect the money supply by buying or selling the U.S. government securities. When the Federal Reserve purchases a government security from the public, it does so with money that did not exist in the system. Therefore making the bank reserve rise and increasing the money supply. The Required-Reserved Ratio specifies the amount banks must hold as reserves...
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...Monetary Policy in Nigeria The Impact of Monetary policy on Nigeria’s Economic Growth. Monetary Policy in Nigeria - Developing countries growth policies are better delivered as full packages since fiscal and monetary policies are inextricable, except in terms of the instruments and implementing authorities. However, monetary policy appears more potent in correcting short term macroeconomic maladjustments because of the frequency in applying and altering the policy tools, relative ease of its decision process and the sheer nature of the sector which propagates its effect to the real economy – the financial system. The main objective of monetary policy in Nigeria is to ensure price and monetary stability. This is mainly achieved by causing savers to avail investors of surplus funds for investment through appropriate interest rate structures; stemming wide fluctuations in the exchange rate of the naira: proper supervision of banks and related institutions to ensure financial sector soundness; maintenance efficient payments system; applying deliberate polices to expand the scope of the financial system so that interior economics, which a re largely informal, are financially included. Financial inclusion is Particularly important in the sense that the larger it is, the larger the interest rate sensitivity of production and aggregate demand and so the more effective monetary policy is. The economy of Nigeria is faced with unemployment low investment and high inflation rate...
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...Literature Review……………………………………………… 8-9 III. Discussion III.1. Interest rate versus exchange rate in Bank deposit……… 10 III.1.1 Appreciate US Dollar in Bank Deposit factor…10-11 III.1.2 Depreciate US Dollar in Bank Deposit factor….. 11 III.2. Interest rate affected in Stock market…………………... 11 III.2.1 Depreciate US Dollar in Stock Market………..11-12 III.2.2 Appreciate US Dollar in Stock Market..................12 IV. Conclusion……………………………………………………… 13 V. References…………………………………………………….14-15 Abstract In this paper, I use high frequency data to investigate the extent to which interest rate changes originated in the United States by the Reserve Federal Fund. More specifically, I am interested in understanding in effects of changes in the Federal Reserve Fund’s interest rates on differential between (short term) local currency interest rates. I also investigate how interest rate influences to the foreign exchange market when Federal set the interest rate. The result indicates that Federal Reserve’s rate can influence foreign exchange market in the bank deposit factor and in the stock market. Key words: U.S Federal Reserve, Federal Fund rate, Interest rate and foreign exchange market. ACKNOWLEDGMENTS First of all, I have been blessed with the help of some wonderful people while preparing this term paper. Thanks must first given to Dr. CHHUN Vannak, the lecturer of Pannasastra University...
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...Complexities of the Financial System Brandi Humphrey Professor Joseph Arbeiter Finance 100 January 15, 2014 Financial markets are defined as locations or electronic forums that facilitate the flow of funds among investors, businesses, and governments. There are four types of financial markets and they are; debt securities markets, equity securities markets, derivative securities markets, and foreign exchange markets. Financial markets are also known to facilitate the transferring of previously issued debt and equity securities from existing to new investors. Financial markets are where traders buy and sell stocks, bonds, derivatives, foreign exchange and commodities. U.S. financial markets impact the economy because it can influence prices, whether they increase or decrease. For instance when there is too much money in the real estate market, interest rates plummet. This caused peopled to take out loans, even if they were considered ineligible buyers thus creating unacceptable risks to investors who began selling them to get rid of them. This causes a crash in the real estate market and also leaves the investors high and dry. Finance is one of the most important functions of any business. Companies are financed in one or two ways; debt or equity. The definition of debt is the amount owed or that one is bound to pay to or perform for another and equity is defined as the funds supplied by the owners that represent their residual claim on the firm. Debt financing is a negative...
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