Credit shocks could have important policy implications: RBI paper -Governance Now

Credit shocks could have important policy implications: RBI paper

While bank credit shocks are more dominant in influencing real house prices, it is the monetary policy shock which primarily causes variations in real stock prices

GN Bureau | January 11, 2017

#monetary policy #Reserve Bank of India #bank credit #RBI #stock market

Reserve Bank of India

House and equity prices respond at varying speeds and significantly varying magnitude to monetary policy shocks, signifying that it may turn out to be challenging for policy makers to simultaneously stabilise both, said a Reserve Bank of India working paper on Wednesday.

The working paper, authored by Bhupal Singh and Avadhoot R Nadkarni, said that aggregate demand shocks are found to be more dominant in causing fluctuations in asset prices as compared with credit shocks, thus highlighting the role of economic cycles in accentuating asset price rise.

A credit shock occurs when there is a swift reduction in the availability of loans (credit) or a sharp increase in the costs of getting new loans from banks.

“As EMDEs (emerging market and developing economies) reach higher level of financial deepening, linkages between interest rate, credit, stock and house prices may turn stronger and the assessment of their effects may assume greater importance.”

The findings could have important policy implications for an EMDE like India. The limited role of credit shocks in causing stock price movements could be true for India given the regulatory norms for banks’ exposure to capital markets, it added.

The paper said that the principal shocks that influence movements in asset prices are real output (aggregate demand), bank credit and monetary policy shocks. Real output shock, capturing mainly the aggregate demand shock, leads to significant increase in real credit growth, which persists for eight quarters after the initial shock.

Simultaneously, there is significant increase in both house and stock prices - the impact on stock prices appear to be much more pronounced and durable as compared with the impact on house prices.

It said that real bank credit shock leads to significant increase in real output and a short run decline in inflation. Both real stock and house prices rise in response to an expansionary credit shock but the impact is significant and persistence only in the case of house prices. The phenomena of lack of significant impact on stock prices could be inter-alia attributed to various regulatory restrictions imposed on sectoral credit flow to stock markets.

“Against the backdrop of our central hypothesis that credit shocks rather than interest rate shocks play important role in causing movements in asset prices, empirical results suggest that while bank credit shocks are more dominant in influencing real house prices, it is the monetary policy shock which primarily causes variations in real stock prices.”

Read: RBI Working Paper “How Asset Prices Interact with Bank Credit and Monetary Policy? Evidence from Emerging Market and Developing Economies”

Comments

Other News

‘Gandhi’s Spiritual Politics: Austerity, Fasting and Secularism’

On the occasion of the birth anniversary of Mahatma Gandhi, renowned academic publishers Sage have opened access to many notable articles and essays on the Father of the Nation. Here we reproduce an excerpt from one of them, well-known historian Amar Farooqui’s highly original and detailed article in

Bharatiya Bhasha Utsav, Technology & Bharatiya Bhasha Summit launched

Union Minister for Education and Skill Development & Entrepreneurship Dharmendra Pradhan Saturday launched the Bharatiya Bhasha Utsav and inaugurated the two-day Technology & Bharatiya Bhasha Summit in New Delhi. The summit aims to facilitate a seamless transition from the current education ecosyst

India retains 40th rank in the Global Innovation Index 2023

India has retained the 40th rank out of 132 economies in the Global Innovation Index 2023 rankings published by the World Intellectual Property Organization. India has been on a rising trajectory, over the past several years in the Global Innovation Index (GII), from a rank of 81 in 2015 to 40 in 2023. Inn

Vibrant Gujarat not just about branding, also an event of bonding: Modi

Prime minister Narendra Modi addressed the programme marking 20 years celebration of the Vibrant Gujarat Global Summit at Science City in Ahmedabad on Wednesday. The Vibrant Gujarat Global Summit was started 20 years ago, on September 28, 2003, under the leadership of Modi, then chief minis

AI in education: How to embrace the change (and why)

It is often said that industry is at 4.0 and education is at 2.0. To transform education in line with artificial intelligence (AI), it is imperative to adopt what companies like Google are doing. We must learn to grow along with AI as AI is going to grow. There is a need to evolve the mindsets of educators