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
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.”
 
 
 


 

Comments

 

Other News

A gender perspective on migration

Khohar, a village located in Alwar district of Rajasthan, nestled in the foothills of Aravalis, is home to 154 families, most of whom are farmers by profession. The village has a large adult population with 65 percent over the age of 18. The village educational levels are relatively low, with household h

Is the political will lacking to make Delhi`s air clean?

Is the political will lacking to make Delhi`s air clean?

For the sunset years

The New Pension Scheme (NPS), the government of India’s flagship pension scheme, has been subject to a number of important reforms in recent times. This is a welcome change from the norm wherein the government’s and the regulators’ interest in pension products is passing at best. The Pe

Who will pay the price of overpopulation?

Olden days of civilisation experienced famines and natural disasters that caused human misery. While human population was limited, natural habitats were undisturbed and abundant; so calamities of nature were absorbed without any serious consequences. However, this no longer holds true in the current

Schooling change

Jhunjhunu, in northern Rajasthan, is known for its grand havelis and the frescoes on their walls. But they weren’t on prime minister Narendra Modi’s mind when he spoke of the desert town in his Mann Ki Baat radio talk of March 2018. What he focused on, instead, were the government schools in

The road ahead

A fter mixed response from the EPC (engineering, procurement and construction) and BOT-Annuity (build, own, transfer) model, the road sector in India is exploring the Hybrid Annuity Model (HAM) for roadways construction. In HAM, 40 percent of the project cost is provided by the government as ‘const

Current Issue

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter