Iranian Journal of Accounting, Auditing and Finance

Iranian Journal of Accounting, Auditing and Finance

Single Monetary Policy, Inflation Targeting, Interest Rate Targeting and Bank Efficiency in the Euro Area: Panel Generalized Method of Moments Approach

Document Type : Original Article

Authors
Ehsan Rajabi 1
Reza Sherafatian Jahromi 2
1 Department of Agriculture and Food Policy, Agriculture Planning, Economic and Rural Development Research Institute (APERDRI), Ministry of Jihad-e Agriculture, Tehran, Iran
2 Department of Economics, Universiti Putra Malaysia, 43400 Serdang, Selangor, Malaysia
10.22067/ijaaf.2021.40647
Abstract
This study investigates the dynamic linkages between the efficiency of 126 selected banks and the Single Monetary Policy (SMP) defined by credit channel, interest rate channel, exchange rate channel, and price stability in 17 Euro area countries from 1999 to 2012. The dynamic generalised method of moments (GMM) estimator shows a positive relationship between the bank's cost and profit efficiency and bank lending and liquidity by estimating the two-stage panel regression model. Still, capitalisation, exchange rate, inflation targeting (price stability), long term interest rate targeting was associated with lower cost and profit efficiency scores. Therefore, the impact of the Maastricht Protocol targeted policy, coefficients of inflation and long-term interest rate targeting variables are negatively related to the bank efficiency level. Specifically, on average higher bank lending, liquidity and deposit facility can be associated with improving profit efficiency of banks. In contrast, capitalisation, exchange rate, inflation targeting, and long-term interest rate targeting variables had a negative effect on cost and profit efficiency levels. The policy implication arising from the analyses presented is that the European monetary authority has faced significant pressures of inflation targeting and long-term interest rate targeting policy on bank performance that negatively influence bank efficiency.
Keywords
Inflation Targeting
Interest Rate Targeting
Credit Channel
Interest Rate Channel
Exchange Rate Channel
Price Stability
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