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  3. American Economic Journal: Macroeconomics
  4. October 2021
  5. Why Are Banks Exposed to Monetary Policy?

Why Are Banks Exposed to Monetary Policy?

  • Sebastian Di Tella
  • Pablo Kurlat
American Economic Journal: Macroeconomics
vol. 13, no. 4, October 2021
(pp. 295-340)
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Abstract

We propose a model of banks' exposure to movements in interest rates and their role in the transmission of monetary shocks. Since bank deposits provide liquidity, higher interest rates allow banks to earn larger spreads on deposits. Therefore, if risk aversion is higher than one, banks' optimal dynamic hedging strategy is to take losses when interest rates rise. This risk exposure can be achieved by a traditional maturity-mismatched balance sheet and amplifies the effects of monetary shocks on the cost of liquidity. The model can match the level, time pattern, and cross-sectional pattern of banks' maturity mismatch.

Citation

Di Tella, Sebastian, and Pablo Kurlat. 2021. "Why Are Banks Exposed to Monetary Policy?" American Economic Journal: Macroeconomics, 13 (4): 295-340. DOI: 10.1257/mac.20180379

Additional Materials

JEL Classification

  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E44 Financial Markets and the Macroeconomy
  • E51 Money Supply; Credit; Money Multipliers
  • E52 Monetary Policy
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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