Why Are Banks Exposed to Monetary Policy?
Sebastian Di Tella
- American Economic Journal: Macroeconomics (Forthcoming)
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.
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