Heterogeneity and Monetary Policy

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Hyatt Regency Chicago, McCormick
Hosted By: Econometric Society
  • Chair: Amir Sufi, University of Chicago

Market Power in Mortgage Lending and the Transmission of Monetary Policy

Adi Sunderam
,
Harvard Business School
David Scharfstein
,
Harvard University

Abstract

We present evidence that high concentration in mortgage lending reduces the sensitivity of
mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. We isolate the direct effect of concentration in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where bank mergers increase concentration in mortgage lending. Within a county, sensitivities to MBS yields decrease after a concentration increasing merger. Our results suggest that the strength of the housing channel of monetary policy transmission varies in both the time series and the cross section.

Do Banks Pass Through Credit Expansions to Households Who Want to Borrow?

Johannes Stroebel
,
New York University
Sumit Agarwal
,
National University of Singapore

Abstract

We examine the ability of policymakers to stimulate household spending during the Great Recession by reducing banks’ cost of funds. Using panel data on 8.5 million credit cards and 743 credit limit regression discontinuities, we find that the one-year marginal propensity to borrow (MPB) is declining in credit score, falling from 59% for consumers with FICO scores below 660 to essentially zero for consumers with FICO scores above 740. We use the same credit limit discontinuities, combined with a model of lending, to estimate banks’ marginal propensity to lend (MPL) out of a decrease in their cost of funds. For the lowest FICO score consumers, higher credit limits sharply reduce profits from lending, limiting banks’ incentives to pass through credit expansions to these consumers. We conclude that banks’ MPL is lowest for consumers with the highest MPB and discuss the implications for policies that aim to stimulate the economy through banks.

Regional Heterogeneity and Monetary Policy

Joseph Vavra
,
University of Chicago
Martin Alberto Beraja
,
University of Chicago
Andreas Fuster
,
Federal Reserve Bank of New York
Erik Hurst
,
University of Chicago

Abstract

We argue that the time-varying regional distribution of housing equity shapes the aggregate
consequences of monetary policy through its influence on mortgage refinancing. Using
detailed loan-level data, we begin by showing that: (i) the refinancing response to interest
rate cuts is strongly affected by regional differences in housing equity, and (ii) both these differences
and overall refinancing vary over time with changes in the regional distribution of
house price growth and unemployment. Then, we build a heterogeneous household model
of refinancing in order to derive aggregate implications of monetary policy from our regional
evidence. We find that the 2008 equity distribution made spending in depressed regions less
responsive to interest rate cuts, thus dampening aggregate stimulus and increasing regional
consumption inequality, whereas the opposite occurred in some earlier recessions. Taken together,
our results strongly suggest that monetary policy makers should track the regional
distribution of equity over time.

Monetary Policy According to HANK

Benjamin Moll
,
Princeton University
Greg Kaplan
,
Princeton University
Giovanni L. Violante
,
New York University

Abstract

This note contains supplementary material to Kaplan, Moll, and Violante (2016). In the first part, we analyze the effectiveness of forward guidance in HANK. We show that, in contrast to representative-agent economies, the announcement of a future interest rate cut in our baseline economy has a smaller impact on current consumption than an equal-size contemporaneous cut. We explain the role of hand-to-mouth households and fiscal policy in accounting for this finding. In the second part, we study the transmission of a conventional monetary policy shock in an economy where household liquidity is provided by the private sector rather than by the government. Like in our baseline economy, it is also true that indirect general equilibrium effects dominate the direct intertemporal substitution channel for stimulating consumption: lowering the nominal interest rate reduces the cost of funds for firms and induces an investment boom that, in turn, triggers a rise in aggregate labor demand.
Discussant(s)
Amir Kermani
,
University of California-Berkeley
Arlene Wong
,
Northwestern University
Daniel Greenwald
,
New York University
Adrien Auclert
,
Princeton University
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit