Monetary Policy and Financial Intermediation
Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM
- Chair: Simon Gilchrist, Boston University
Monetary Stimulus and Bank Lending
AbstractIn recent business cycle downturns, monetary policymakers worldwide have sought to stimulate their economies by conducting asset purchases. The U.S. Federal Reserve purchased both agency mortgage-backed securities (MBS) and Treasury (TSY) securities, which are generally thought to be comparable in credit quality and stimulative effects. This paper investigates the effect of such purchases on mortgage lending, commercial lending, and firm investment using micro-level data. We find that MBS and TSY purchases have asymmetric effects. In response to MBS purchases, banks that are active in the MBS market increase their mortgage origination market share, compared to other banks. At the same time, these banks reduce commercial lending. As a result, firms that borrow from these banks decrease investment. The effect of TSY purchases is either positive, as expected, or insignificant in most cases. Our results suggest different effects depending on the type of asset purchased, that MBS purchases cause distortionary effects across banks and firms, and that TSY purchases did not cause a large positive stimulus to the economy through the bank lending channel.
Banking on Deposits: Maturity Transformation Without Interest Rate Risk
AbstractWe show that in stark contrast to conventional wisdom, maturity transformation does not expose banks to significant interest rate risk. Aggregate net interest margins have been near-constant over 1955–2013, despite substantial maturity mismatch and wide variation in interest rates. We argue that this is due to banks’ market power in deposit markets. Market power allows banks to pay deposit rates that are low and
therefore relatively insensitive to interest rate changes, but it also requires them to pay large operating costs. This makes deposits resemble fixed-rate liabilities. Banks hedge these liabilities by investing in long-term assets, whose interest payments are also relatively insensitive to interest rate changes. Consistent with this view, we find that banks match the interest rate sensitivities of their expenses and income one for one. Furthermore, banks with lower interest expense sensitivity hold assets with substantially longer duration. We exploit cross-sectional variation in market power and
show that it generates variation in expense sensitivity that is matched one-for-one by income sensitivity. Our results provide a novel explanation for the coexistence of deposit-taking and maturity transformation.
Interest Rate Conundrums in the Twenty-first Century
AbstractA large literature argues that long-term interest rates appear to react far more to high-frequency (for example, daily or monthly) movements in short-term interest rates than is predicted by the standard expectations hypothesis. We find that, since 2000, such high-frequency “excess sensitivity” remains evident in U.S. data and has, if anything, grown stronger. By contrast, the positive association between low-frequency changes (such as those seen at a six- or twelve-month horizon) in short- and long-term interest rates, which was quite strong before 2000, has weakened substantially in recent years. As a result, “conundrums”—defined as six- or twelve-month periods in which short rates and long rates move in opposite directions—have become far more common since 2000. We argue that the puzzling combination of high-frequency excess sensitivity and low-frequency decoupling between short- and long-term rates can be understood using a model in which (i) shocks to short-term interest rates lead to a rise in term premia on long-term bonds and (ii) arbitrage capital moves slowly over time. We discuss the implications of our findings for interest rate predictability, the transmission of monetary policy, and the validity of high-frequency event study approaches for assessing the impact of monetary policy.
London Business School
Massachusetts Institute of Technology
University of California-Irvine
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G2 - Financial Institutions and Services