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Monetary Policy and Financial Intermediation

Paper Session

Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM

Pennsylvania Convention Center, 112-A
Hosted By: American Economic Association
  • Chair: Simon Gilchrist, Boston University

The Reversal Interest Rate: The Effective Lower Bound of Monetary Policy

Markus K. Brunnermeier
,
Princeton University
Yann Koby
,
Princeton University

Abstract

The "reversal interest rate'' is the rate at which accommodative monetary policy "reverses" its effect and becomes contractionary. The reversal interest rate depends on various factors: (i) banks' asset holdings with fixed (non-floating) interest payments, (ii) degree of interest rate pass-through to loan rate and deposit rate, (iii) amount of bank's whole sale funding. Quantitative easing (QE) increases the reversal rate. QE should only employed after interest rate cut is exhausted. Moreover, low interest rates beyond the time when fixed interest rate mature undo its effectiveness, suggesting a different forward guidance policy.

Monetary Stimulus and Bank Lending

Indraneel Chakraborty
,
University of Miami
Itay Goldstein
,
University of Pennsylvania
Andrew MacKinlay
,
Virginia Tech

Abstract

In 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

Itamar Drechsler
,
New York University
Alexi Savov
,
New York University
Philipp Schnabl
,
New York University

Abstract

We 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

Samuel Hanson
,
Harvard University
David Olivier Lucca
,
Federal Reserve Bank of New York
Jonathan Wright
,
Johns Hopkins University

Abstract

A 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.
Discussant(s)
Helene Rey
,
London Business School
Christopher Palmer
,
Massachusetts Institute of Technology
Adi Sunderam
,
Harvard University
Eric Swanson
,
University of California-Irvine
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • G2 - Financial Institutions and Services