Monetary Policy I
Paper Session
Monday, Jan. 4, 2021 12:15 PM - 2:15 PM (EST)
- Chair: Mari Robertson, Rollins College
Understanding the Effects of Unconventional Monetary Policy on Corporate Bond Market in the Euro Area
Abstract
In light of the recent COVID-19 crisis, it is clear that unconventional monetary policies have become part of the standard tool kit of developed countries central banks. A set of such policies affects directly corporate bonds. Understanding the underlying mechanisms through which they operate is of paramount importance for optimal policy design. In this paper, we study the impact of three unconventional monetary policy packages adopted by the European Central Bank (ECB) on the corporate bond market. These policies include participating in large scale purchase of government and corporate debt, direct lending facilities, and adopting negative interest rates. We use information on credit default swaps to decompose, in a model-free manner, corporate spreads into a default and a non-default component. While all ECB policies caused a decrease in corporate spreads, the largest impact comes from the monetary policy easing package in June 2014, when interest rates went into negative territory for the first time. We find that the default component is small across all packages and the impact on corporate spreads is almost fully explained by the effect on the non-default component. We show evidence that this result is driven by the increase in demand for safer bonds as these are more affected by the ECB interventions. The excess demand is not homogeneous across investors, rather each program triggers an excess demand from specific sectors.Monetary Policy Disconnect
Abstract
We study a major friction hindering monetary policy transmission, that is market segmentation. We show that the monetary policy disconnect arises from two forms of segmentation affecting the main short-term funding market, the repurchase agreement (repo) market. First, banks with access to the central bank's deposit facility are less responsive to the monetary policy target rate. Second, rates of repos secured by assets eligible for Quantitative Easing programs diverge more from the target rate. We also find that both forms of segmentation add to one another, suggesting an amplifying effect in weakening monetary policy transmission.Risk, Monetary Policy and Asset Prices in a Global World
Abstract
We study how monetary policy and risk shocks affect major asset prices (interest rates, stocks, long-term bonds) in three large economies: the US, the euro area, and Japan. Using a high-frequency framework, we fail to find evidence in favor of monetary policy affecting foreign asset prices through a risk channel. There is however a strong global common component in risk shocks affecting asset prices in all three economies. We document direct monetary policy spillovers, which are economically relatively more (less) important for interest rates and bond prices (stock prices) than risk shocks. The US generates relatively important “pure” monetary policy spillovers, but information shocks emanating from the European Central Bank produce relatively the strongest effects on international stock and bond markets. The monetary policy effects on asset prices may well reflect a persistent direct interest rate effect rather than a risk premium effect.Monetary Policy and Regional Inequality
Abstract
We study the impact of monetary policy on regional inequality using granular data on economic activity at the city- and county-level in Europe. We document pronounced heterogeneity in the regional patterns of monetary policy transmission. The output response to monetary policy shocks is stronger and more persistent in poorer regions, with the difference becoming particularly pronounced in the extreme tails of the distribution. Regions in the lower parts of the distribution exhibit hysteresis, consisting of long-lived adjustments in employment and labor productivity in response to the shocks. As a consequence, policy tightening aggravates regional inequality and policy easing mitigates it.Monetary Policy with Heterogeneous Financial Markets
Abstract
We develop a dynamic stochastic general equilibrium model of a closed economy to study monetary policy transmission in an environment where firms have access to different forms of financing. Embedding financial frictions a la Holmström Tirole (QJE, 1997) allows us to create financial markets in which well-capitalized firms are financed through bond markets whereas less capitalized firms have to rely on more costly bank lending. Firms with least equity obtain no funding. This setup makes the financing structure endogenous and not only allows to study the financing mix but also the extensive margin. The framework naturally encompasses several monetary policy propagation channels studied in the empirical literature (e.g. the bank capital channel, broad credit channel). It allows to study the effectiveness of monetary propagation depending on the nature of the financial markets, relative size of the banking sector. It also allows to analyze consequences of building deep capital markets, like the Capital Markets Union, for the conduct of monetary policy.JEL Classifications
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit