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  5. New Topics in Monetary Policy Transmission
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New Topics in Monetary Policy Transmission

Paper Session

Sunday, Jan. 8, 2023 10:15 AM - 12:15 PM (CST)

Sheraton New Orleans, Borgne
Hosted By: American Finance Association
  • Chair: Yiming Ma, Columbia University

Liquidity, Liquidity Everywhere, Not a Drop to Use - Why Flooding Banks with Central Bank Reserves May Not Expand Liquidity

Viral V. Acharya
,
New York University, CEPR, and NBER
Raghuram Rajan
,
University of Chicago

Abstract

Central bank balance sheet expansion is financed by commercial banks. It involves not just a substitution of liquid central bank reserves for other assets held by commercial banks, but also a counterpart increase in commercial bank liabilities, such as short-term deposits issued to finance reserves. Banks typically also write a variety of other claims on reserve holdings. Normally, central bank balance sheet expansion will enhance the net future availability of liquidity to the system. However, in episodes of stress when a large fraction of claims on liquidity are exercised, the demand for liquidity can be significantly greater than the availability of reserves. Furthermore, some liquid commercial banks may hoard reserves to bolster their own prospects, contributing significantly to liquidity shortages. Therefore, because central bank balance sheet expansion operates through commercial bank balance sheets, it need not eliminate future episodes of liquidity stress, it may even exacerbate them. This may also attenuate any positive effects of central bank balance sheet expansion on economic activity.

Money Markets and Bank Lending: Evidence from the Adoption of Tiering

Carlo Altavilla
,
European Central Bank
Miguel Boucinha
,
European Central Bank
Lorenzo Burlon
,
European Central Bank
Mariassunta Giannetti
,
Stockholm School of Economics
Julian Schumacher
,
University of Mainz

Abstract

Exploiting the introduction of the ECB’s tiering system for remunerating excess reserve holdings, we document the importance of access to the money market for bank lending. We show that the two-tier system produced positive wealth effects for banks with excess reserves and encouraged a reallocation of liquidity toward banks with unused exemptions. This ultimately decreased the fragmentation in the money market and enhanced the monetary policy transmission mechanism. The increased access to money market by banks with unused allowances incentivizes them to extend more credit than other banks, including banks with excess liquidity whose valuations increased the most.

Monetary Policy and Fragility in Corporate Bond Funds

John Kuong
,
INSEAD
Jinyuan Zhang
,
INSEAD

Abstract

We document aggregate outflows from corporate bond funds before the Federal Funds Target rate (FFTar) is increased. Our evidence supports a mechanism in which fund investors learn about the increase in FFTar and redeem their shares to profit from the temporary mispricing of net asset values (NAVs) arising from stale pricing and to avoid the liquidation cost from other investors' redemption. Consistent with the mechanism, we show that the sensitivity of outflow to increases in FFTar is greater when liquidity is lower. Stale NAVs and loose monetary policy environment increase (decrease) the sensitivity when liquidity is high (low). Our results highlight when and how monetary policy could systematically exacerbate the fragility in corporate bond funds.

Monetary Policy and Corporate Debt Maturity

Andrea Fabiani
,
Bank of Italy
Luigi Falasconi
,
University of Pennsylvania
Janko Heineken
,
University of Bonn

Abstract

We show that a policy rate cut lengthens corporate debt maturity. Over a 1-
year horizon, a 1 standard deviation (7.5 basis points) expansionary interest rate
shock raises the share of long-term debt by 50 basis points. Large firms active
in the bond market are responsible for the adjustment. A simple model combining moral-hazard frictions and yield-seeking investors explain the findings: a policy rate cut boosts demand for long-term debt-securities by yield-seeking investors; large and unconstrained firms accommodate the demand shift by issuing bonds. Empirical evidence on the response of firms’ bond-issuance and on mutual funds’ debt-securities holdings validates the mechanism.

Discussant(s)
Antoine Martin
,
Federal Reserve Bank of New York
Amy Huber Wang
,
University of Pennsylvania
William Diamond
,
University of Pennsylvania
Olivier Darmouni
,
Columbia University
JEL Classifications
  • G0 - General