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  5. Financial Intermediation: Monetary Policy Transmission
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Financial Intermediation: Monetary Policy Transmission

Paper Session

Saturday, Jan. 6, 2024 10:15 AM - 12:15 PM (CST)

Marriott Rivercenter, Grand Ballroom Salon D
Hosted By: American Finance Association
  • Chair: Moritz Lenel, Princeton University

Heterogeneous Intermediaries and Bond Characteristics in the Transmission of Monetary Policy

Federic Holm-Hadulla
,
European Central Bank
Matteo Leombroni
,
Boston College

Abstract

This paper studies the transmission of monetary policy to the corporate bond market. We show that the yields of bonds held by mutual funds are more responsive to corporate bond purchases by the central bank. We attribute this phenomenon to (i) systematic variations in the bond selection of heterogeneous intermediaries and (ii) market segmentation. Our findings reveal that central bank corporate bond purchases primarily influence credit spreads. As the mutual fund sector holds securities carrying higher credit risk, it naturally experiences a more pronounced impact. Additionally, due to market segmentations, bonds with similar risk but higher mutual fund shares may exhibit different price responses. As insurance companies and banks refrain from investing in certain securities, mutual funds are forced to intermediate them. This leads to a higher compensation for risk and stronger sensitivity to policy changes. We also find that both selection and market segmentations are crucial in comprehending the stronger effects of conventional monetary policy on bonds held by mutual funds vis-\'a-vis bonds held by other investors.

Stop Believing in Reserves

Sriya Anbil
,
Federal Reserve Board
Alyssa Anderson
,
Federal Reserve Board
Ethan Cohen
,
University of Minnesota
Romina Ruprecht
,
Federal Reserve Board

Abstract

We study the transmission channels of quantitative tightening (QT). We develop a structural model where reducing the size of the Federal Reserve’s balance sheet affects the demand for reserves by banks and demand for liquidity by non-banks, and calibrate our model to the data of the current monetary tightening cycle. Rather than the demand for reserves by banks which is typically considered in the existing academic literature, we find that the demand for liquidity by non-banks is the binding constraint for the size of the Federal Reserve’s balance sheet. We show that the Federal Reserve can reduce the size of its balance sheet by more if it sets interest rates higher, documenting a novel complimentarity between both monetary policy tools.

Lending by Servicing: Monetary Policy Transmission through Shadow Banks

Isha Agarwal
,
University of British Columbia
Malin Hu
,
Vanderbilt University
Raluca A. Roman
,
Federal Reserve Bank of Philadelphia
Keling Zheng
,
University of British Columbia

Abstract

We propose a new conceptual framework for monetary policy transmission through shadow banks in the mortgage market that highlights the role of mortgage servicing in generating non-deposit funds for lending. We document that mortgage servicing acts as a natural hedge against interest rate shocks and dampens the effect of monetary policy on shadow bank mortgage lending. Higher interest rates reduce prepayment risk, increasing the collateral value of mortgage servicing assets and cashflow from servicing income. This enables shadow banks with greater exposure to mortgage servicing to obtain more funding. The mortgage servicing channel is weaker for traditional banks due to their reliance on deposit funding and the capital charge on mortgage servicing assets. Our estimates imply that the rising share of shadow banks in mortgage servicing has weakened the pass-through of monetary policy to aggregate mortgage lending.

Discussant(s)
Lira Mota
,
Massachusetts Institute of Technology
Yiming Ma
,
Columbia University
Michael Reher
,
University of California-San Diego
JEL Classifications
  • G2 - Financial Institutions and Services