Financial Intermediation: Fragmentation and Policy Transmission
Paper Session
Saturday, Jan. 6, 2024 12:30 PM - 2:15 PM (CST)
- Chair: Linda Goldberg, Federal Reserve Bank of New York, NBER and CEPR
The Asymmetric Credit Channel of Monetary Policy
Abstract
We show that firm investment and employment respond strongly to contractionarymonetary policy but weakly to expansionary policy, and that this pattern can be attributed
to an asymmetric credit channel. Using microdata, we find that financial constraints
increase the responsiveness of investment and hiring to contractionary policy
surprises but weaken their response to expansionary surprises. Financial constraints
tighten and debt flows decline in response to contractionary policy, but barely respond
to expansionary policy. To rationalize the strong role of financial factors in
the asymmetric transmission of monetary policy, we build a heterogeneous firm model
where, consistent with the data, firms must satisfy several financial constraints. A
strong asymmetry occurs because the most rate-sensitive constraint binds after contractionary
shocks while the least rate-sensitive one binds after easing shocks. These
results suggest that the strength of the transmission of monetary policy depends on
the aggregate distribution of firm financial distress, but only for contractionary policy.
The Inflationary Effects of Quantitative Easing
Abstract
We provide new evidence on the inflationary effects of Quantitative Easing (QE) using Swedish administrative data at the bank, firm, and product level. For identification, we rely on bank-firm lending relationships and the heterogeneous participation rates of banks in the government bond purchase program. Our results show that the bond purchase program led to a significant and persistent increase in producer price inflation. Importantly, we find that the degree of financial frictions considerably influences firms' price response: low leverage firms do not change their prices, whereas high leverage firms raise their prices significantly. This divergent pricing behaviour can be rationalized by a significant increase in long-term borrowing and interest rate expenses among high leverage firms. The difference in price responses across high and low leverage firms is less pronounced for exogenous changes in the repo rate implying that the transmission mechanism of QE differs from the one of conventional interest rate policy.A Structural Model of Interbank Network Formation and Contagion
Abstract
The interbank network, in which banks compete with each other to supply and demand financial products, creates surplus but may also result in risk propagation. We examine this trade-off by setting out a model in which banks form interbank network links endogenously, taking into account the effect of links on default risk. We estimate this model based on novel, granular data on aggregate exposures between banks. We find that the decentralised interbank market is not efficient, primarily because banks do not fully internalise a network externality in which their interbank links affect the default risk of other banks. A social planner would be able to increase surplus on the interbank market by 13% without increasing mean bank default risk or decrease mean bank default risk by 4% without decreasing interbank surplus. We propose two novel regulatory interventions (caps on aggregate exposures and pairwise capital requirements) that result in efficiency gains.Discussant(s)
Ivan Ivanov
,
Federal Reserve Bank of Chicago
Lorena Keller
,
University of Pennsylvania
Ryan Kim
,
Johns Hopkins University
Celso Brunetti
,
Federal Reserve Board
JEL Classifications
- G2 - Financial Institutions and Services
- F4 - Macroeconomic Aspects of International Trade and Finance