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This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policies. There are two main results. First, real interest rate rigidities in a monopolistic banking system have an asymmetric impact on financial stability: they increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective regulatory framework aimed at preserving financial stability.
Monetary policy --- Bank loans --- Global Financial Crisis, 2008-2009. --- Global Economic Crisis, 2008-2009 --- Subprime Mortgage Crisis, 2008-2009 --- Financial crises --- Bank credit --- Loans --- Monetary management --- Economic policy --- Currency boards --- Money supply --- Econometric models. --- Banks and Banking --- Finance: General --- Economic Theory --- Industries: Financial Services --- Macroeconomics --- Financial Markets and the Macroeconomy --- Monetary Policy --- Policy Objectives --- Policy Designs and Consistency --- Policy Coordination --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- General Financial Markets: Government Policy and Regulation --- Financial Economics --- Interest Rates: Determination, Term Structure, and Effects --- Financial Crises --- Finance --- Banking --- Economic theory & philosophy --- Economic & financial crises & disasters --- Financial sector stability --- Financial frictions --- Central bank policy rate --- Financial sector policy and analysis --- Economic theory --- Financial services --- Collateral --- Financial institutions --- Global financial crisis of 2008-2009 --- Financial services industry --- Banks and banking --- Economic forecasting --- Interest rates --- Global Financial Crisis, 2008-2009 --- United States
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This paper develops a model featuring both a macroeconomic and a financial friction that speaks to the interaction between monetary and macro-prudential policy and to the role of U.S. monetary and regulatory policy in the run up to the Great Recession. There are two main results. First, real interest rate rigidities in a monopolistic banking system increase the probability of a financial crisis (relative to the case of flexible interest rate) in response to contractionary shocks to the economy, while they act as automatic macro-prudential stabilizers in response to expansionary shocks. Second, when the interest rate is the only available policy instrument, a monetary authority subject to the same constraints as private agents cannot always achieve a (constrained) efficient allocation and faces a trade-off between macroeconomic and financial stability in response to contractionary shocks. An implication of our analysis is that the weak link in the U.S. policy framework in the run up to the Global Recession was not excessively lax monetary policy after 2002, but rather the absence of an effective second policy instrument aimed at preserving financial stability.
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Credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a panel of corporate bonds matched with balance sheet data for U.S. non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms' expected default. Our results suggest that frictions in the financial intermediation sector play a crucial role in shaping the transmission mechanism of monetary policy.
Business and Economics --- Macroeconomics --- International Economics --- Financial Markets and the Macroeconomy --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Economic & financial crises & disasters --- Economics of specific sectors --- Financial crises --- Economic sectors --- Currency crises --- Informal sector --- Economics
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Credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a panel of corporate bonds matched with balance sheet data for U.S. non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms' expected default. Our results suggest that frictions in the financial intermediation sector play a crucial role in shaping the transmission mechanism of monetary policy.
Business and Economics --- Macroeconomics --- International Economics --- Financial Markets and the Macroeconomy --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Economic & financial crises & disasters --- Economics of specific sectors --- Financial crises --- Economic sectors --- Currency crises --- Informal sector --- Economics
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In this paper we first compare house price cycles in advanced and emerging economies using a new quarterly house price data set covering the period 1990-2012. We find that house prices in emerging economies grow faster, are more volatile, less persistent and less synchronized across countries than in advanced economies. We also find that they correlate with capital flows more closely than in advanced economies. We then condition the analysis on an exogenous change to a particular component of capital flows. We find that a global liquidity shock, identified by aggregating bank-to-bank cross border flows and by using the external instrumental variable approach of Stock and Watson (2012) and Mertens and Ravn (2013), has a much stronger impact on house prices and consumption in emerging markets than in advanced economies. In our empirical model, holding house prices or the exchange rate constant in response to this shock tends to dampen its effects on consumption in emerging economies.
Housing --- Business cycles. --- Capital movements. --- International liquidity. --- Balance of payments --- International finance --- Liquidity (Economics) --- Capital flight --- Capital flows --- Capital inflow --- Capital outflow --- Flight of capital --- Flow of capital --- Movements of capital --- Foreign exchange --- Economic cycles --- Economic fluctuations --- Cycles --- Affordable housing --- Homes --- Houses --- Housing needs --- Residences --- Slum clearance --- Urban housing --- City planning --- Dwellings --- Human settlements --- Prices --- Social aspects --- Developed countries --- Advanced countries --- Advanced nations --- Developed nations --- Economically advanced countries --- Economically advanced nations --- First World --- Industrial countries --- Industrial nations --- Industrial societies --- Industrialized countries --- Industrialized nations --- Western countries --- Prices. --- Finance: General --- Foreign Exchange --- Inflation --- Macroeconomics --- Real Estate --- Housing Supply and Markets --- Portfolio Choice --- Investment Decisions --- Macroeconomics: Consumption --- Saving --- Wealth --- Price Level --- Deflation --- Property & real estate --- Finance --- Currency --- Housing prices --- International liquidity --- Consumption --- Exchange rates --- Asset and liability management --- National accounts --- Economics --- United States
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Are uncertainty shocks a major source of business cycle fluctuations? This paper studies the effect of a mean preserving shock to the variance of aggregate total factor productivity (macro uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (micro uncertainty) in a financial accelerator DSGE model with sticky prices. It explores the different mechanisms through which uncertainty shocks are propagated and amplified. The time series properties of macro and micro uncertainty are estimated using U.S. aggregate and firm-level data, respectively. While surprise increases in micro uncertainty have a larger impact on output than macro uncertainty, these account for a small (non-trivial) share of output volatility.
Labor --- Macroeconomics --- Money and Monetary Policy --- Production and Operations Management --- General Aggregative Models: General --- Business Fluctuations --- Cycles --- Financial Markets and the Macroeconomy --- Production --- Cost --- Capital and Total Factor Productivity --- Capacity --- Labor Demand --- Macroeconomics: Consumption --- Saving --- Wealth --- Price Level --- Inflation --- Deflation --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Labour --- income economics --- Monetary economics --- Total factor productivity --- Self-employment --- Consumption --- Sticky prices --- Credit --- National accounts --- Prices --- Money --- Industrial productivity --- Self-employed --- Economics --- United States
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House prices and exchange rates can potentially amplify the expansionary effect of capital inflows by inflating the value of collateral. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.
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