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This paper highlights the importance of debt composition in setting optimal fiscal and monetary policy over short-run business cycles and in the long run. Nominal debt as state-contingent debt can be a significant policy tool to reduce the volatility of distortionary government policy, thereby reducing macroeconomic volatility while increasing equilibrium output and consumption. The welfare gain from using nominal debt to hedge against shocks to the government budget is as large as the welfare gain from the ability to issue debt.

Debts, Public. --- Monetary policy. --- Fiscal policy. --- Tax policy --- Taxation --- Economic policy --- Finance, Public --- Monetary management --- Currency boards --- Money supply --- Debts, Government --- Government debts --- National debts --- Public debt --- Public debts --- Sovereign debt --- Debt --- Bonds --- Deficit financing --- Government policy --- Macroeconomics --- Money and Monetary Policy --- Public Finance --- Labor --- Financial Markets and the Macroeconomy --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Stabilization --- Treasury Policy --- Debt Management --- Sovereign Debt --- National Government Expenditures and Related Policies: General --- Macroeconomics: Consumption --- Saving --- Wealth --- Labor Economics: General --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Personal Income and Other Nonbusiness Taxes and Subsidies --- Demand and Supply of Labor: General --- Public finance & taxation --- Labour --- income economics --- Monetary economics --- Welfare & benefit systems --- Expenditure --- Consumption --- Currencies --- Labor taxes --- National accounts --- Taxes --- Labor supply --- Expenditures, Public --- Economics --- Labor economics --- Money --- Income tax --- Labor market --- United States

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This paper argues that the stock market is an important channel of monetary policy. Monetary policy affects real economic activity because inflation levies a property tax on stocks in addition to an income tax on dividend payments. Inflation thus taxes stocks more heavily than it does bonds. Households alter their required rate of return as inflation changes, and firms adjust production in order to satisfy their shareholders’ demands. As the stock market channel grows in importance, the appropriate intermediate target for the central bank is the price level, with price stability being the ultimate goal.

Finance: General --- Inflation --- Investments: Stocks --- Macroeconomics --- Money and Monetary Policy --- Monetary Policy --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Price Level --- Deflation --- General Financial Markets: General (includes Measurement and Data) --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Investment & securities --- Finance --- Monetary economics --- Stocks --- Stock markets --- Monetary base --- Asset prices --- Financial institutions --- Financial markets --- Prices --- Money --- Stock exchanges --- Money supply --- United States

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This paper investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements, by raising banks’ marginal cost of funding, lead to higher lending rates. The data presented in the paper suggest that large banks would on average need to increase their equity-to-asset ratio by 1.3 percentage points under the Basel III framework. GMM estimations indicate that this would lead large banks to increase their lending rates by 16 basis points, causing loan growth to decline by 1.3 percent in the long run. The results also suggest that banks’ responses to the new regulations will vary considerably from one advanced economy to another (e.g. a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the U.S.) depending on cross-country variations in banks’ net cost of raising equity and the elasticity of loan demand with respect to changes in loan rates.

Banks and banking --- Agricultural banks --- Banking --- Banking industry --- Commercial banks --- Depository institutions --- Finance --- Financial institutions --- Money --- State supervision --- Econometric models. --- Banks and Banking --- Finance: General --- Investments: Stocks --- Economic Theory --- Industries: Financial Services --- Financial Risk Management --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Agriculture: Aggregate Supply and Demand Analysis --- Prices --- General Financial Markets: Government Policy and Regulation --- Financial Crises --- Investment & securities --- Economic theory & philosophy --- Financial services law & regulation --- Economic & financial crises & disasters --- Loans --- Stocks --- Demand elasticity --- Basel III --- Economic theory --- Financial regulation and supervision --- Financial crises --- Elasticity --- Economics --- Denmark

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This paper examines the role of bank capital in decision-making by bank holding companies (BHCs) in the United States. Following Chami and Cosimano’s (2001) call option approach to bank capital, BHCs optimally choose the amount of capital to insure the bank against becoming capital constrained in the future. We provide empirical support for this model, and find that a higher optimal level of capital leads to higher loan rates. Furthermore, higher loan rates result in lower amounts of lending. Thus, an increase in capital requirements is likely to lead to higher loan rates and a significant reduction in lending.

Bank capital -- United States -- Econometric models. --- Bank holding companies -- United States -- Econometric models. --- Bank loans -- United States -- Econometric models. --- Banks and Banking --- Financial Risk Management --- Money and Monetary Policy --- Industries: Financial Services --- Investments: Stocks --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financial Institutions and Services: Government Policy and Regulation --- Financial Crises --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Finance --- Financial services law & regulation --- Banking --- Economic & financial crises & disasters --- Monetary economics --- Investment & securities --- Loans --- Capital adequacy requirements --- Financial crises --- Bank credit --- Financial institutions --- Financial regulation and supervision --- Money --- Stocks --- Asset requirements --- Banks and banking --- Credit --- United States

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Investors seek to hedge against interest rate risk by taking long or short positions on bonds of different maturities. We study changes in risk taking behavior in a low interest rate environment by estimating a market stochastic discount factor that is non-linear and therefore consistent with the empirical properties of cashflow valuations identified in the literature. We provide evidence that non-linearities arise from hedging strategies of investors exposed to interest rate risk. Capital losses are amplified when interest rates increase and risk averse investors have taken positions on instruments with longer maturity, expecting instead interest rates to revert back to their historical average.

Banks and Banking --- Finance: General --- Investments: General --- Investments: Bonds --- Interest Rates: Determination, Term Structure, and Effects --- Financial Econometrics --- Portfolio Choice --- Investment Decisions --- General Financial Markets: General (includes Measurement and Data) --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- Finance --- Investment & securities --- Financial services law & regulation --- Yield curve --- Bonds --- Securities --- Market risk --- Securities markets --- Financial services --- Financial institutions --- Financial regulation and supervision --- Financial markets --- Interest rates --- Financial instruments --- Financial risk management --- Capital market --- United States