Inside the bank lending channel

This paper tests cross-sectional differences in the effectiveness of the bank lending channel. The results, derived from a comprehensive sample of Italian banks, suggest that heterogeneity in the monetary policy pass-through exists. After a monetary tightening the decrease in lending is lower for well-capitalized banks that are perceived as less risky by the market and are better able to raise uninsured deposits. Liquid banks can protect their loan portfolio against monetary tightening simply by drawing down cash and securities. The presence of internal capital markets in bank holding companies also contributes to insulate monetary shocks. Bank size is never relevant.     

Trade credit, bank lending and monetary policy transmission

This paper investigates the role of trade credit in the transmission of monetary policy. Most models of the transmission mechanism allow firms to access only financial markets or bank lending according to some net worth criterion. In our model we consider external finance from trade credit as an additional source of funding for firms that cannot obtain credit from banks. We predict that when monetary policy tightens there will be a reduction in bank lending relative to trade credit. This is confirmed with an empirical investigation of 16,000 UK manufacturing firms.     

Econometric analysis of bank lending and business cycles in South Africa

This article examines econometric relationships between bank lending and business cycle in South Africa. Two long-run economic relationships are hypothesized between total credit and the variables, namely, coincidental indicators, spread between lending and borrowing rates, money supply, stock price index, inflation and banking sector specific factors included in the model. Of these variables, only coincident indicators, changes in money supply as well as capital, and reserve are found to exert some influence on short-run total credit availability.     

Macroeconomic Fluctuations and Bank Lending: Evidence for Germany and the Euro Area

Abstract. This paper analyzes the dynamic response of loans to the private sector and of economic activity to aggregate supply, demand and monetary policy shocks in Germany and the euro area based on a standard macroeconomic VAR using sign restrictions to identify the structural shocks. The main results of this analysis are that (i) with the exception of the response to the supply shock in Germany, the response of loans to the three macroeconomic shocks is rather weak and in most cases insignificant; (ii) the 2000–05 credit slowdown and weak economic performance in Germany were primarily driven by adverse supply shocks; and (iii) the marked slowdown in credit creation in Germany over this period actually represents a realignment of the outstanding stock of loans with its deterministic level. In order to assess the role of bank lending in the transmission of macroeconomic shocks, we further perform counterfactual simulations and analyze the dynamic responses of German loan subaggregates in order to test the distributional implications of potential credit market frictions. These exercises do not indicate that credit market frictions play an amplifying role in the transmission of macroeconomic fluctuations.     

Asymmetric Information and the Transmission Mechanism of Monetary Policy

Abstract. This paper analyses the consequences of asymmetric information in credit markets for the monetary transmission mechanism. It shows that asymmetric information can not only reinforce but can also weaken or overcompensate the effects of the standard interest rate channel. Crucial is that informational problems lead to an external finance premium that can be positive or negative for marginal entrepreneurs. Tight money may lead to an increase in the absolute value of this premium, implying that there is a credit channel of monetary policy, but its working direction is ambiguous.     

Financial imbalances and gradualism

In the last years, in the major OECD economies, while inflation has become lower and more stable, episodes of financial instability and large cycles in asset prices have shown up with (often) non-negligible effects on economic activity. These facts should call for a larger concern with financial imbalances by the central bank. Adapting the model by Caplin and Leahy (1996)—where a central bank, which is uncertain about the state of the economy and its reaction to policy, seeks an optimal search strategy to influence private agents' responses—by substituting the central bank's price stability objective with a financial stability one, we find that the monetary authority should follow a less aggressive policy than the one suggested by the original model. However, initial conditions play a crucial role in determining the degree of gradualism by the policy maker with the policy becoming more and more aggressive as the initial interest rate shrinks.     

Dichotomy between macroprudential policy and monetary policy on credit and inflation

This paper compares macroprudential policy and monetary policy using a simple New Keynesian model with credit. Macroprudential policy is effective in stabilizing credit with limited impact on inflation. Monetary policy stabilizes inflation, but is ‘too blunt’ for credit stabilization.     

Fiscal leadership and central bank design

Abstract.  This article investigates the impact, on economic performance, of the timing of moves in a policy game between the government and the central bank for a government that has both redistributional and stabilization objectives. It is shown that both inflation and income inequality are reduced without sacrificing output growth if the government assumes a leadership role compared with a regime in which monetary and fiscal policy are determined simultaneously. Further, it is shown that government leadership benefits both the fiscal and monetary authorities through the enhanced coordination that this arrangement implies.     

High yield spreads,real economic activity,and the financial accelerator

We study the leading properties of 30 US high yield spreads for economic growth between 1996 and 2012 and show that they disappeared in the second half of the 2000s. Our empirical findings demonstrate the unreliability of high yield spreads as leading indicators and cast doubts on the existence of a strong and functioning financial accelerator in recent years.     

Loan processing costs,information asymmetries and the speed of technology adoption

This paper presents a simple model in which credit-constrained firms might delay the adoption of new and more productive technologies because of the external financing costs involved. Applying for a loan can be a very costly process by itself. Where there is a high degree of credit rationing, these costs might even deter entrepreneurs from applying for a loan altogether. We argue that the efficiency of the banking system, by affecting such costs, can influence the profitability of new technologies and entrepreneur's investment decisions, which, in turn, influence new technology implementation, capital accumulation and growth.     

Monetary Policy, Agency Costs and Output Dynamics

This paper examines the role of financial market imperfections for output reactions to nominal interest rate shocks. Empirical evidence shows a hump-shaped impulse response function of output and suggests that credit supply co-moves with output. A monetary business cycle model with staggered price setting is presented where the firms' outlays for capital and labor must be covered by the sum of net worth of entrepreneurs and loans in the form of debt contracts. These properties are shown to generate a hump-shaped impulse response of output, which takes on the smooth and persistent appearance of the empirical output response when nominal wages are set in a staggered way, too.     

Cross-country differences in monetary policy execution and money market rates’ volatility

Volatility patterns in overnight interest rates display differences across industrial countries that existing models—designed to replicate the features of individual countries’ markets—cannot account for. This paper presents an equilibrium model of the overnight interbank market that matches cross-country differences in patterns in interest volatility by incorporating differences in how central banks manage liquidity in response to shocks. Our model is consistent with central banks’ practice of rationing access to marginal facilities when the objective of stabilizing short-term interest rates conflicts with another high-frequency objective, such as an exchange rate target.     

Financialization and the rentier income share – evidence from the USA and Germany

During the past two decades, there has been a shift of significance from the real to the financial sector. In the course of (financial) globalization, measures of liberalization and deregulation have contributed to a strengthening of financial capital. The concept of shareholder value orientation has become more powerful, capital income has increased tremendously, while real wages have stagnated. Most industrial countries have experienced a decline in the share of labor income. Based on a review of empirics and literature, this paper seeks to determine who gained from the fall in the labor share of income in the USA and Germany, respectively. If financialization is indeed responsible for the decline, rentiers should be the beneficiaries. In order to identify the relevant effects, the profit share of the two countries under observation is split between the share of retained earnings and the share of net property income (= rentiers’ income) using a modification of the approach chosen by Epstein and Jayadev (2005 Epstein, G. and Jayadev, A. 2005. “The rise of rentier incomes in OECD countries: Financialization, central bank policy and labor solidarity”. In Financialization and the world economy, Edited by: Epstein, G. Cheltenham: Edward Elgar.  [Google Scholar]). The evidence presented shows that the development of the rentier income share indeed corresponds quite well with the stages of development of financialization in the two different countries: in the US, where the important shift towards financialization occurred in the early 1980s, the rentiers’ share of income shows a corresponding leap upwards exactly at that time and remains on a higher level until the end of the observation period. In Germany, the process of financialization started much later – in the beginning of the 1990s – and followed a much more gradual transition, which is perfectly mirrored by the development of income shares: from the 1990s onwards, the rentiers’ income share gradually increased over time.     

Business cycle asymmetry via occasionally binding international borrowing constraints

This paper illustrates how occasionally binding credit constraints can be quantitatively important to delivering business-cycle asymmetries. An empirical exercise suggests that countries display some business-cycles asymmetries, and an open-economy real business-cycle model is assessed where an international borrowing constraint binds occasionally. In the model, downward movements with a slack constraint are sharper and quicker than upward movements with a binding constraint, and this can deliver asymmetry over the business cycle. The model is calibrated to Canadian data and suggests that a necessary ingredient for asymmetry is a high initial level of foreign debt.     

Asset bubbles in an overlapping generations model with endogenous labor supply

This paper examines the effects of asset bubbles in an overlapping generations model with endogenous labor supply. We show analytically that asset bubbles can lead to an expansion in steady-state capital, investment, employment and output under certain conditions.     

What drives provincial‐Canada yield spreads?

Abstract.  Although recent research has led to a deeper understanding of the factors determining yields on long-term Canada bonds, there has been little corresponding work on provincial bonds. By using a carefully constructed new data set, we establish two important results. First, provincial fiscal positions (debt and deficits) are an important factor in determining yield spreads between provincial and Canada bonds. Second, we show that provincial bonds are a substitute for corporate debt, in that during recessionary 'flights to quality' their yields react like those on corporate bonds.